Keep Calm and Boglehead On!

[grok87]

Keep Calm and Boglehead On!

So this is not one of those posts saying “don’t worry the stock market will snap back, buy on the dips.”

The market may not come back, or it may not come back for a very long time.

Look at the example of Japan. The Nikkei average peaked at 38,000 in 1990. It bottomed out 13 years later in 2003 at 7,600, i.e. an 80% drop. And in 2010, 20 years after the peak it was still below $10,000.
…
http://3.bp.blogspot.com/_nSTO-vZpSgc/T ... ecades.png
…
While the “lost 2 decades” of Japan provides a cautionary tale, it may be more an example of the perils of investing in a single country’s stock market. My own rule of thumb is to invest in the Total World Stock index (VTWSX) and to be prepared for markets to drop 50% and stay down for 10 years.
VTWSX peaked in January 2018 and is now down 20% from its peak:
https://www.google.com/search?q=vtwsx+q ... irefox-b-1

So as the saying goes, we ain’t seen nothing yet!

Here’s how I am organizing my long term investments to cope with the “down 50% for 10 years scenario”

a) Liability Matching Portfolio: My goal is to build up a combination of Social Security, Employer Pensions, and Long Term Tips ladder that will replace 1/3 of my salary when I retire.
b) Risk Portfolio: 50% Global Stocks, 25% Treasuries/TIPs, 25% Real Estate/”Other Alternatives”

So the idea is to think of these two pieces, the Liability Matching Portfolio and Risk Portfolio, as separate from each other. Ideally if one has a decent Employer Pension, one wouldn’t need to worry about the Liability Matching portfolio piece at all. For the Risk portfolio, the mixture of Stocks, Bonds and alternatives will hopefully provide a smoother ride than an all stock portfolio and opportunities for a rebalancing bonus. Here’s how the pieces of my risk portfolio have performed YTD:

VTWSX: -14%
Vang. Intermed Treas Index: +0.8%
Vang. TIPS: -1.65%
Vang. REits: -9.8%
TIAA Real Estate: +4.4%
Vang. Mkt. Netural: -0.2%

With a 50/12.5/12.5/10/10/5 weighting it works out to -7.7% YTD which is not anything that makes me lose sleep. If VTWSX had lost half its value it would work out to down about 25% which I could still live with.

Keep Calm and Boglehead On! (KCBO)
cheers,
grok

[2015]

I'm personally an advocate for LMP. I'm curious, what was your rational for using LMP to replace 1/3 of your salary?

[ignition]

The market may not come back, or it may not come back for a very long time.

Look at the example of Japan. The Nikkei average peaked at 38,000 in 1990. It bottomed out 13 years later in 2003 at 7,600, i.e. an 80% drop. And in 2010, 20 years after the peak it was still below $10,000.

Thanks for keeping us calm!

[grok87]

I'm personally an advocate for LMP. I'm curious, what was your rational for using LMP to replace 1/3 of your salary?

More detail here
viewtopic.php?f=10&t=245377
"Grok's LMP-4: The 3-legged stool approach to retirement planning"
the idea is to have a balanced approach to retirement income =1/2 of Salary with 1/3 coming from Social Security, 1/3 from Employer-Pension/TIPS-ladder and 1/3 from a Risk portfolio. So 1/2*(1/3+1/3) = 1/3.

As far as suggesting retirement income of 1/2 of Salary, I was just trying to be realistic. Retiring on half pay is hopefully an achievable goal for most people.

cheers,
grok

[grok87]

The market may not come back, or it may not come back for a very long time.

Look at the example of Japan. The Nikkei average peaked at 38,000 in 1990. It bottomed out 13 years later in 2003 at 7,600, i.e. an 80% drop. And in 2010, 20 years after the peak it was still below $10,000.

Thanks for keeping us calm!

I know right! Let's pray it never happens here. But i think it's prudent to prepare for the "50% down for 10 years" scenario. As Pasteur once said "Chance favors the prepared mind."
cheers,
grok

[bertilak]

Another thought:

Even if Mr. Market "never" comes back, what else are you going to invest in? (Assuming you can't predict the future and already have a will-diversified portfolio, including international.)

[2015]

I'm personally an advocate for LMP. I'm curious, what was your rational for using LMP to replace 1/3 of your salary?

More detail here
viewtopic.php?f=10&t=245377
"Grok's LMP-4: The 3-legged stool approach to retirement planning"
the idea is to have a balanced approach to retirement income =1/2 of Salary with 1/3 coming from Social Security, 1/3 from Employer-Pension/TIPS-ladder and 1/3 from a Risk portfolio. So 1/2*(1/3+1/3) = 1/3.

As far as suggesting retirement income of 1/2 of Salary, I was just trying to be realistic. Retiring on half pay is hopefully an achievable goal for most people.

cheers,
grok

Thanks for the link and explanation. I absolutely agree it's possible to retire on half one's salary. I certainly did. I retired (semi) early as a result of frugality, never spending increases in income no matter how small or large they were, and saving at a minimum 50% of my net for years. This came after making all the usual mistakes active investors make in the beginning. My 3 fund PF has long since ensured I won't make any more. I truly believe that success in retirement is a result of personal competencies more than any single strategy.

Regarding LMP, I have liability matched until delayed SS at age 70. As I have unusually high SS, delayed SS will serve as LMP covering all expenses. I have a sizable RP, but with my very low risk tolerance, I just could't bring myself to rely it for any portion of expenses. In retirement, I didn't want to experience the angst we are reading in many threads about the market right now.

[smectym]

Keep Calm and Boglehead On!

So this is not one of those posts saying “don’t worry the stock market will snap back, buy on the dips.”

The market may not come back, or it may not come back for a very long time.

Look at the example of Japan. The Nikkei average peaked at 38,000 in 1990. It bottomed out 13 years later in 2003 at 7,600, i.e. an 80% drop. And in 2010, 20 years after the peak it was still below $10,000.
…
http://3.bp.blogspot.com/_nSTO-vZpSgc/T ... ecades.png
…
While the “lost 2 decades” of Japan provides a cautionary tale, it may be more an example of the perils of investing in a single country’s stock market. My own rule of thumb is to invest in the Total World Stock index (VTWSX) and to be prepared for markets to drop 50% and stay down for 10 years.
VTWSX peaked in January 2018 and is now down 20% from its peak:
https://www.google.com/search?q=vtwsx+q ... irefox-b-1

So as the saying goes, we ain’t seen nothing yet!

Here’s how I am organizing my long term investments to cope with the “down 50% for 10 years scenario”

a) Liability Matching Portfolio: My goal is to build up a combination of Social Security, Employer Pensions, and Long Term Tips ladder that will replace 1/3 of my salary when I retire.
b) Risk Portfolio: 50% Global Stocks, 25% Treasuries/TIPs, 25% Real Estate/”Other Alternatives”

So the idea is to think of these two pieces, the Liability Matching Portfolio and Risk Portfolio, as separate from each other. Ideally if one has a decent Employer Pension, one wouldn’t need to worry about the Liability Matching portfolio piece at all. For the Risk portfolio, the mixture of Stocks, Bonds and alternatives will hopefully provide a smoother ride than an all stock portfolio and opportunities for a rebalancing bonus. Here’s how the pieces of my risk portfolio have performed YTD:

VTWSX: -14%
Vang. Intermed Treas Index: +0.8%
Vang. TIPS: -1.65%
Vang. REits: -9.8%
TIAA Real Estate: +4.4%
Vang. Mkt. Netural: -0.2%

With a 50/12.5/12.5/10/10/5 weighting it works out to -7.7% YTD which is not anything that makes me lose sleep. If VTWSX had lost half its value it would work out to down about 25% which I could still live with.

Keep Calm and Boglehead On! (KCBO)
cheers,
grok

grok, solid post. For those without “a decent Employer Pension” (and that’s most of us in the private sector) consider term SPIA’s from a low-cost provider such as Vanguard.

It’s a fallacy to assume that any annuity you buy must be “for life”.

For example, If an early retirement household has a $1000 income hole to plug and it’s 10 years to retirement, a $100,000 10 yr. SPIA will generate roughly $1000 per month (these figures are approximate and change as interest rates change). Since we do our SPIA’s as rollovers from a Vanguard Variable Annuity via 1035 exchange, the monthly payments are taxed only as to the “earnings” portion; return of principal, of course, is not taxed.

There various ways to replicate the coveted “check every month” the now vanishing employer pension once provided to many Americans (but is now increasingly restricted to the governmental nomenklatura). Not perfect, but this is the best method we’ve found; currently generates $3900 per month in tax-favored income. For the more the limited term annuities actually have upside in that they will terminate right about the time that RIA’s begin


Smectym

[AlphaLess]

How many threads, posts, comments do we need about the legend of the Nikkei?

[Gort]

(deleted)

[CaliJim]

Keep Calm and Boglehead On!

So this is not one of those posts saying “don’t worry the stock market will snap back, buy on the dips.”

The market may not come back, or it may not come back for a very long time.

Look at the example of Japan. The Nikkei average peaked at 38,000 in 1990. It bottomed out 13 years later in 2003 at 7,600, i.e. an 80% drop. And in 2010, 20 years after the peak it was still below $10,000.
…
http://3.bp.blogspot.com/_nSTO-vZpSgc/T ... ecades.png
…
While the “lost 2 decades” of Japan provides a cautionary tale, it may be more an example of the perils of investing in a single country’s stock market. My own rule of thumb is to invest in the Total World Stock index (VTWSX) and to be prepared for markets to drop 50% and stay down for 10 years.
VTWSX peaked in January 2018 and is now down 20% from its peak:
https://www.google.com/search?q=vtwsx+q ... irefox-b-1

So as the saying goes, we ain’t seen nothing yet!

Here’s how I am organizing my long term investments to cope with the “down 50% for 10 years scenario”

a) Liability Matching Portfolio: My goal is to build up a combination of Social Security, Employer Pensions, and Long Term Tips ladder that will replace 1/3 of my salary when I retire.
b) Risk Portfolio: 50% Global Stocks, 25% Treasuries/TIPs, 25% Real Estate/”Other Alternatives”

So the idea is to think of these two pieces, the Liability Matching Portfolio and Risk Portfolio, as separate from each other. Ideally if one has a decent Employer Pension, one wouldn’t need to worry about the Liability Matching portfolio piece at all. For the Risk portfolio, the mixture of Stocks, Bonds and alternatives will hopefully provide a smoother ride than an all stock portfolio and opportunities for a rebalancing bonus. Here’s how the pieces of my risk portfolio have performed YTD:

VTWSX: -14%
Vang. Intermed Treas Index: +0.8%
Vang. TIPS: -1.65%
Vang. REits: -9.8%
TIAA Real Estate: +4.4%
Vang. Mkt. Netural: -0.2%

With a 50/12.5/12.5/10/10/5 weighting it works out to -7.7% YTD which is not anything that makes me lose sleep. If VTWSX had lost half its value it would work out to down about 25% which I could still live with.

Keep Calm and Boglehead On! (KCBO)
cheers,
grok

Amen

[grok87]

How many threads, posts, comments do we need about the legend of the Nikkei?

if you prefer looking at the US market, then according to Shiller's data the S&P peaked at 31.3 in September of 1929. 10 years later it was at 12.8- i.e. still down 60% after 10 years.
http://www.econ.yale.edu/~shiller/data.htm

[grok87]

Keep Calm and Boglehead On!

So this is not one of those posts saying “don’t worry the stock market will snap back, buy on the dips.”

The market may not come back, or it may not come back for a very long time.

Look at the example of Japan. The Nikkei average peaked at 38,000 in 1990. It bottomed out 13 years later in 2003 at 7,600, i.e. an 80% drop. And in 2010, 20 years after the peak it was still below $10,000.
…
http://3.bp.blogspot.com/_nSTO-vZpSgc/T ... ecades.png
…
While the “lost 2 decades” of Japan provides a cautionary tale, it may be more an example of the perils of investing in a single country’s stock market. My own rule of thumb is to invest in the Total World Stock index (VTWSX) and to be prepared for markets to drop 50% and stay down for 10 years.
VTWSX peaked in January 2018 and is now down 20% from its peak:
https://www.google.com/search?q=vtwsx+q ... irefox-b-1

So as the saying goes, we ain’t seen nothing yet!

Here’s how I am organizing my long term investments to cope with the “down 50% for 10 years scenario”

a) Liability Matching Portfolio: My goal is to build up a combination of Social Security, Employer Pensions, and Long Term Tips ladder that will replace 1/3 of my salary when I retire.
b) Risk Portfolio: 50% Global Stocks, 25% Treasuries/TIPs, 25% Real Estate/”Other Alternatives”

So the idea is to think of these two pieces, the Liability Matching Portfolio and Risk Portfolio, as separate from each other. Ideally if one has a decent Employer Pension, one wouldn’t need to worry about the Liability Matching portfolio piece at all. For the Risk portfolio, the mixture of Stocks, Bonds and alternatives will hopefully provide a smoother ride than an all stock portfolio and opportunities for a rebalancing bonus. Here’s how the pieces of my risk portfolio have performed YTD:

VTWSX: -14%
Vang. Intermed Treas Index: +0.8%
Vang. TIPS: -1.65%
Vang. REits: -9.8%
TIAA Real Estate: +4.4%
Vang. Mkt. Netural: -0.2%

With a 50/12.5/12.5/10/10/5 weighting it works out to -7.7% YTD which is not anything that makes me lose sleep. If VTWSX had lost half its value it would work out to down about 25% which I could still live with.

Keep Calm and Boglehead On! (KCBO)
cheers,
grok

grok, solid post. For those without “a decent Employer Pension” (and that’s most of us in the private sector) consider term SPIA’s from a low-cost provider such as Vanguard.

It’s a fallacy to assume that any annuity you buy must be “for life”.

For example, If an early retirement household has a $1000 income hole to plug and it’s 10 years to retirement, a $100,000 10 yr. SPIA will generate roughly $1000 per month (these figures are approximate and change as interest rates change). Since we do our SPIA’s as rollovers from a Vanguard Variable Annuity via 1035 exchange, the monthly payments are taxed only as to the “earnings” portion; return of principal, of course, is not taxed.

There various ways to replicate the coveted “check every month” the now vanishing employer pension once provided to many Americans (but is now increasingly restricted to the governmental nomenklatura). Not perfect, but this is the best method we’ve found; currently generates $3900 per month in tax-favored income. For the more the limited term annuities actually have upside in that they will terminate right about the time that RIA’s begin


Smectym

Thanks Semectym.
If you are trying to guarantee an income stream for a fixed 10 year periods wouldn't a bond ladder work as well? It's not clear to me what the advantage of a fixed term SPIA is, unless of course there are significant mortality credits.
cheers,
grok

[dogagility]

How many threads, posts, comments do we need about the legend of the Nikkei?

if you prefer looking at the US market, then according to Shiller's data the S&P peaked at 31.3 in September of 1929. 10 years later it was at 12.8- i.e. still down 60% after 10 years.

Agree. What is the probability that someone would invest their entire savings at a market peak? Or invest all of their savings in a place that turned out like the Legend of the Nikkei?

All this angst over very unlikely events... doesn't seem like the recipe to "Keep Calm and Boglehead On". IMO, that recipe may be to stop reading this board for the next month or two.

[grok87]

How many threads, posts, comments do we need about the legend of the Nikkei?

if you prefer looking at the US market, then according to Shiller's data the S&P peaked at 31.3 in September of 1929. 10 years later it was at 12.8- i.e. still down 60% after 10 years.

Agree. What is the probability that someone would invest their entire savings at a market peak? Or invest all of their savings in a place that turned out like the Legend of the Nikkei?

All this angst over very unlikely events... doesn't seem like the recipe to "Keep Calm and Boglehead On". IMO, that recipe may be to stop reading this board for the next month or two.

I guess what I am saying is prepare for a 50% equity drawdown that lasts 10 years. Because there is some chance it may happen over your investing horizon. And if/when it does happen, and it's Possible this is the start, then don’t panic but keep calm and boglehead on...

[Cognitive_Squeeze]

How many threads, posts, comments do we need about the legend of the Nikkei?

+1

https://www.nytimes.com/2012/01/08/opin ... nted=all--

[AlphaLess]

How many threads, posts, comments do we need about the legend of the Nikkei?

+1

https://www.nytimes.com/2012/01/08/opin ... nted=all--

Excellent article. Thanks for sharing.

Too many people tie success to either stock or housing prices.

Certainly, we at bogleheads, are not impartial. We are heavily invested in stocks, so we root for stocks to succeed.

But what if a society provided adequate retirement benefit / protection?

Then needing stocks to retire is out of the equation.

Furthermore, continuously rising housing prices are not such a good thing.
In fact, housing prices should be level with inflation: i.e., real housing prices should be flat.

Give it a 0.5 - 1.0% increase effect for maintaining and improving your house, and that's it.
Case and Shiller have demonstrated that pretty much that is the case: in the long run.
However, over the last 20 years, we have had too many housing boom and bust cycles.

Apparently, the housing trading market is not able to product such steady growth.
High transaction costs associated with house buying / selling, and high switching costs associated with moving, and lack of mechanisms for acquiring controlling interest (without living there), as well as lack of mechanisms for short selling are all contributing factors.

[phantom0308]

Where can I find these magical employer pensions you speak of? They seem to have gone extinct outside the public sector before I entered the labor force. What is the likelihood of a pension paying out if the stock market drops 50% for 10 years? I’d think that underfunded pensions would become a bigger problem than they already are.

[smectym]

Can’t speak for grok but if he’s saying that Bogleheads should guard against complacency, or any idea that we have the “magic sauce” that guarantees we’ll be definitely OK “if we Stay the Course,” then that’s worth reflecting on. We like to say that “we don’t know nuthin,” can’t predict the future direction of stock prices etc., but our portfolios belie such professions and seem geared on the assumption that “in the long term” stock prices will generally rise. The recent rally, historic by any measure, introduces a heavy dose of recency bias that reinforces such potentially over-optimistic assumptions.

“Sky is Falling” and Doom Porn should indeed be discounted, but that’s not the same thing as failing to seriously consider worst case scenarios and stress-testing the portfolio to survive the worst case.

Smectym

[grok87]

Where can I find these magical employer pensions you speak of? They seem to have gone extinct outside the public sector before I entered the labor force.

it's a good point. i only have a small pension from a previous employer. so my plan is to build a long term tips ladder to help supplement things. My goal is to generate inflation adjusted retirement income = 1/3 of my salary from a combination of social security, employer pension, and tips-ladder.
cheers,
grok

[grok87]

Can’t speak for grok but if he’s saying that Bogleheads should guard against complacency, or any idea that we have the “magic sauce” that guarantees we’ll be definitely OK “if we Stay the Course,” then that’s worth reflecting on. We like to say that “we don’t know nuthin,” can’t predict the future direction of stock prices etc., but our portfolios belie such professions and seem geared on the assumption that “in the long term” stock prices will generally rise. The recent rally, historic by any measure, introduces a heavy dose of recency bias that reinforces such potentially over-optimistic assumptions.

“Sky is Falling” and Doom Porn should indeed be discounted, but that’s not the same thing as failing to seriously consider worst case scenarios and stress-testing the portfolio to survive the worst case.

Smectym

agree.
I think your phrase "stress-testing" is the concept i was going after with my "down 50% for 10 years" scenario. It is worth knowing how your portfolio would handle that scenario if it happens shortly before you retire.

I think the "down 50% for 10 years" is a bad scenario but i personally don't consider it a worst case. Worse things happened recently in Japan and in the US during the Great depression.

cheers,
grok

[zaboomafoozarg]

Where can I find these magical employer pensions you speak of? They seem to have gone extinct outside the public sector before I entered the labor force. What is the likelihood of a pension paying out if the stock market drops 50% for 10 years? I’d think that underfunded pensions would become a bigger problem than they already are.

Banking, insurance, and manufacturing are a few industries that I've still seen offer pensions. I have a pension with my current company and also vested into a pension with my previous company. And in the meantime I interviewed at a third company and they had a pension as well.

Both the pensions I'm vested in now are currently funded above 100%.

[marcopolo]

Can’t speak for grok but if he’s saying that Bogleheads should guard against complacency, or any idea that we have the “magic sauce” that guarantees we’ll be definitely OK “if we Stay the Course,” then that’s worth reflecting on. We like to say that “we don’t know nuthin,” can’t predict the future direction of stock prices etc., but our portfolios belie such professions and seem geared on the assumption that “in the long term” stock prices will generally rise. The recent rally, historic by any measure, introduces a heavy dose of recency bias that reinforces such potentially over-optimistic assumptions.

“Sky is Falling” and Doom Porn should indeed be discounted, but that’s not the same thing as failing to seriously consider worst case scenarios and stress-testing the portfolio to survive the worst case.

Smectym

agree.
I think your phrase "stress-testing" is the concept i was going after with my "down 50% for 10 years" scenario. It is worth knowing how your portfolio would handle that scenario if it happens shortly before you retire.

I think the "down 50% for 10 years" is a bad scenario but i personally don't consider it a worst case. Worse things happened recently in Japan and in the US during the Great depression.

cheers,
grok

One can always imagine even worse cases than the next guy. You say up thread that your solution is to build a TIPS ladder, rely on SS, and a pension, so does your imagination stop at the possibility that governments default on debt, pensions fails? All of those have also happened in the past in different economies.

[phantom0308]

Where can I find these magical employer pensions you speak of? They seem to have gone extinct outside the public sector before I entered the labor force. What is the likelihood of a pension paying out if the stock market drops 50% for 10 years? I’d think that underfunded pensions would become a bigger problem than they already are.

Banking, insurance, and manufacturing are a few industries that I've still seen offer pensions. I have a pension with my current company and also vested into a pension with my previous company. And in the meantime I interviewed at a third company and they had a pension as well.

Both the pensions I'm vested in now are currently funded above 100%.

Cool, both the companies I’ve worked for (manufacturing heavy machinery and automotive) have offered pensions in the past but have been phasing them out, so they’re only available to older employees.

[oldzey]

Stay the Course!

[4nursebee]

I like the Nikkei examples as what they worst could be. The Nikkei is now 20,000.

I like the approach of here is what I am doing in case of a worst case scenario (and I like that the OP says what they are doing).


[EDIT, I should have said this is what I am doing, re reading it makes it seem like I am attributing this to the OP]
1. All personal debt paid off (only business rental real estate loans).
2. Minimize expenses, typically done through paying up for items on the front end (concrete house, solar, metal roof, quality HVAC). Aim has been for efficiency so bills would be low.
3. LCOL area.
4. Pension + SS will be >50% of income.
5. Rental real estate provides extra income and peace of mind.
5. Build stronger cash reserve.
6. Maintain BH investing with retirement assets.

Peace of mind!

[rai]

I think looking at Japan market bubble is not being honest at all regarding the current stock market. Back in 1990 Japan stock market was worth something like 55% of the global stock market and the PE of that index was 70 or so while the current US PE is more reasonable 20 or so.

Home real estate prices were so high in Japan people were taking out 100 year mortgages to afford real estate.

[aj76er]

How many threads, posts, comments do we need about the legend of the Nikkei?

if you prefer looking at the US market, then according to Shiller's data the S&P peaked at 31.3 in September of 1929. 10 years later it was at 12.8- i.e. still down 60% after 10 years.
http://www.econ.yale.edu/~shiller/data.htm

And now for your next trick - demonstrate when it happened to a global market equity portfolio.

[grok87]

Can’t speak for grok but if he’s saying that Bogleheads should guard against complacency, or any idea that we have the “magic sauce” that guarantees we’ll be definitely OK “if we Stay the Course,” then that’s worth reflecting on. We like to say that “we don’t know nuthin,” can’t predict the future direction of stock prices etc., but our portfolios belie such professions and seem geared on the assumption that “in the long term” stock prices will generally rise. The recent rally, historic by any measure, introduces a heavy dose of recency bias that reinforces such potentially over-optimistic assumptions.

“Sky is Falling” and Doom Porn should indeed be discounted, but that’s not the same thing as failing to seriously consider worst case scenarios and stress-testing the portfolio to survive the worst case.

Smectym

agree.
I think your phrase "stress-testing" is the concept i was going after with my "down 50% for 10 years" scenario. It is worth knowing how your portfolio would handle that scenario if it happens shortly before you retire.

I think the "down 50% for 10 years" is a bad scenario but i personally don't consider it a worst case. Worse things happened recently in Japan and in the US during the Great depression.

cheers,
grok

One can always imagine even worse cases than the next guy. You say up thread that your solution is to build a TIPS ladder, rely on SS, and a pension, so does your imagination stop at the possibility that governments default on debt, pensions fails? All of those have also happened in the past in different economies.

it's a good point.
i'm partial to William Bernstein's framing of risk in his book on "Deep Risk": High Inflation; Deflation; Devastation (War); and Confiscation. I suppose the US government defaulting on treasuries would fall under confiscation and i suppose that is perhaps the weak spot of my approach. Regarding the first 3:

High Inflation: Hopefully covered by TIPS and Real estate
Deflation: hopefully covered by Treasuries and not tilting to small or value stocks
Devastation (War): Hopefully covered by a Total World stock market approach

[grok87]

Stay the Course!

nice poster!

[grok87]

How many threads, posts, comments do we need about the legend of the Nikkei?

if you prefer looking at the US market, then according to Shiller's data the S&P peaked at 31.3 in September of 1929. 10 years later it was at 12.8- i.e. still down 60% after 10 years.
http://www.econ.yale.edu/~shiller/data.htm

And now for your next trick - demonstrate when it happened to a global market equity portfolio.

will have to check my dimson and marsh book...

[grok87]

I like the Nikkei examples as what they worst could be. The Nikkei is now 20,000.

I like the approach of here is what I am doing in case of a worst case scenario (and I like that the OP says what they are doing).

1. All personal debt paid off (only business rental real estate loans).
2. Minimize expenses, typically done through paying up for items on the front end (concrete house, solar, metal roof, quality HVAC). Aim has been for efficiency so bills would be low.
3. LCOL area.
4. Pension + SS will be >50% of income.
5. Rental real estate provides extra income and peace of mind.
5. Build stronger cash reserve.
6. Maintain BH investing with retirement assets.

Peace of mind!

thanks

[grok87]

I think looking at Japan market bubble is not being honest at all regarding the current stock market. Back in 1990 Japan stock market was worth something like 55% of the global stock market and the PE of that index was 70 or so while the current US PE is more reasonable 20 or so.

Home real estate prices were so high in Japan people were taking out 100 year mortgages to afford real estate.

thanks. i didn't know it got to 70

[smectym]

Can’t speak for grok but if he’s saying that Bogleheads should guard against complacency, or any idea that we have the “magic sauce” that guarantees we’ll be definitely OK “if we Stay the Course,” then that’s worth reflecting on. We like to say that “we don’t know nuthin,” can’t predict the future direction of stock prices etc., but our portfolios belie such professions and seem geared on the assumption that “in the long term” stock prices will generally rise. The recent rally, historic by any measure, introduces a heavy dose of recency bias that reinforces such potentially over-optimistic assumptions.

“Sky is Falling” and Doom Porn should indeed be discounted, but that’s not the same thing as failing to seriously consider worst case scenarios and stress-testing the portfolio to survive the worst case.

Smectym

agree.
I think your phrase "stress-testing" is the concept i was going after with my "down 50% for 10 years" scenario. It is worth knowing how your portfolio would handle that scenario if it happens shortly before you retire.

I think the "down 50% for 10 years" is a bad scenario but i personally don't consider it a worst case. Worse things happened recently in Japan and in the US during the Great depression.

cheers,
grok

One can always imagine even worse cases than the next guy. You say up thread that your solution is to build a TIPS ladder, rely on SS, and a pension, so does your imagination stop at the possibility that governments default on debt, pensions fails? All of those have also happened in the past in different economies.

Sure, “one can always imagine,” but gratuitously attributing such ever-more-implausible arguments to ones opponent, who never proposed them, is a rhetorical and logical fallacy fallacy (“reductio ad absurdum”).

A prolonged funk in US or global equity prices, persisting much longer than most investors, including bogleheads, expect or plan for, is not an absurd or ridiculous scenario; and the very fact that some on this board choose to treat it as such exposes the inherent bias towards a faith-based belief that those who “Stay the Course!” must necessarily earn their just reward.

“Isn’t it pretty to think so.”

Smectym

[marcopolo]

Can’t speak for grok but if he’s saying that Bogleheads should guard against complacency, or any idea that we have the “magic sauce” that guarantees we’ll be definitely OK “if we Stay the Course,” then that’s worth reflecting on. We like to say that “we don’t know nuthin,” can’t predict the future direction of stock prices etc., but our portfolios belie such professions and seem geared on the assumption that “in the long term” stock prices will generally rise. The recent rally, historic by any measure, introduces a heavy dose of recency bias that reinforces such potentially over-optimistic assumptions.

“Sky is Falling” and Doom Porn should indeed be discounted, but that’s not the same thing as failing to seriously consider worst case scenarios and stress-testing the portfolio to survive the worst case.

Smectym

agree.
I think your phrase "stress-testing" is the concept i was going after with my "down 50% for 10 years" scenario. It is worth knowing how your portfolio would handle that scenario if it happens shortly before you retire.

I think the "down 50% for 10 years" is a bad scenario but i personally don't consider it a worst case. Worse things happened recently in Japan and in the US during the Great depression.

cheers,
grok

One can always imagine even worse cases than the next guy. You say up thread that your solution is to build a TIPS ladder, rely on SS, and a pension, so does your imagination stop at the possibility that governments default on debt, pensions fails? All of those have also happened in the past in different economies.

Sure, “one can always imagine,” but gratuitously attributing such ever-more-implausible arguments to ones opponent, who never proposed them, is a rhetorical and logical fallacy fallacy (“reductio ad absurdum”).

A prolonged funk in US or global equity prices, persisting much longer than most investors, including bogleheads, expect or plan for, is not an absurd or ridiculous scenario; and the very fact that some on this board choose to treat it as such exposes the inherent bias towards a faith-based belief that those who “Stay the Course!” must necessarily earn their just reward.

“Isn’t it pretty to think so.”

Smectym

Perhaps you missed my point.

I have no problem with one assuming equity risk could be much worse than "50% down for 10 years", because as pointed out, it has happened. But, the point I was making is that if you are going to consider that level of risk in your planning, it seems inconsistent to then largely ignore risks in other investment vehicles like pensions, bonds, social security. There have been historical examples of those investments failing as well.

[jharkin]

Can’t speak for grok but if he’s saying that Bogleheads should guard against complacency, or any idea that we have the “magic sauce” that guarantees we’ll be definitely OK “if we Stay the Course,” then that’s worth reflecting on. We like to say that “we don’t know nuthin,” can’t predict the future direction of stock prices etc., but our portfolios belie such professions and seem geared on the assumption that “in the long term” stock prices will generally rise. The recent rally, historic by any measure, introduces a heavy dose of recency bias that reinforces such potentially over-optimistic assumptions.

“Sky is Falling” and Doom Porn should indeed be discounted, but that’s not the same thing as failing to seriously consider worst case scenarios and stress-testing the portfolio to survive the worst case.

Smectym

+1 and like Grok my plan is to have very diverse options beyond just relying on the market. We will have fairly heft SS (me) and a modest public school pension (my wife) that should cover the majority of our basic expenses if we delay and take them as late as possible. So investments will only need to cover a third or less of our projected retirement expenses, even factoring in the maximum medicare out of pocket costs.

All of this predicates having a paid off house and a much lower expense rate than our working years.. And that too adds flexibility... if we do run into a Nikkei or 1929 scenario I can always back off on retirement contributions and accelerate mortgage payoff instead.

But the #1 hedge for both my wife and I - the enabler of the flexibility above - was to choose careers and employers that valued long term job stability over high salaries.

[grok87]

Can’t speak for grok but if he’s saying that Bogleheads should guard against complacency, or any idea that we have the “magic sauce” that guarantees we’ll be definitely OK “if we Stay the Course,” then that’s worth reflecting on. We like to say that “we don’t know nuthin,” can’t predict the future direction of stock prices etc., but our portfolios belie such professions and seem geared on the assumption that “in the long term” stock prices will generally rise. The recent rally, historic by any measure, introduces a heavy dose of recency bias that reinforces such potentially over-optimistic assumptions.

“Sky is Falling” and Doom Porn should indeed be discounted, but that’s not the same thing as failing to seriously consider worst case scenarios and stress-testing the portfolio to survive the worst case.

Smectym

agree.
I think your phrase "stress-testing" is the concept i was going after with my "down 50% for 10 years" scenario. It is worth knowing how your portfolio would handle that scenario if it happens shortly before you retire.

I think the "down 50% for 10 years" is a bad scenario but i personally don't consider it a worst case. Worse things happened recently in Japan and in the US during the Great depression.

cheers,
grok

One can always imagine even worse cases than the next guy. You say up thread that your solution is to build a TIPS ladder, rely on SS, and a pension, so does your imagination stop at the possibility that governments default on debt, pensions fails? All of those have also happened in the past in different economies.

Sure, “one can always imagine,” but gratuitously attributing such ever-more-implausible arguments to ones opponent, who never proposed them, is a rhetorical and logical fallacy fallacy (“reductio ad absurdum”).

A prolonged funk in US or global equity prices, persisting much longer than most investors, including bogleheads, expect or plan for, is not an absurd or ridiculous scenario; and the very fact that some on this board choose to treat it as such exposes the inherent bias towards a faith-based belief that those who “Stay the Course!” must necessarily earn their just reward.

“Isn’t it pretty to think so.”

Smectym

Perhaps you missed my point.

I have no problem with one assuming equity risk could be much worse than "50% down for 10 years", because as pointed out, it has happened. But, the point I was making is that if you are going to consider that level of risk in your planning, it seems inconsistent to then largely ignore risks in other investment vehicles like pensions, bonds, social security. There have been historical examples of those investments failing as well.

I suppose an unhedged foreign bond fund would be a good protector in the scenario of a US government bond default. Vanguard doesn't offer such a product but others do. State street has an ETF BWX that appears to fit the bill.
http://performance.morningstar.com/fund ... ture=en_US
it is down -2% YTD vs. Vanguard's hedged international bond fund which is up. So pretty sure BWX is unhedged.
1% yield for a duration of 8. So not much expected return but presumably would provide downside protection in the scenario of a US treasury default- so might be worth a look...
cheers,
grok