Optimal approaches when you've "won the game"

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aspiringboglehead
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Optimal approaches when you've "won the game"

Post by aspiringboglehead »

I wonder if there's any interesting or helpful analysis to cover the situation that arises when you've built up a portfolio that comfortably allows you to meet your financial goals.

One thought that occurs to me is that it may be useful to allocate some funds toward redundant "insurance" of your goals. This may come perilously close to one of the basic fallacies taught to financial planners so that they can avoid them -- "mental accounting" of different piles of money -- but it doesn't seem irrational in this situation.

For example, say you've accumulated a large portfolio and want to ensure that you will have the equivalent of $x/year (adjusted for actual inflation) to cover expenses for the rest of your life. Rather than treating your portfolio as a single collection of money that would probably always meet this goal as a general matter, it doesn't seem irrational to "account" for different pieces of it that can independently produce that income -- say, an FDIC-insured bank account, an ultrasafe money-market fund, a holding of inflation-indexed bonds, a holding of long-term nominal bonds, an equity portfolio in an amount equal to 25x yearly expenses, and so on. This gives purpose to particular holdings rather than aimlessly constructing a unified portfolio and then analyzing it in terms of historical volatility and return. Each piece responds separately to a different, admittedly low risk (e.g., inflation-tracking error in TIPS, interest-rate risk, reinvestment risk, and so on) whereas a unified portfolio responds to those risks imprecisely and in the aggregate.

In other words, this seems to be a way to build an extremely robust, liability-based asset allocation that can potentially give you greater peace of mind than "Well, I've accumulated enough, so I'm 20% in equities and 80% in safe bonds of intermediate term or less because FIREcalc says that'll always meet my goal" or anything else that involves a percentage-based allocation to equities and bonds for a unified portfolio. Am I wrong about that or, conversely, just stating the obvious?

To be clear, the goal wouldn't be to become as wealthy as possible given acceptable risks; it would simply be to reduce the likelihood of a shortfall as much as possible.
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tooluser
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Re: Optimal approaches when you've "won the game"

Post by tooluser »

Is there a definition for "won the game"? I don't see anything in the Wiki. It would be good to start from a baseline.
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Re: Optimal approaches when you've "won the game"

Post by The Wizard »

The optimal approach is just to keep on keeping on.
Maybe slightly change your AA to more conservative but stay the course with what did the job...
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Re: Optimal approaches when you've "won the game"

Post by dknightd »

Buy an SPIA that covers your cost of living. The rest is gravy.
If you value a bird in the hand, pay off the loan. If you are willing to risk getting two birds (or none) from the market, invest the funds. Retired 9/19. Still working on mortgage payoff.
sf_tech_saver
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Re: Optimal approaches when you've "won the game"

Post by sf_tech_saver »

50/50 portfolio is my plan. Personal goal is to have $5M in a 50/50 (VTI/VTEB) and figure it out from there.

Winning the game is when I can't find a 100 year scenario where what I have in a 50/50 isn't enough.

IMHO that covers you fairly well against both inflation and a bear market.

I'd also own a primary residence (or two) in a HCOL global city (SF, NYC etc). Worst case you could always trade that down, but they tend to be pretty resilient.

Winning the game to me is having enough to keep it really really simple.
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gmaynardkrebs
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Re: Optimal approaches when you've "won the game"

Post by gmaynardkrebs »

tooluser wrote: Sat Mar 02, 2019 9:12 pm Is there a definition for "won the game"? I don't see anything in the Wiki. It would be good to start from a baseline.
The way I have seen it used if where you have reached a point where you know you have as much money as you want or need, and are unwilling to make investments that jeopardize that enviable status. The sum will differ from person to person and situation to situation.
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Re: Optimal approaches when you've "won the game"

Post by Dandy »

I follow Dr. Wm Bernstein's idea for "those who have enough". He suggests having 20 to 25 years worth of drawdown dollars in "safe" products (my term). The rest invest anyway you want even 100% equities.

In retirement I was looking for how my portfolio should be structured. Was 60/40 too aggressive? Was 40/60 too conservative? His idea made sense to me -- I saw it as a bottom up approach i.e. secure your retirement funding first and let that guide you to an overall allocation. So I decided to have at least enough "safe" assets to fund retirement to age 90. My idea of "safe" is FDIC products, short term bond funds, money market funds/deposit accounts, etc. That resulted in a about 2/3 of my fixed income being in "safe" assets. My "risk" portfolio is equities and intermediate bond funds allocated about 67/33 for an overall allocation of 43/57.

This approach gave me peace of mind as I don't worry as much about equity performance. My withdrawals are usually a mix of "safe" and "risk" assets. I guess I would only use "safe" if equities really tanked. This extends either the length of the "safe" portfolio and/or helps keep up with inflation.

When I collected SS at age 70 it reduced reduced my withdrawal needs. But, since if I die first my non investment savvy wife will lose her SS, 50% of my pension and probably be in a higher tax bracket (filing single instead of joint). So, I left the original plan in place.

This is not a growth strategy it is an asset preservation strategy. If you start with "enough" there is less need for growth for you, your spouse or your heirs. If you have a decent size "risk" portfolio you will still likely get some growth and some help in offsetting inflation.
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Re: Optimal approaches when you've "won the game"

Post by SDLinguist »

If looking to optimize potential total returns and keep the winning portion safe the optimal choice would be to do some mental accounting.

Keep the money you need to have won at your desired allocation and then go ultra high risk/reward on the rest.

I am taking having won to mean having enough to the point where you don't care about the extra.

There are two problems though that need to be overcome. Few people will be able to rationally stay the course and separate the having won money from the extra. The second is balancing the high risk/high reward to a point where it is still investigating and does not cross over into speculation or just plain gambling.
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Re: Optimal approaches when you've "won the game"

Post by gmaynardkrebs »

sf_tech_saver wrote: Sat Mar 02, 2019 9:28 pm 50/50 portfolio is my plan. Personal goal is to have $5M in a 50/50 (VTI/VTEB) and figure it out from there.

Winning the game is when I can't find a 100 year scenario where what I have in a 50/50 isn't enough.

IMHO that covers you fairly well against both inflation and a bear market.

I'd also own a primary residence (or two) in a HCOL global city (SF, NYC etc). Worst case you could always trade that down, but they tend to be pretty resilient.

Winning the game to me is having enough to keep it really really simple.
Stocks (VTI) provide inflation protection "fairly well" over long periods to the extent they represent real assets, but not over shorter periods of say 10 years. In either case, it's not as ironclad as with TIPS. You must be in a fairly high tax bracket, so you would want to keep TIPS only in your 401K. I assume (hope) that VTEB is in taxable. :happy
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Re: Optimal approaches when you've "won the game"

Post by sf_tech_saver »

gmaynardkrebs wrote: Sun Mar 03, 2019 10:09 am
sf_tech_saver wrote: Sat Mar 02, 2019 9:28 pm
Stocks (VTI) provide inflation protection "fairly well" over long periods to the extent they represent real assets, but not over shorter periods of say 10 years. In either case, it's not as ironclad as with TIPS. You must be in a fairly high tax bracket, so you would want to keep TIPS only in your 401K. I assume (hope) that VTEB is in taxable. :happy
Tax rate last year was 51% so that tends to make municipals pretty attractive in after tax.

I actually hold mostly VCADX/VCLAX with some VTEB as I'm in California but VTEB is my general market short hand for non CA residents.

The incremental inflation protection of TIPS vs. VTI in a long term portfolio is an interesting question. I would enjoy a whole thread on that topic.
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sf_tech_saver
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Re: Optimal approaches when you've "won the game"

Post by sf_tech_saver »

With a SEC yield of just .79% TIPS (VAIPX) seems like relatively expensive insurance vs. riding VTI out.
VTI is a modern marvel
Island John
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Re: Optimal approaches when you've "won the game"

Post by Island John »

You might want to take a look at Michael McClung's book "Living Off Your Money". In addition to it being an excellent resource for guidance on income harvesting, variable withdrawal, and asset allocation, he has an entire chapter titled "Underpinning Systemic Withdrawals with Guaranteed Income".

There is a Bogleheads thread discussing the book here: viewtopic.php?f=10&t=192105&hilit=mcclu ... your+money
Last edited by Island John on Sun Mar 03, 2019 12:12 pm, edited 1 time in total.
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aspiringboglehead
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Re: Optimal approaches when you've "won the game"

Post by aspiringboglehead »

I've always thought that many people adopt approaches that are too risky and complicated in order to keep up with inflation. For example, money markets have done surprisingly well at keeping up with inflation on their own:

https://portfoliocharts.com/2017/05/12/ ... -investor/

Like the author of that article, it's always seemed to me that people have in mind the loss in real purchasing-power of cash over time without imagining that it was earning anything. If it was earning interest at a competitive bank-account or money-market rate over the last century, inflation wasn't a big problem overall. Certainly it wasn't enough to motivate large equity allocations on its own, but people seem to talk as if it was.

I also think many people experience the "loss" from inflation too acutely as a psychological matter. If someone's real purchasing power goes down from $10 million to $9.6 million, it's not a big deal in most cases. Losing more than that from "safe" short-term assets isn't a large risk unless you've literally kept the money in "cash" in a mattress or bank-account vault.
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Re: Optimal approaches when you've "won the game"

Post by dbr »

sf_tech_saver wrote: Sun Mar 03, 2019 11:26 am With a SEC yield of just .79% TIPS (VAIPX) seems like relatively expensive insurance vs. riding VTI out.
Note G says "G — DOES NOT INCLUDE ANY INCOME ADJUSTMENT RESULTING FROM CHANGE IN INFLATION RATE" which means you have to add the current rate of inflation to that number before comparing to nominal investments. This is a common misreading of that data. Vanguard quotes the current yield to maturity as 2.4%
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Re: Optimal approaches when you've "won the game"

Post by sf_tech_saver »

dbr wrote: Sun Mar 03, 2019 11:57 am
sf_tech_saver wrote: Sun Mar 03, 2019 11:26 am With a SEC yield of just .79% TIPS (VAIPX) seems like relatively expensive insurance vs. riding VTI out.
Note G says "G — DOES NOT INCLUDE ANY INCOME ADJUSTMENT RESULTING FROM CHANGE IN INFLATION RATE" which means you have to add the current rate of inflation to that number before comparing to nominal investments. This is a common misreading of that data. Vanguard quotes the current yield to maturity as 2.4%
Thought that almost 'had' to be the case with a current inflation rate near 2. Thanks for the clarification.

Any thoughts on TIPS vs. VTI on long term inflation protection in a portfolio?
VTI is a modern marvel
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Re: Optimal approaches when you've "won the game"

Post by heyyou »

Is there much difference between somewhat conservative, accumulative investing and the overall risk of a very conservative plus quite risky portfolio? Seems to me, it could be wise to at least expect to adapt as the future occurs, or perhaps expect that the historical optimal may only be good enough but not the best, for a future problem. TIPS were designed to fit previous high inflation (1970s-early 80s), then lost some value when a different situation occurred in 2008. More succinctly, be aware of false precision when planning for what is unknown.
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Re: Optimal approaches when you've "won the game"

Post by dbr »

sf_tech_saver wrote: Sun Mar 03, 2019 12:01 pm
dbr wrote: Sun Mar 03, 2019 11:57 am
sf_tech_saver wrote: Sun Mar 03, 2019 11:26 am With a SEC yield of just .79% TIPS (VAIPX) seems like relatively expensive insurance vs. riding VTI out.
Note G says "G — DOES NOT INCLUDE ANY INCOME ADJUSTMENT RESULTING FROM CHANGE IN INFLATION RATE" which means you have to add the current rate of inflation to that number before comparing to nominal investments. This is a common misreading of that data. Vanguard quotes the current yield to maturity as 2.4%
Thought that almost 'had' to be the case with a current inflation rate near 2. Thanks for the clarification.

Any thoughts on TIPS vs. VTI on long term inflation protection in a portfolio?
Yes, TIPS and VTI are such drastically different assets that the comparison for that purpose is meaningless. A better question to ask is what asset allocation meets one's needs keeping on mind that inflation is a risk. If a person can meet their needs without holding stocks then TIPS are a logical solution to inflation risk with no default risk and the ability to control interest rate risk by selecting the duration or by building a ladder. At short durations cash deposits may well be relatively on pace with inflation but offer lower return than longer duration investments. The price of higher return from TIPS is interest rate risk.

If the investor needs the expected return of stocks and can tolerate the uncertainty, then stocks on average will outrun inflation but are not going to be compensated in real time for inflation and may be hurt in short runs by increasing inflation.

It really depends on what one is trying to do when talking about inflation "protection."
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Re: Optimal approaches when you've "won the game"

Post by Random Walker »

I too am a big fan of William Bernstein. Larry Swedroe has written something to the effect that “the strategy for becoming rich is totally different from the strategy for staying rich”. Based I think on something I read by Bernstein a long time ago, I’m a big fan of viewing one's assets as a whole from top down; this is certainly rational during the accumulation phase. But it’s also very rational to take a different approach after “winning the game”, and this is what Bernstein promotes in his fairly recent ebook on lifecycle investing. He recommends dividing one’s assets into a liability matching portfolio and a risk portfolio. I think, as mentioned above, the LMP consists of 25-30 years living expenses invested conservatively and the RP is whatever one wishes to do. As I approach retirement, I’m 56, this approach increasingly makes sense to me.
Something else Bernstein emphasizes in his lifecycle book is that when one enters the realm of having won the game, he shouldn’t futz around. It’s rational to take some definitive action to lock down the LMP. This is why I have previously referred to “customizing one’s own glide path” towards the retirement portfolio. We can’t control markets, but we can control how we respond to their gyrations in relation to our own personal circumstances. Equities have an SD 2-3X their annualized return, and return distributions have fat tails. Under that circumstance, doing something target date fundish like decreasing equity allocation 1% per year seems less than optimal. When markets have been generous, valuations plump, future expected returns lower, and whole potential distribution of future returns shifted left, why not take a bigger step towards the LMP by taking a bigger chunk of risk off the table? After securing the LMP, the investor can freely invest the RP as aggressively as he wishes. Moreover, having LMP secured, he is more likely to have the fortitude to stick to his RP plan.

Dave
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Re: Optimal approaches when you've "won the game"

Post by willthrill81 »

Dandy wrote: Sun Mar 03, 2019 6:28 am I follow Dr. Wm Bernstein's idea for "those who have enough". He suggests having 20 to 25 years worth of drawdown dollars in "safe" products (my term). The rest invest anyway you want even 100% equities.
Such a strategy seems to be borderline 'recklessly conservative' to me. Historically, nominal bonds have been at greater risk of real losses over 20+ years than equities; I believe that Siegel found the tipping point to actually be about 18 years. And of course, that ignores the far greater upside potential that equities have had over that same period.

Benjamin Graham recommended that no investor have a lesser allocation to equities than 25%. And since the 1970s at least, a 25/75 allocation has actually been less volatile than 0/100 in addition to having a higher return. In order to maintain such an AA and still have 25 years of spending in 'safe' assets, that means that you would need an additional 8.3 years of spending in equities, or a total of 33.3X your annual spending. But at a 3% withdrawal rate, do you really need to be 75% 'safe' assets? Perhaps some do, but I would hope not many.
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Re: Optimal approaches when you've "won the game"

Post by willthrill81 »

Random Walker wrote: Sun Mar 03, 2019 12:11 pmLarry Swedroe has written something to the effect that “the strategy for becoming rich is totally different from the strategy for staying rich”.
That's certainly not the approach that the deca-millionaires I know have taken.

If a 70/30 AA is good enough for a retiree with $2 million, it must be good enough for someone with $20 million or $200 million.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
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aspiringboglehead
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Re: Optimal approaches when you've "won the game"

Post by aspiringboglehead »

Random Walker wrote: Sun Mar 03, 2019 12:11 pm I too am a big fan of William Bernstein. Larry Swedroe has written something to the effect that “the strategy for becoming rich is totally different from the strategy for staying rich”. Based I think on something I read by Bernstein a long time ago, I’m a big fan of viewing one's assets as a whole from top down; this is certainly rational during the accumulation phase. But it’s also very rational to take a different approach after “winning the game”, and this is what Bernstein promotes in his fairly recent ebook on lifecycle investing. He recommends dividing one’s assets into a liability matching portfolio and a risk portfolio. I think, as mentioned above, the LMP consists of 25-30 years living expenses invested conservatively and the RP is whatever one wishes to do. As I approach retirement, I’m 56, this approach increasingly makes sense to me.
Something else Bernstein emphasizes in his lifecycle book is that when one enters the realm of having won the game, he shouldn’t futz around. It’s rational to take some definitive action to lock down the LMP. This is why I have previously referred to “customizing one’s own glide path” towards the retirement portfolio. We can’t control markets, but we can control how we respond to their gyrations in relation to our own personal circumstances. Equities have an SD 2-3X their annualized return, and return distributions have fat tails. Under that circumstance, doing something target date fundish like decreasing equity allocation 1% per year seems less than optimal. When markets have been generous, valuations plump, future expected returns lower, and whole potential distribution of future returns shifted left, why not take a bigger step towards the LMP by taking a bigger chunk of risk off the table? After securing the LMP, the investor can freely invest the RP as aggressively as he wishes. Moreover, having LMP secured, he is more likely to have the fortitude to stick to his RP plan.

Dave
Thanks -- this seems to be very similar to the instincts I was exploring at the start of the thread. I think my only real difference is in being particularly conservative in constructing the liability-matching portfolio: particularly with low expenses, I think I get some psychological value by redundantly "insuring" my ability to meet liabilities. It seems fine to sacrifice theoretical growth in order to achieve that goal. And that goal finally gives some purpose to my asset allocation, which has otherwise always felt aimless and arbitrary.

Insuring against liabilities goes beyond asset allocations, too. I started thinking about this topic because of the recent thread asking how many people can live comfortably off Social Security; I consider that a separate, redundant type of insurance. As another example, owning real-estate outright can be a further, independent sort of assurance against various risks. As could a very stable job. At some point, admittedly, the risk-aversion becomes ridiculous, but the point is that it gives actionable structure to an asset allocation under circumstances where it otherwise would be easy to justify any allocation from 0% to 100% equities.
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Re: Optimal approaches when you've "won the game"

Post by garlandwhizzer »

Annuities and nominal bonds, anything that offers a fixed nominal income stream is vulnerable to inflation. Stocks are vulnerable to bear markets, black swans, stagflation. Everything except TIPS in fact seem vulnerable to stagflation and black swans. Even Treasuries and TIPS are vulnerable to rare geopolitical disasters like a war which unlike the others, we don't win. There are also global disasters--runaway global warming, environmental devastation, world wide plague like the Black Death, huge asteroid strike like the one that killed the dinosaurs--that devastate everything. In such cases the US government can go bankrupt. It could print the money to back up its bonds but likely the money would be worth nothing like Germany in 1920s or the Confederacy in the Civil War. Then there's always the issue of long term dementia/medical disaster with the loss of ability to make sound financial decisions and envoy life. In such cases you are vulnerable to unethical financial advisors/greedy relatives that can pilfer your assets.

Total safety from all possibilities is something that all of us desire greatly but this world offers it to no one. There is some level of risk in everything. Rather than obsessing endlessly over reducing risk to zero (which I believe to be impossible), it may be preferable to pick a rational portfolio attuned with your own individual circumstances rather than blindly following some financial guru's cookbook promising risk reduction to zero. There is no way to reduce risk to zero in the face of an uncertain future. What protects you from one disaster may set you up for another one coming from a different direction. The problem is that we don't know up front where the disaster will be coming from. I don't ever plan to completely abandon widely diversified stocks or quality bonds or safe cash or some real assets like my home, auto, etc, which I own outright without mortgage or debt. I don't know the future but that the risk/reward balance seems right for me and allows me to sleep at night.

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Re: Optimal approaches when you've "won the game"

Post by Johnsson »

An aside...

For many this turns into a plan with several phases, for example...

- The years from retirement until Medicare... keeping MFJ returns below the ACA 'cliff' of $64,960.
- The years from Medicare until SS starts... keeping MFJ returns below the IRMAA 'cliff' of $170,000.
- The years collecting SS and RMDs, hopefully with minimal RMDs due to beneficial fund placement (maybe by Roth conversions during the previous phases).

My point is that for many it is not simply having an LMP, but is a process of managing funds in various accounts through times of varying constraints towards a goal of minimizing taxes while ensuring there are 'enough' available funds to live without worry... not for the faint of heart (unless you have so much the taxes and 'cliffs' are unimportant).

Proper conservative planning is the key for me.
Last edited by Johnsson on Sun Mar 03, 2019 1:23 pm, edited 1 time in total.
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Re: Optimal approaches when you've "won the game"

Post by TheTimeLord »

Random Walker wrote: Sun Mar 03, 2019 12:11 pm I too am a big fan of William Bernstein. Larry Swedroe has written something to the effect that “the strategy for becoming rich is totally different from the strategy for staying rich”. Based I think on something I read by Bernstein a long time ago, I’m a big fan of viewing one's assets as a whole from top down; this is certainly rational during the accumulation phase. But it’s also very rational to take a different approach after “winning the game”, and this is what Bernstein promotes in his fairly recent ebook on lifecycle investing. He recommends dividing one’s assets into a liability matching portfolio and a risk portfolio. I think, as mentioned above, the LMP consists of 25-30 years living expenses invested conservatively and the RP is whatever one wishes to do. As I approach retirement, I’m 56, this approach increasingly makes sense to me.
Something else Bernstein emphasizes in his lifecycle book is that when one enters the realm of having won the game, he shouldn’t futz around. It’s rational to take some definitive action to lock down the LMP. This is why I have previously referred to “customizing one’s own glide path” towards the retirement portfolio. We can’t control markets, but we can control how we respond to their gyrations in relation to our own personal circumstances. Equities have an SD 2-3X their annualized return, and return distributions have fat tails. Under that circumstance, doing something target date fundish like decreasing equity allocation 1% per year seems less than optimal. When markets have been generous, valuations plump, future expected returns lower, and whole potential distribution of future returns shifted left, why not take a bigger step towards the LMP by taking a bigger chunk of risk off the table? After securing the LMP, the investor can freely invest the RP as aggressively as he wishes. Moreover, having LMP secured, he is more likely to have the fortitude to stick to his RP plan.

Dave
15 years ago I would have said the fates be damned, I am 65/35. Now older (wiser is debatable) I have settled into an approach more in line with Bernstein and Swedroe. I have evolved to value Risk Management over Maximizing Gains. My numbers have plenty of slack in them and the utility of each additional dollar continues to diminish. As they say in golf "If you are going to lay up, then lay up", in other words don't try to be too perfect it can get you into trouble.
IMHO, Investing should be about living the life you want, not avoiding the life you fear. | Run, You Clever Boy! [9085]
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Re: Optimal approaches when you've "won the game"

Post by gmaynardkrebs »

garlandwhizzer wrote: Sun Mar 03, 2019 12:49 pm Annuities and nominal bonds, anything that offers a fixed nominal income stream is vulnerable to inflation. Stocks are vulnerable to bear markets, black swans, stagflation. Everything except TIPS in fact seem vulnerable to stagflation and black swans. Even Treasuries and TIPS are vulnerable to rare geopolitical disasters like a war which unlike the others, we don't win. There are also global disasters--runaway global warming, environmental devastation, world wide plague like the Black Death, huge asteroid strike like the one that killed the dinosaurs--that devastate everything. In such cases the US government can go bankrupt. It could print the money to back up its bonds but likely the money would be worth nothing like Germany in 1920s or the Confederacy in the Civil War. Then there's always the issue of long term dementia/medical disaster with the loss of ability to make sound financial decisions and envoy life. In such cases you are vulnerable to unethical financial advisors/greedy relatives that can pilfer your assets.

Total safety from all possibilities is something that all of us desire greatly but this world offers it to no one. There is some level of risk in everything. Rather than obsessing endlessly over reducing risk to zero (which I believe to be impossible), it may be preferable to pick a rational portfolio attuned with your own individual circumstances rather than blindly following some financial guru's cookbook promising risk reduction to zero. There is no way to reduce risk to zero in the face of an uncertain future. What protects you from one disaster may set you up for another one coming from a different direction. The problem is that we don't know up front where the disaster will be coming from. I don't ever plan to completely abandon widely diversified stocks or quality bonds or safe cash or some real assets like my home, auto, etc, which I own outright without mortgage or debt. I don't know the future but that the risk/reward balance seems right for me and allows me to sleep at night.

Garland Whizzer
So, because we can't reduce the risk to zero for Black Death, alien invasion, an asteroid strike, and the US becoming Weimar Germany, it's obsessing over some "financial guru's cookbook" to protect against entirely foreseeable risks we can protect against?
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Re: Optimal approaches when you've "won the game"

Post by gips »

I’ve seen a number of financially independent colleagues and friends return to work after they won the game due to big losses. I’ve structured our investments 40-60 fixed income to equities and the fixed income is 70 per cent fdic products. If the stock portion of our portfolio declines to zero, we should still be good to go. Of course if that happens the fdic portion of our portfolio will also be worthless...
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Re: Optimal approaches when you've "won the game"

Post by Leesbro63 »

Isn’t “liability matching” really just asset allocation where your fixed income amount can cover your base expenses, and you never rebalance from bonds to stocks?
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Re: Optimal approaches when you've "won the game"

Post by friar1610 »

I've historically spent too much time worrying about asset allocation and whether or not I've "got it right". Over the past months as I've delved into the LMP concept and read a LOT of older posts/threads on the subject, I've come around to that way of thinking. Although we can live more than adequately on my inflation-indexed pension and 2 modest SS checks, my main concern is how my wife will fare if I'm the first to go. In a situation similar to what dandy mentioned above, she will only get to keep 40% of my pension and one SS check (plus the payout from a VA) while her taxes and Medicare expenses will increase. I'm rejiggering our portfolio to provide her with 20 years of "safe" investments to supplement the guaranteed income streams she will have. The only big change will be to exchange some amount of Total Bond Mkt Index for its Short Term counterpart. (I already have a good chunk of CDs and I-Bonds, so I feel good about the fixed-income diversification.)

The real surprise has been that this will allow me to slightly increase our overall equity percentage. I'd been timid about going much above the 40-45% range but this will take me to about 50%. I know that's not much of an increase but it will allow me to add equities to our IRAs such that we'll have the opportunity to take RMDs from the equity side when appropriate, something we can't do now as they're 100% fixed-income. And I feel much more relaxed about the higher equity allocation having arrived at it from an LMP analysis rather than from a hunch, a coin flip or an on-line questionnaire/calculator.

Were there no concern about my wife's future finances, I'd be more aggressive since I could live alone just fine on my pension and SS, but the LMP approach seems to me to be the safer, more responsible way to proceed under my circumstances.
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Re: Optimal approaches when you've "won the game"

Post by Random Walker »

garlandwhizzer wrote: Sun Mar 03, 2019 12:49 pm Rather than obsessing endlessly over reducing risk to zero (which I believe to be impossible), it may be preferable to pick a rational portfolio attuned with your own individual circumstances rather than blindly following some financial guru's cookbook promising risk reduction to zero. There is no way to reduce risk to zero in the face of an uncertain future.
Garland Whizzer
Im a huge fan of Monte Carlo Simulation. My advisor uses I think about 85-87% as a baseline acceptable success rate for plans they develop. Of course they can adjust target success rate according to individual client preferences. MCS is a very interesting exercise. It forces one to clearly distinguish needs from wants. Changes in spending have significant impact on success rates, and for me, I’ve been somewhat surprised at the lack of asset allocation effect on success rates. The plan that results in the greatest terminal mean wealth is likely not the plan that minimizes the likelihood of outliving one’s assets.

Dave
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Re: Optimal approaches when you've "won the game"

Post by Leesbro63 »

I believe Dr. Bernstein says that anything beyond 80% certainty is folly. That the other 20% risk is from stuff you can’t anticipate (“black swan”).
Last edited by Leesbro63 on Sun Mar 03, 2019 1:46 pm, edited 1 time in total.
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Re: Optimal approaches when you've "won the game"

Post by Random Walker »

Thought I’d post a link to a previous thread that I think is relevant on customizing the glide path to one’s own personal circumstance and market fluctuations.

viewtopic.php?t=236967

Dave
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Re: Optimal approaches when you've "won the game"

Post by Random Walker »

And I think this thread on “Murphy’s Law Of Retirement” is relevant as well.

viewtopic.php?t=220275

Dave
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Re: Optimal approaches when you've "won the game"

Post by Beliavsky »

I don't think the concept of "winning the game" is helpful for investing. In football if you are down by 2 very late in the game, a field goal earning 3 points is as good as a touchdown earning 7, but spending and wealth levels are not like that. Less is worse, but it is a gradual and continuous effect.

Suppose there are two investors of the same age and lifestyle goals. Both think that in retirement, withdrawing $50K in 2019 dollars plus Social Security benefits would be enough for them to live on.

Jim has enough money that if he invests conservatively (say in a short-term Treasury bond fund), he will have enough to meet the 50K goal. Bob needs more portfolio appreciation to reach the same goal, so he invests primarily in stock index funds. If he invested like Jim, he would likely be able to spend only 30K per year from savings in retirement.

Maybe Bob is doing the right thing, but he must understand that stocks are risky, and that in wanting to better than spend 30K annually from savings in retirement, he risks being able to spend much *less* than that in retirement, say 10K or 20K, if stocks do poorly.

In general, the rich have greater ability to bear risk than the middle class, which is one reason why the rich tend to have a large fraction of their wealth in equities. The idea of "winning the game" and therefore de-risking can be justified only if there is a binary wealth threshold across which utility changes dramatically. I don't think the utility of consumption changes abruptly for most people, especially in a country such as the U.S. with a welfare state that meets subsistence needs. Therefore there is not some amount of wealth beyond which an investor should strongly de-risk.
Last edited by Beliavsky on Mon Mar 04, 2019 2:57 pm, edited 4 times in total.
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Re: Optimal approaches when you've "won the game"

Post by gmaynardkrebs »

friar1610 wrote: Sun Mar 03, 2019 1:38 pm The real surprise has been that this will allow me to slightly increase our overall equity percentage.
Who delivered this "surprise."?
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Re: Optimal approaches when you've "won the game"

Post by NoHeat »

aspiringboglehead wrote: Sat Mar 02, 2019 9:06 pm To be clear, the goal wouldn't be to become as wealthy as possible given acceptable risks; it would simply be to reduce the likelihood of a shortfall as much as possible.
Given this goal, and assets that exceed needs, lots of approaches will work, including the OP’s.

Interestingly, the goal that the OP doesn’t take, amassing extra wealth, is the one that was assumed in the CFA program, for wealth management, when I studied that almost 15 years ago. The CFA authors just assumed that once a high-net-worth client “won the game”, the client should dial up the portfolio’s riskiness to rack up the biggest pile of money. Considering that you can’t take it with you, I thought their assumption was peculiar.
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Re: Optimal approaches when you've "won the game"

Post by Dandy »

Such a strategy seems to be borderline 'recklessly conservative' to me. Historically, nominal bonds have been at greater risk of real losses over 20+ years than equities;
A lot depends on what "enough" is, what your dollar draw down per year is, how much income you have from pension, social security, etc., your level of debt, your ability to reduce expenses if needed and what your overall allocation turns our to be.

I think you need to have significant assets beyond the "safe" assets to be non reckless. I have about 1/3 "safe" 2/3 "risk" and an overall of 43% equities. That equity allocation is significantly higher than the VG TD Retirement Income Fund (at almost 31%), higher than VG TD 2015 Fund (40%) but lower than the TD 2020 Fund (53%). So its in the reasonable ball park.

Also, depending on how you withdraw each year you could alter that allocation dramatically over time. e.g. if you only withdraw from the "safe" assets you will likely have a rising equity allocation from both superior equity performance and fixed income depletion. I recommend a flexible withdrawal approach unless equities have plunged. To me the "safe" assets are like insurance - they are there if I need them if things elsewhere get bad for awhile even for a long while.

I don't believe there is a set it and forget it retirement investment or withdrawal strategy as much as people wish there was one. Or one without risk - just too many variables and no human capital most of what can be a long retirement--or not! :oops:
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Re: Optimal approaches when you've "won the game"

Post by gmaynardkrebs »

willthrill81 wrote: Sun Mar 03, 2019 12:18 pm Historically, nominal bonds have been at greater risk of real losses over 20+ years than equities;
Real losses of what magnitude? (That is a rhetorical question.)
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Re: Optimal approaches when you've "won the game"

Post by stlutz »

Considering various buckets of money is a good way to arrive at a rational asset allocation. But I think the idea of dedicating bucket X to this expense and bucket Y to that expense gives the illusion of precision whereas real life can be unpredictable and variable from year to year. How do I know exactly how much money I'll need/want for housing 10 years from now?

In other words, think through the buckets to come up with an asset allocation, but then manage that asset allocation as a unified portfolio and single bucket of money going forward.

The original post doesn't have any specifics to work from in terms of age, dollars invested, desired spending goal etc., so it's hard to assess what a reasonable AA might be.
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Re: Optimal approaches when you've "won the game"

Post by Dandy »

stlutz wrote: Sun Mar 03, 2019 2:41 pm Considering various buckets of money is a good way to arrive at a rational asset allocation. But I think the idea of dedicating bucket X to this expense and bucket Y to that expense gives the illusion of precision whereas real life can be unpredictable and variable from year to year. How do I know exactly how much money I'll need/want for housing 10 years from now?

In other words, think through the buckets to come up with an asset allocation, but then manage that asset allocation as a unified portfolio and single bucket of money going forward.

The original post doesn't have any specifics to work from in terms of age, dollars invested, desired spending goal etc., so it's hard to assess what a reasonable AA might be.
Just to clarify:
Wm Bernstein's idea of have 20 to 25 years worth of draw down in "safe" assets (my words) has nothing to do with buckets. It is an allocation of fixed income to very safe fixed income vs say having all of it in Total bond fund. Just like investors' allocation to small cap, international and US equities doesn't create buckets. There is no of moving assets required to refill depleted buckets etc.
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