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No Need For Stocks??

Posted: Sun Jan 24, 2010 12:53 pm
by retcaveman
Over the last couple of years, I have become increasingly aware of the view that people who have considerable assets (I know it's relative, but let's say $2 mil+) don't need to risk putting much into the stock market. This has been stated in several recent posts and in a number of articles and books. For example, on page 241 of "The Bogleheads Guide to Investiing," it says, "When a retiree no longer has employment income, it's imperative to understand that keeping what we have is much more important than risking what we have in an attempt to gain even more."

I totally acknowledge that on the surface, this is obvious Dahhh! But after many years of hearing/reading variations of 100 minus your age in stock (your age in bonds), never have less than 20 -25% in the stock market and 100% in bonds is riskier than a 20%/80% stock/bond portfolio, I have been noodling the question of "how much is enough" as it relates to the amount of money you have and the amount of stock to hold.

My current thinking is to embrace the "never" have less than 20 -25% in the market and am prepared to work the dramatic swings in the market eg Dow 7000 and 14000. Right or wrong, I harvested most of my stock gains since 1/09 and am currently sitting at 25% sock. (I am 62 and retired with no debt and a pension.)

I would appreciate hearing what others think about this issue. What might one's investment strategy without stocks look like? (I get the obvious options eg bonds, TIPS, CD's, etc.) But a coherent strategy.

I have learned so much from this forum, even when it served only to reinforce what I had previously read or believed. The power of the "groupthink" represented by the helpful and thoughtful people here is enormous.

Thanks,
caveman

Re: No Need For Stocks??

Posted: Sun Jan 24, 2010 1:01 pm
by bearwolf
retcaveman wrote:
I would appreciate hearing what others think about this issue. What might one's investment strategy without stocks look like? (I get the obvious options eg bonds, TIPS, CD's, etc.) But a coherent strategy.

I have learned so much from this forum, even when it served only to reinforce what I had previously read or believed. The power of the "groupthink" represented by the helpful and thoughtful people here is enormous.

Thanks,
caveman
A question I have about this approach is "How do you hold these assets if you have limited tax sheltered space." I currently have to hold some of my bond position in Muni Bond funds because of lack of tax sheltered space. I'm currently about 60 stocks/40 bonds. I am considering moving to 50/50 but don't know if I want to add to my Muni Bond position.

BearWolf

Posted: Sun Jan 24, 2010 3:05 pm
by Snowjob
If you were going to eliminate stocks, I think you would have to look into some inidividual picks among bonds / prefereds / partnerships etc. You could probably do just fine but it would take more work than you are probably willing to do on a consistant basis...

Re: No Need For Stocks??

Posted: Sun Jan 24, 2010 3:11 pm
by alec
retcaveman wrote:I would appreciate hearing what others think about this issue. What might one's investment strategy without stocks look like? (I get the obvious options eg bonds, TIPS, CD's, etc.) But a coherent strategy.
How about:

1) minus pension + SS away from needed income.
2) buy inflation adjusted annuity to make up difference.
3) put rest in TIPS

how's that?

Re: No Need For Stocks??

Posted: Sun Jan 24, 2010 3:22 pm
by bob90245
alec wrote:
retcaveman wrote:I would appreciate hearing what others think about this issue. What might one's investment strategy without stocks look like? (I get the obvious options eg bonds, TIPS, CD's, etc.) But a coherent strategy.
How about:

1) minus pension + SS away from needed income.
2) buy inflation adjusted annuity to make up difference.
3) put rest in TIPS

how's that?
Brilliant! Closely matches the strategy I offered:

Image
Source: http://bobsfiles.home.att.net/SaferPlan2.html

Re: No Need For Stocks??

Posted: Sun Jan 24, 2010 3:52 pm
by Eric White
bob90245 wrote:
alec wrote:
retcaveman wrote:I would appreciate hearing what others think about this issue. What might one's investment strategy without stocks look like? (I get the obvious options eg bonds, TIPS, CD's, etc.) But a coherent strategy.
How about:

1) minus pension + SS away from needed income.
2) buy inflation adjusted annuity to make up difference.
3) put rest in TIPS

how's that?
Brilliant! Closely matches the strategy I offered:

Image
Source: http://bobsfiles.home.att.net/SaferPlan2.html
Bob, this is a very naive question, but how would I set up a TIPS ladder in a tax-deferred account? Would you be able to take money out of a 401k/403b and transfer it to Treasury Direct as an IRA? I'd love to do that when I retire, but I don't understand how to physically do it...

Thanks and sorry for the stupid question!

Cheers,
Eric White

Re: No Need For Stocks??

Posted: Sun Jan 24, 2010 4:53 pm
by alec
bob90245 wrote:Brilliant! Closely matches the strategy I offered:
Welcome to the dark side. 8)

Re: No Need For Stocks??

Posted: Sun Jan 24, 2010 6:01 pm
by bob90245
Eric White wrote:Bob, this is a very naive question, but how would I set up a TIPS ladder in a tax-deferred account? Would you be able to take money out of a 401k/403b and transfer it to Treasury Direct as an IRA? I'd love to do that when I retire, but I don't understand how to physically do it...
I vaguely recall reading on Bogleheads that Treasury Direct can only be set up with taxable money. Someone can confirm if this is true or not.

Nevertheless, there won't be anything preventing you from transfering your 401k/403b to an IRA custodian (under circumstances when you will be eligible) using their brokerage service to buy individual TIPS to fill the steps of your ladder.

Re: No Need For Stocks??

Posted: Sun Jan 24, 2010 6:26 pm
by Mel Lindauer
bob90245 wrote:
Eric White wrote:Bob, this is a very naive question, but how would I set up a TIPS ladder in a tax-deferred account? Would you be able to take money out of a 401k/403b and transfer it to Treasury Direct as an IRA? I'd love to do that when I retire, but I don't understand how to physically do it...
I vaguely recall reading on Bogleheads that Treasury Direct can only be set up with taxable money. Someone can confirm if this is true or not.

Nevertheless, there won't be anything preventing you from transfering your 401k/403b to an IRA custodian (under circumstances when you will be eligible) using their brokerage service to buy individual TIPS to fill the steps of your ladder.
Bob's recollection is correct. You must have a custodian buy the TIPS for your tax-deferred account which means you can't use TD for tax-deferred accounts.

Posted: Sun Jan 24, 2010 6:44 pm
by alec
on a similar but separate note, if you have the Treasury bonds in a taxable brokerage acct, you can transfer them to Treasury Direct:
Transfer of Securities from the Commercial Book-Entry System to TreasuryDirect

If you hold Treasury bills, notes, bonds, or TIPS through a broker or bank, you can have your broker or bank transfer the securities to TreasuryDirect.

1. Open an account in TreasuryDirect. (If you already have an account, you may skip this step.)

2. Give your bank or broker the following information:
Receiving bank name: TREASURYDIRECT (all capital letters, no spaces)
ABA number: 051736158
Your TreasuryDirect account number
link

Posted: Sun Jan 24, 2010 6:54 pm
by etarini
First post; just registered. The topic of secure decumulation attracts me like a moth to a candle. Haven't done all my Bogleheads reading yet, but I've started to explore bonds/decumulation in the same way I once approached stocks/accumulation. Six years from retirement, saving like mad, a lot to learn. What a wonderful resource this is, and what wonderful people!

Eric

Posted: Sun Jan 24, 2010 6:55 pm
by AzRunner
To me, no stocks violates the "widely diversified" Boglehead philosophy. If you had no need or desire to take any risk, I'd still say hold 20% in widely diversified equities.

Norm

Posted: Sun Jan 24, 2010 7:00 pm
by stratton
AzRunner wrote:To me, no stocks violates the "widely diversified" Boglehead philosophy. If you had no need or desire to take any risk, I'd still say hold 20% in widely diversified equities.
No stocks also implies saving more.

if you can save enough then no stocks won't be as subject to a last minute stocks market dump screwing up retirement.

I agree even 20% stocks is better diversification. I'd also suggest global weighting with that small a stock percentage.

Paul

Posted: Sun Jan 24, 2010 7:04 pm
by Mel Lindauer
alec wrote:on a similar but separate note, if you have the Treasury bonds in a taxable brokerage acct, you can transfer them to Treasury Direct:
Transfer of Securities from the Commercial Book-Entry System to TreasuryDirect

If you hold Treasury bills, notes, bonds, or TIPS through a broker or bank, you can have your broker or bank transfer the securities to TreasuryDirect.

1. Open an account in TreasuryDirect. (If you already have an account, you may skip this step.)

2. Give your bank or broker the following information:
Receiving bank name: TREASURYDIRECT (all capital letters, no spaces)
ABA number: 051736158
Your TreasuryDirect account number
link
Hi Alec:

This may well work for taxable accounts, but I don't think it would work for tax-deferred accounts, which is where TIPS are normally held. Rather, your plan custodian must make the purchase for your account.

Posted: Sun Jan 24, 2010 7:11 pm
by dmcmahon
The main problem with your idea is inflation. This can destroy the value of your "safe" savings over the course of several decades, leaving you without as much to pay the bills as you'd originally thought, even if, nominally, you appear to be staying even. This is more and more true the earlier you retire. It's difficult to accumulate $2 million in tax-deferred savings. After you factor in taxes on the interest income, you're lucky to break even versus inflation using safe government bonds, and more likely you'll slowly fall behind. Worse still, a bout of 70s-style inflation could occur during your retirement, cutting the purchasing power of your savings in half in a short period of time.

Posted: Mon Jan 25, 2010 8:41 am
by gd
There is an older quirky book called "Your Money or Your Life" that presents the idea you should stick all your money in government bonds (written pre-TIPS), as one piece of a fairly radical lifestyle strategy. It's an interesting book to read, although I'd get it from a library. I once loaned a copy to someone whose life was controlled by her debt, and she accused me of recruiting for a cult. It evokes strong reactions, pro and con.

Posted: Mon Jan 25, 2010 10:00 am
by Beagler
gd wrote:I once loaned a copy to someone whose life was controlled by her debt, and she accused me of recruiting for a cult. It evokes strong reactions, pro and con.
A cult of people who invest in gov't bonds? Even the financial figure most adherent to this (Prof. Bodie) could hardly be painted with that brush.

Posted: Mon Jan 25, 2010 10:16 am
by dbr
etarini wrote:First post; just registered. The topic of secure decumulation attracts me like a moth to a candle. Haven't done all my Bogleheads reading yet, but I've started to explore bonds/decumulation in the same way I once approached stocks/accumulation. Six years from retirement, saving like mad, a lot to learn. What a wonderful resource this is, and what wonderful people!

Eric
The single largest factor, maybe even the only factor one needs to truly consider, in safe decumulation is being sure to have lots of money and plan on spending very little of it. After that it gets really tricky. The wildcard in all calculations is inflation.

Re: No Need For Stocks??

Posted: Mon Jan 25, 2010 10:53 am
by Independent
alec wrote:
retcaveman wrote:I would appreciate hearing what others think about this issue. What might one's investment strategy without stocks look like? (I get the obvious options eg bonds, TIPS, CD's, etc.) But a coherent strategy.
How about:

1) minus pension + SS away from needed income.
2) buy inflation adjusted annuity to make up difference.
3) put rest in TIPS

how's that?
This makes sense to me. In fact, we're doing it. As it turns out for us, step 2 can be accomplished by deferring SS benefits.

I'm not going to claim that this gives us the best long term chance of maximizing our estate, or even maximizing spending between now and then. But if I can avoid explaining to my wife why the stocks went down this quarter, it's worth the cost.

Posted: Mon Jan 25, 2010 10:58 am
by Rodc
If one is really concerned with risk I would think a healthy dose of annuities is in order as is keeping required expenses to a minimum.

The second part is very important and generally largely within your control.

Re: No Need For Stocks??

Posted: Mon Jan 25, 2010 11:20 am
by fishnskiguy
Bob, this is a very naive question, but how would I set up a TIPS ladder in a tax-deferred account? Would you be able to take money out of a 401k/403b and transfer it to Treasury Direct as an IRA? I'd love to do that when I retire, but I don't understand how to physically do it...

Thanks and sorry for the stupid question!

Cheers,
Eric White

As others have pointed out, you cannot have an IRA at Treasury Direct.

What you can do is:
1. Transfer 401K to an IRA.
2. Move the IRA to Vanguard.
3. Open a brokerage account within the IRA.
4. Buy TIPS through the brokerage account. If your IRA is large enough to make Voyager status, you can purchase TIPS at auction at no cost.

Chris

Re: No Need For Stocks??

Posted: Mon Jan 25, 2010 11:42 am
by ilan1h
retcaveman wrote:Over the last couple of years, I have become increasingly aware of the view that people who have considerable assets (I know it's relative, but let's say $2 mil+) don't need to risk putting much into the stock market. This has been stated in several recent posts and in a number of articles and books. For example, on page 241 of "The Bogleheads Guide to Investiing," it says, "When a retiree no longer has employment income, it's imperative to understand that keeping what we have is much more important than risking what we have in an attempt to gain even more."

I totally acknowledge that on the surface, this is obvious Dahhh! But after many years of hearing/reading variations of 100 minus your age in stock (your age in bonds), never have less than 20 -25% in the stock market and 100% in bonds is riskier than a 20%/80% stock/bond portfolio, I have been noodling the question of "how much is enough" as it relates to the amount of money you have and the amount of stock to hold.

My current thinking is to embrace the "never" have less than 20 -25% in the market and am prepared to work the dramatic swings in the market eg Dow 7000 and 14000. Right or wrong, I harvested most of my stock gains since 1/09 and am currently sitting at 25% sock. (I am 62 and retired with no debt and a pension.)

I would appreciate hearing what others think about this issue. What might one's investment strategy without stocks look like? (I get the obvious options eg bonds, TIPS, CD's, etc.) But a coherent strategy.

I have learned so much from this forum, even when it served only to reinforce what I had previously read or believed. The power of the "groupthink" represented by the helpful and thoughtful people here is enormous.

Thanks,
caveman
I'm in the same position. However, I think it's very dependent on personality. I have enough assets at this point that I don't really need to take on any risk going forward. On the other hand, I have enough assets that I can afford to lose some of them and yet still be comfortable. Therefore, I am not inclined at this time to withdraw from the markets and rest on my laurels. At 49 I still keep 40% kicking around in the market and most of the rest is in munis and TIPS. Since I invest purely in index funds and rarely touch them, it's not that much of a hassle for me to let it ride. I've known others, however, who developed such a loathing for the complexities of the market that they stopped meddling with it as soon as they could.

Posted: Mon Jan 25, 2010 12:28 pm
by ddb
I have no need for stocks, despite the fact that 75% of my portfolio is invested in very risky equities and commodities funds.

My rationale is that I will work until 70, and would like to save up enough money in fixed income assets to meet required income goals (not including social security). Social security and stock holdings will provide me with supplemental income and/or wealth to be transferred to heirs.

As a guide, I use the Vanguard Immediate Annuity Calculator to determine how much I need saved in fixed income assets at age 70. Assuming I want $4K per month (real) for the live of my wife and I, I need to save approximately $620K in real dollars at age 70. I assume 2% real returns and try to keep myself on track to have that much saved at that time. I put the entire remainder of my savings into equities. I don't really rebalanced (i.e. I never sell fixed income holdings), but if I find I'm accumulating too much in fixed income too fast, I'll just direct all contributions to equities.

- DDB

Re: No Need For Stocks??

Posted: Thu Jan 28, 2010 10:38 am
by Eric White
fishnskiguy wrote: As others have pointed out, you cannot have an IRA at Treasury Direct.

What you can do is:
1. Transfer 401K to an IRA.
2. Move the IRA to Vanguard.
3. Open a brokerage account within the IRA.
4. Buy TIPS through the brokerage account. If your IRA is large enough to make Voyager status, you can purchase TIPS at auction at no cost.

Chris
Chris, thank you very much for the clear & concise reply! I will definitely do that when I retire for the TIPS ladder portion of my investments.

I didn't know about the Voyager perk of buying TIPS at auction at no cost. That's pretty amazing. I wasn't sure if the laddering would be cost prohibitive due to transaction costs at a brokerage.

Thanks again!!!
Eric