Just sell and re-purchase EE Bonds at the 20th year.Default User BR wrote:No. They give a one-time doubling at 20 years, not every 20 years. EE bonds stop earning interest at all (and tax is due) at 30 years.crowd79 wrote:That's because the US Treasury makes a 1 time adjustment to the Bonds every 20 years exactly, doubling the value on them, regardless of interest rate. I know they are not sexy investments, but believe they are good for people who want some "certainty" in their portfolio by the time they retire.
Brian
Challenge: How to invest today for a 40 year horizon?
Re: Challenge: How to invest today for a 40 year horizon?
Re: Challenge: How to invest today for a 40 year horizon?
So you're saying keep 40% Short-Term Investment-Grade (VFSTX) as dry powder for opportunistic buying if the market falls. 40% of 25,000 is $10,000, so keep $10,000 in VFSTX as dry powder.Grt2bOutdoors wrote:You're suffering from recency bias. The VFTSX fund currently yields 1.1%, the duration is 2.3 years. Historical performance since inception in 1982 is 6.74% per year. The portfolio relies on the small cap value and international equities to provide some oomph with large cap index. Those inevitable moments where there is a downdraft in the marketplace allows for opportunitic buying and that is where the Short-Term fund comes into play. Stability of your powder is important and do you really believe that corporate bond yields will be this low over the next 40 years? We should all hope not.grayfox wrote:OK, 60% stocks and 40% ST Investment-Grade (VFSTX).Grt2bOutdoors wrote:
The goal is $250,000 - not the more the better. With that in mind, one would need to earn a minimum of 5.93% compounded annually per year. I would use a 60/40 portfolio, rebalanced annually - 60% large cap index, 20% small value, 20% total international ex-us and 40% Short-Term Investment Grade.
The YTM on VFTSX is only 1.1%. It seems like 40% of the portfolio would be dead money.
I suppose 40% in cash or ST would make the portfolio less volatile, but it would greatly reduce the expected return of the portfolio. I don't think it would maximize the return. It may make it hard to even reach the minimum $200,000.
Well suppose stocks return 6% pa while VFTSX returns 1% pa, and you will move from VFSTX to stocks if the market falls 20%.
I set up a spreadsheet to see what would happen. Put $10,000 in VFSTX vs $10,000 in stocks, and how much you have in stocks after a crash.
Code: Select all
1.00% 6.00% 20.00% 50.00%
VFSTX STOCK DROP DROP
0 10,000 10,000
1 10,100 10,600 8,480 5,300
2 10,201 11,236 8,989 5,618
3 10,303 11,910 9,528 5,955
4 10,406 12,625 10,100 6,312
5 10,510 13,382 10,706 6,691 <- even with 20% crash, stocks have more than VFSTX
6 10,615 14,185 11,348 7,093
7 10,721 15,036 12,029 7,518
8 10,829 15,938 12,751 7,969
9 10,937 16,895 13,516 8,447
10 11,046 17,908 14,327 8,954
11 11,157 18,983 15,186 9,491
12 11,268 20,122 16,098 10,061
13 11,381 21,329 17,063 10,665
14 11,495 22,609 18,087 11,305
15 11,610 23,966 19,172 11,983 <- after 50% crash, stocks still have more than VFSTX
16 11,726 25,404 20,323 12,702
17 11,843 26,928 21,542 13,464
18 11,961 28,543 22,835 14,272
19 12,081 30,256 24,205 15,128
20 12,202 32,071 25,657 16,036
21 12,324 33,996 27,197 16,998
22 12,447 36,035 28,828 18,018
23 12,572 38,197 30,558 19,099
24 12,697 40,489 32,391 20,245
25 12,824 42,919 34,335 21,459
26 12,953 45,494 36,395 22,747
27 13,082 48,223 38,579 24,112
28 13,213 51,117 40,893 25,558
29 13,345 54,184 43,347 27,092
30 13,478 57,435 45,948 28,717
31 13,613 60,881 48,705 30,441
32 13,749 64,534 51,627 32,267
33 13,887 68,406 54,725 34,203
34 14,026 72,510 58,008 36,255
35 14,166 76,861 61,489 38,430
36 14,308 81,473 65,178 40,736
37 14,451 86,361 69,089 43,180
38 14,595 91,543 73,234 45,771
39 14,741 97,035 77,628 48,518
40 14,889 102,857 82,286 51,429
2. If you instead wait for a 50% crash, after 15 years, stocks will have more than VFSTX even after a 50% crash. So the 50% crash would have to come within a 15-year window for the strategy to pay off.
3. If the crash never comes, after 40 years, you have 102,857 in stocks and only 14,889 in VFTSX. You gave up $87,969
Basically keeping 40% in dry powder is a bet that a crash will come within some time window. I'm not opposed to keeping dry powder. if VFSTX were yielding 3 or 5% it might be worth holding some cash back because that would push the payoff window out a lot farther. But when the dry powder is only returning 1.1% nominal, and losing to inflation, this doesn't seem like a good market timing bet.
Re: Challenge: How to invest today for a 40 year horizon?
^
I think this concept is often overlooked. For instance, a 50% crash isn't so bad if you previously had quadrupled your money. If your equities have done decent, it may take a lot of losses to get down to where bond returns are. Over long holding periods, bonds have always dragged against returns of equities. With current yields, they are going to drag more than they historically have for the forseeable future.
Without a doubt, if your goal is to get the highest returns you should omit bonds. If you are striving for more efficiency (higher Sharpe Ratio) then you should include them.
I think this concept is often overlooked. For instance, a 50% crash isn't so bad if you previously had quadrupled your money. If your equities have done decent, it may take a lot of losses to get down to where bond returns are. Over long holding periods, bonds have always dragged against returns of equities. With current yields, they are going to drag more than they historically have for the forseeable future.
Without a doubt, if your goal is to get the highest returns you should omit bonds. If you are striving for more efficiency (higher Sharpe Ratio) then you should include them.
There are no guarantees, only probabilities.
Re: Challenge: How to invest today for a 40 year horizon?
You can see that in this chart here going back to 1982. Vanguard S&P500 VFINX vs Vanguard ST Investment Grade VFSTX
VFINX vs VFSTX
Despite the huge stock market crashes of 2000-2003 and 2008-2009, stocks were still way way way above VFSTX.
Now if you can predict that a crash is imminent, then being out of the market makes sense. But that hasn't been demonstrated to be an ability anyone has.
VFINX vs VFSTX
Despite the huge stock market crashes of 2000-2003 and 2008-2009, stocks were still way way way above VFSTX.
Now if you can predict that a crash is imminent, then being out of the market makes sense. But that hasn't been demonstrated to be an ability anyone has.
Re: Challenge: How to invest today for a 40 year horizon?
In an Ibbotson Associates report on Lifetime Asset Allocations: Methodologies for Target Maturity Funds, they present a chart of the "equity glide paths of the largest target maturity fund families."
I'm reposting this chart and link to an Ibbotson report from another thread because it seems apropos.
In the Executive summary of the report is a chart titled "Generalized Ibbotson Target Maturity Glide Path". It shows at about age 20 or 25, which would be about 40 years before retirement, investor would have 100% stock, with high international, high EM and high small cap.
Re: Challenge: How to invest today for a 40 year horizon?
Does that mean I win?
There are no guarantees, only probabilities.
Re: Challenge: How to invest today for a 40 year horizon?
Yep, it looks like you get a gold star.
Re: Challenge: How to invest today for a 40 year horizon?
I like this question. Is the answer no?chicagobear wrote:Has there ever been a 40 year period when an all equity portfolio (especially if diversified internationally) hasn't beaten a balanced portfolio?
1) Invest you must 2) Time is your friend 3) Impulse is your enemy 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course. (Plagiarized, but worth stealing)
Re: Challenge: How to invest today for a 40 year horizon?
Well, the 40 years caught my eye and I misread the thread title so I was looking for a different solution until I read the meat of the topic.
My problem to solve is:
I have a portfolio of 1.25m that has to last 40 years with taking a 30,000 withdrawal each year. The withdrawal can be taken once or in pieces.
I have a solution and was looking here for alternatives or verification.
Hmmm, it sounds suspiciously like articles that I have read dealing with Retirement Income Strategies.
Sorry for the attempted hijack.
My problem to solve is:
I have a portfolio of 1.25m that has to last 40 years with taking a 30,000 withdrawal each year. The withdrawal can be taken once or in pieces.
I have a solution and was looking here for alternatives or verification.
Hmmm, it sounds suspiciously like articles that I have read dealing with Retirement Income Strategies.
Sorry for the attempted hijack.
Re: Challenge: How to invest today for a 40 year horizon?
That sounds like the old Safe Withdrawal Rate topic that has been discussed in about 1 million different threads on Bogelheads. Here is the wiki article :
http://www.bogleheads.org/wiki/Safe_Withdrawal_Rates
I don't think there is much new to say on that subject. If any dead horse has been beaten beyond recognition, it is Safe Withdrawal Rate topic.
Search for wade pfau who has written numerous papers on the subject.
http://www.bogleheads.org/wiki/Safe_Withdrawal_Rates
I don't think there is much new to say on that subject. If any dead horse has been beaten beyond recognition, it is Safe Withdrawal Rate topic.
Search for wade pfau who has written numerous papers on the subject.
Re: Challenge: How to invest today for a 40 year horizon?
I found this online calculator for S&P 500 that shows percentages of times the S&P outperformed some return over various time period.
S&P 500 Return History
I put in 5.34%, not adjust for inflation, which should give 8x in nominal terms
40-Years: 76.47% not so good
I put in 3.53%, adjust for inflation, which should give 4x in real terms
40-Years: 99.67% this would work
Note: I changed the goal part-way through the discussion from 8x before-inflation to 4x after-inflation in 40 years.
So the idea of 100% stocks for 40 years, with opportunistic switching to Treasury bonds, sounds plausible.
S&P 500 Return History
I put in 5.34%, not adjust for inflation, which should give 8x in nominal terms
40-Years: 76.47% not so good
I put in 3.53%, adjust for inflation, which should give 4x in real terms
40-Years: 99.67% this would work
Note: I changed the goal part-way through the discussion from 8x before-inflation to 4x after-inflation in 40 years.
So the idea of 100% stocks for 40 years, with opportunistic switching to Treasury bonds, sounds plausible.