Question about Bernstein's Stop Playing the Game

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Cheego
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Re: Question about Bernstein's Stop Playing the Game

Post by Cheego »

I got to thinking about the 25x in FI idea this morning. I'm guessing that the 25 multiplier came from the expectation that fixed income sources would yield a 4% return, which would be enough to cover essential spending needs. But that is not realistic in today's market. Perhaps it doesn't matter though since the remaining allocation in equities would not likely suffer a 100% loss so what essential expenses the FI can't cover is covered by withdrawals or dividends from the equity side.

Does that seem right?

If not, then based on today's FI returns, I'd say the multiplier should be closer to 50 (or 2% return). I've not yet read Bernstein's book but will soon. May be this notion is covered there.
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Re: Question about Bernstein's Stop Playing the Game

Post by dbr »

Cheego wrote: Wed Oct 13, 2021 8:59 am I got to thinking about the 25x in FI idea this morning. I'm guessing that the 25 multiplier came from the expectation that fixed income sources would yield a 4% return, which would be enough to cover essential spending needs. But that is not realistic in today's market. Perhaps it doesn't matter though since the remaining allocation in equities would not likely suffer a 100% loss so what essential expenses the FI can't cover is covered by withdrawals or dividends from the equity side.

Does that seem right?

If not, then based on today's FI returns, I'd say the multiplier should be closer to 50 (or 2% return). I've not yet read Bernstein's book but will soon. May be this notion is covered there.
A 100% fixed income (five year Treasuries) portfolio expected to last 30 years needs about 40 times expenses when the 4% rule is good. If you think current conditions are bad, then it would be worse than that. But it has nothing to do with 4% return because it is assumed on the one hand that one spends down the principal but on the other hand that expenses increase with inflation. The best example for a Bernstein inspired inflation indexed 30 year fixed portfolio would be a ladder of 30 year TIPS. At 0% real return you get a 3.3% payout or 33x expenses. To get a 4.0% payout you need to have acquired TIPS at about 1.4% real return. Today 30 year TIPS real yield is about 0%.

But you are missing that Bernstein divides spending into "absolutely essential" and "discretionary" and the 25x is for the essential part. You are supposed to own stocks to support the other part.
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Cheego
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Re: Question about Bernstein's Stop Playing the Game

Post by Cheego »

dbr wrote: Wed Oct 13, 2021 9:12 am
Cheego wrote: Wed Oct 13, 2021 8:59 am I got to thinking about the 25x in FI idea this morning. I'm guessing that the 25 multiplier came from the expectation that fixed income sources would yield a 4% return, which would be enough to cover essential spending needs. But that is not realistic in today's market. Perhaps it doesn't matter though since the remaining allocation in equities would not likely suffer a 100% loss so what essential expenses the FI can't cover is covered by withdrawals or dividends from the equity side.

Does that seem right?

If not, then based on today's FI returns, I'd say the multiplier should be closer to 50 (or 2% return). I've not yet read Bernstein's book but will soon. May be this notion is covered there.

But you are missing that Bernstein divides spending into "absolutely essential" and "discretionary" and the 25x is for the essential part. You are supposed to own stocks to support the other part.
Thanks, but I do understand that part. I mentioned it above (bolded here).
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Re: Question about Bernstein's Stop Playing the Game

Post by dbr »

Cheego wrote: Wed Oct 13, 2021 9:16 am
dbr wrote: Wed Oct 13, 2021 9:12 am
Cheego wrote: Wed Oct 13, 2021 8:59 am I got to thinking about the 25x in FI idea this morning. I'm guessing that the 25 multiplier came from the expectation that fixed income sources would yield a 4% return, which would be enough to cover essential spending needs. But that is not realistic in today's market. Perhaps it doesn't matter though since the remaining allocation in equities would not likely suffer a 100% loss so what essential expenses the FI can't cover is covered by withdrawals or dividends from the equity side.

Does that seem right?

If not, then based on today's FI returns, I'd say the multiplier should be closer to 50 (or 2% return). I've not yet read Bernstein's book but will soon. May be this notion is covered there.

But you are missing that Bernstein divides spending into "absolutely essential" and "discretionary" and the 25x is for the essential part. You are supposed to own stocks to support the other part.
Thanks, but I do understand that part. I mentioned it above (bolded here).
Good enough. But to your point, I don't really understand where the 25x that he quotes comes from. The usual rational would be 4% SWR studies, but 4% does not work for 100% fixed income, even under normal circumstances, let alone your possibly justified worry. Having 25x part of one's spending in fixed income and the rest in equities could just land a person at a 40/60 portfolio or something and a 4% rule withdrawal rate for the whole, and that does compute. I have never been able to understand how to divide spending into essential and discretionary and then align part of a portfolio with one and the other part of the portfolio with the other.

I admit Bernstein does not make a lot of sense to me except perhaps for pointing out that inflation indexed annuities are helpful (take SS at 70) and that having a TIPS ladder might let some people relax more except when such a ladder becomes too expensive. There are easier ways to plan for retirement than trying to understand what Bernstein really means.

I do not disagree that people should be warned to not take too much risk they don't need in stocks, but there are much better ways to say that than to talk about games. The better way to say that is to say not to take more risk than necessary in stocks, necessary being determined by what one wants from one's investments combined with understanding the consequences of asset allocations and what consequences are acceptable.
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Re: Question about Bernstein's Stop Playing the Game

Post by delamer »

dbr wrote: Wed Oct 13, 2021 9:28 am
Cheego wrote: Wed Oct 13, 2021 9:16 am
dbr wrote: Wed Oct 13, 2021 9:12 am
Cheego wrote: Wed Oct 13, 2021 8:59 am I got to thinking about the 25x in FI idea this morning. I'm guessing that the 25 multiplier came from the expectation that fixed income sources would yield a 4% return, which would be enough to cover essential spending needs. But that is not realistic in today's market. Perhaps it doesn't matter though since the remaining allocation in equities would not likely suffer a 100% loss so what essential expenses the FI can't cover is covered by withdrawals or dividends from the equity side.

Does that seem right?

If not, then based on today's FI returns, I'd say the multiplier should be closer to 50 (or 2% return). I've not yet read Bernstein's book but will soon. May be this notion is covered there.

But you are missing that Bernstein divides spending into "absolutely essential" and "discretionary" and the 25x is for the essential part. You are supposed to own stocks to support the other part.
Thanks, but I do understand that part. I mentioned it above (bolded here).
Good enough. But to your point, I don't really understand where the 25x that he quotes comes from. The usual rational would be 4% SWR studies, but 4% does not work for 100% fixed income, even under normal circumstances, let alone your possibly justified worry. Having 25x part of one's spending in fixed income and the rest in equities could just land a person at a 40/60 portfolio or something and a 4% rule withdrawal rate for the whole, and that does compute. I have never been able to understand how to divide spending into essential and discretionary and then align part of a portfolio with one and the other part of the portfolio with the other.

I admit Bernstein does not make a lot of sense to me except perhaps for pointing out that inflation indexed annuities are helpful (take SS at 70) and that having a TIPS ladder might let some people relax more except when such a ladder becomes too expensive. There are easier ways to plan for retirement than trying to understand what Bernstein really means.

I do not disagree that people should be warned to not take too much risk they don't need in stocks, but there are much better ways to say that than to talk about games. The better way to say that is to say not to take more risk than necessary in stocks, necessary being determined by what one wants from one's investments combined with understanding the consequences of asset allocations and what consequences are acceptable.
The 20 to 25 years of residual essential expenses that Bernstein suggests having in cash equivalents (like TIPS) is simply to cover the length of a typical retirement.

So you have all your essential expenses covered by Social Security plus pensions plus cash equivalents, for as long as you are likely to live.
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Re: Question about Bernstein's Stop Playing the Game

Post by dbr »

delamer wrote: Wed Oct 13, 2021 9:40 am
The 20 to 25 years of residual essential expenses that Bernstein suggests having in cash equivalents (like TIPS) is simply to cover the length of a typical retirement.

So you have all your essential expenses covered by Social Security plus pensions plus cash equivalents, for as long as you are likely to live.
[/quote]

Thanks, at least that is a reason. In doing that calculation one has to include inflation. That works if the income stream is inflation indexed or if one has a TIPS ladder. It would seem this is problematic if people think this means putting 25x current essential expenses in bonds. FireCalc says that spending 4% from a 100% five year Treasury portfolio for 25 years historically fails 15% of the time and 5% fails more than half the time. One can also argue that 85% success is close enough, all considered. If that money were put into a 30/70 portfolio then historically there would be 1% failure.

I guess the thing I am missing is the rationale for having such a fear of equities. It is hard to understand what problem a person would have with a 30/70 portfolio or a 50/50 one. But then you have to figure out what it means to have the rest of one's intended spending supported by only equities. How do you parse all that out? You probably end up at 30/70 to 50/50 anyway.
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Re: Question about Bernstein's Stop Playing the Game

Post by Ramjet »

How many Americans can afford to "stop playing the game"?

This is not advice for the average person

Frankly, you have to be "rich"
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Re: Question about Bernstein's Stop Playing the Game

Post by HomerJ »

JoeRetire wrote: Sun Oct 10, 2021 1:34 pm
Cheego wrote: Sun Oct 10, 2021 1:32 pmSo, what would an AA look like if we stopped playing?
0/0/100
Can we try not to be so flippant when fairly new posters ask serious questions?

Especially those with under 100 posts.
A Goldman Sachs associate provided a variety of detailed explanations, but then offered a caveat, “If I’m being dead-### honest, though, nobody knows what’s really going on.”
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Re: Question about Bernstein's Stop Playing the Game

Post by Cheego »

HomerJ wrote: Wed Oct 13, 2021 10:35 am Can we try not to be so flippant when fairly new posters ask serious questions?
Especially those with under 100 posts.
Thank you for posting that.
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Re: Question about Bernstein's Stop Playing the Game

Post by dbr »

Cheego wrote: Sun Oct 10, 2021 1:32 pm So, what would an AA look like if we stopped playing?
So that is a really good question and I think the answer is not all that easy to find in Bernstein.

I may be misrepresenting his ideas but I think I would try to construct it something like this:

1. Examine your estimated spending and divide your expenses into the two categories of essential and discretionary. I suppose somewhere that spending has to be inflated over time and not just be the first year of retirement spending.

2. Place between 20 and 25 times of your (inflation corrected) essential spending into fixed income assets. Fixed income assets could mean an inflation indexed annuity or a TIPS ladder, but now there gets to be a bunch of apples to oranges discussion. An inflation indexed annuity might price out at 25 times the spending intended to cover but now the retirement is allowed to be life. A 30 year TIPS ladder is only 30 years but needs a real yield of 1.5% from 25x and needs a real yield of 3.0% from 20x.

3. Invest the rest of your assets in equities and plan on whatever discretionary spending you can support from that, however you figure that out.

4. An implication is that to retire you need 20-25 times your essential spending assuming there is no discretionary spending and much more than that if you want more. Note that a typical 4% estimate for a 30/70 to 100/0 portfolio would have you retire on a portfolio of 25x your essential and discretionary spending.

This all by itself does not define an asset allocation. We don't know how essential and discretionary spending compare to one another for anyone in particular. We also don't know the total portfolio size so we don't know how large "the rest of your assets" is. A model might be discretionary is 25% of essential and that you can support that from equities at 4% SWR. In that case the asset allocation would be either 24/76 or 20/80.

I think I am being very unfair to Bernstein, so maybe someone can boil down what he actually proposes.
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Re: Question about Bernstein's Stop Playing the Game

Post by JoeRetire »

HomerJ wrote: Wed Oct 13, 2021 10:35 am
JoeRetire wrote: Sun Oct 10, 2021 1:34 pm
Cheego wrote: Sun Oct 10, 2021 1:32 pmSo, what would an AA look like if we stopped playing?
0/0/100
Can we try not to be so flippant when fairly new posters ask serious questions?

Especially those with under 100 posts.
Not flippant at all. No idea why you would say that.
Just remember: it's not a lie if you believe it.
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Re: Question about Bernstein's Stop Playing the Game

Post by dbr »

JoeRetire wrote: Wed Oct 13, 2021 12:26 pm
HomerJ wrote: Wed Oct 13, 2021 10:35 am
JoeRetire wrote: Sun Oct 10, 2021 1:34 pm
Cheego wrote: Sun Oct 10, 2021 1:32 pmSo, what would an AA look like if we stopped playing?
0/0/100
Can we try not to be so flippant when fairly new posters ask serious questions?

Especially those with under 100 posts.
Not flippant at all. No idea why you would say that.
In defense of "not flippant" I think Bernstein seriously proposes 0/0/100 for stocks/bonds/annuities-ladders. This interprets the game as being invested in assets that are not stable in inflation indexed value but subject to valuation in a market. An annuity once purchased is independent of future market values and income from a maturing TIPS is set at the face value of the bond and not affected by TIPS market prices once purchased.

My personal opinion is that "stop playing the game" is probably the flippant expression here, but in fairness to Bernstein I think what he really means is to not count too much on big returns in risky stocks, which is wise advice.
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Re: Question about Bernstein's Stop Playing the Game

Post by HomerJ »

Cheego wrote: Sun Oct 10, 2021 1:32 pm I don't want to turn this in to a humble brag post but, we might be close to the "win" to which Mr. Bernstein refers. When he says "stop playing", I wonder if this is in some sort of absolute term regarding asset allocation or if it's more a relative concept based on a retiree's past investing methods and allocations. So, what would an AA look like if we stopped playing?
NO good investment advice includes an absolute term regarding asset allocation. And Bernstein specifically never suggested 100% cash.

I personally take the phrase "Stop playing the game once you've won" as a suggestion to lower risk once you have "enough" to retire. ​

Going 100% bonds or cash doesn't remove all risk, because you'll still have inflation risk.

Your 30/60/10 is quite conservative, and is a solid place to start retirement.
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Re: Question about Bernstein's Stop Playing the Game

Post by willthrill81 »

Valuethinker wrote: Wed Oct 13, 2021 4:39 am An all cash asset allocation is very exposed to unexpected inflation.
In point of fact, all assets that are not explicitly and contractually linked to inflation, such as TIPS and I bonds, are exposed to unexpected inflation.

However, if by 'cash' one refers to 'near cash equivalents' like T-bills, then cash has actually done a good job at tracking inflation, as noted here, though that doesn't mean that it has always provided a positive real return. We've seen several periods, including one we've been in now for over a decade, where cash had slightly negative real returns.
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Re: Question about Bernstein's Stop Playing the Game

Post by HomerJ »

dbr wrote: Wed Oct 13, 2021 12:35 pm
JoeRetire wrote: Wed Oct 13, 2021 12:26 pm
HomerJ wrote: Wed Oct 13, 2021 10:35 am
JoeRetire wrote: Sun Oct 10, 2021 1:34 pm
Cheego wrote: Sun Oct 10, 2021 1:32 pmSo, what would an AA look like if we stopped playing?
0/0/100
Can we try not to be so flippant when fairly new posters ask serious questions?

Especially those with under 100 posts.
Not flippant at all. No idea why you would say that.
In defense of "not flippant" I think Bernstein seriously proposes 0/0/100 for stocks/bonds/annuities-ladders. This interprets the game as being invested in assets that are not stable in inflation indexed value but subject to valuation in a market. An annuity once purchased is independent of future market values and income from a maturing TIPS is set at the face value of the bond and not affected by TIPS market prices once purchased.

My personal opinion is that "stop playing the game" is probably the flippant expression here, but in fairness to Bernstein I think what he really means is to not count too much on big returns in risky stocks, which is wise advice.
A response to a new poster should include more context and explanation, if possible. I would suggest we explain WHY we give a certain answer to a new poster.

Annuities are not-inflation indexed, and therefore not free of risk. A 0/0/100 annuity would be riskier than a portfolio with some stock funds in it.

If you've hit your number ("won the game"), there's no longer any need to keep a high stock allocation (and the risk of a crash that goes along with it). I will agree that "STOP playing the game" is not the greatest expression ever, and can be confusing. You probably shouldn't stop investing in stocks, but you can certainly cut back.

So let's explain it and talk about it. Let's explain Sequence of return risk, and why it might be a good idea to have a lower stock allocation as you enter retirement. A big crash right as you start pulling from your portfolio can hurt your portfolio survival. When young and working, you can just wait for the market to recover. When you are retired, you need to pull money every year even if the market is down.

Taking some risk off the table make sense. Having some money in safer assets to draw upon while you wait for the stock market to recover is a smart move.

Taking ALL your money off the table is the wrong idea, but his main point is that once you have enough money, the goal should switch to preserving the money, not necessarily growing it.

By definition, once you have "enough" to retire, you don't NEED "more". It's more important to play it safe than to maximize growth.

For most people.

No rule is universal.
A Goldman Sachs associate provided a variety of detailed explanations, but then offered a caveat, “If I’m being dead-### honest, though, nobody knows what’s really going on.”
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Re: Question about Bernstein's Stop Playing the Game

Post by willthrill81 »

HomerJ wrote: Wed Oct 13, 2021 12:56 pm
dbr wrote: Wed Oct 13, 2021 12:35 pm
JoeRetire wrote: Wed Oct 13, 2021 12:26 pm
HomerJ wrote: Wed Oct 13, 2021 10:35 am
JoeRetire wrote: Sun Oct 10, 2021 1:34 pm

0/0/100
Can we try not to be so flippant when fairly new posters ask serious questions?

Especially those with under 100 posts.
Not flippant at all. No idea why you would say that.
In defense of "not flippant" I think Bernstein seriously proposes 0/0/100 for stocks/bonds/annuities-ladders. This interprets the game as being invested in assets that are not stable in inflation indexed value but subject to valuation in a market. An annuity once purchased is independent of future market values and income from a maturing TIPS is set at the face value of the bond and not affected by TIPS market prices once purchased.

My personal opinion is that "stop playing the game" is probably the flippant expression here, but in fairness to Bernstein I think what he really means is to not count too much on big returns in risky stocks, which is wise advice.
A response to a new poster should include more context and explanation, if possible. I would suggest we explain WHY we give a certain answer to a new poster.

Annuities are not-inflation indexed, and therefore not free of risk. A 0/0/100 annuity would be riskier than a portfolio with some stock funds in it.

If you've hit your number ("won the game"), there's no longer any need to keep a high stock allocation (and the risk of a crash that goes along with it). I will agree that "STOP playing the game" is not the greatest expression ever, and can be confusing. You probably shouldn't stop investing in stocks, but you can certainly cut back.

So let's explain it and talk about it. Let's explain Sequence of return risk, and why it might be a good idea to have a lower stock allocation as you enter retirement. A big crash right as you start pulling from your portfolio can hurt your portfolio survival. When young and working, you can just wait for the market to recover. When you are retired, you need to pull money every year even if the market is down.

Taking some risk off the table make sense. Having some money in safer assets to draw upon while you wait for the stock market to recover is a smart move.

Taking ALL your money off the table is the wrong idea, but his main point is that once you have enough money, the goal should switch to preserving the money, not necessarily growing it.

By definition, once you have "enough" to retire, you don't NEED "more". It's more important to play it safe than to maximize growth.

For most people.

No rule is universal.
The problem here is that statements like 'It's probably a good idea for most investors whose portfolio reaches a certain multiple of their annual expenses to reduce their exposure to volatile assets, such as stocks, as the negative impact of downside risk is likely greater than the positive impact of upside potential, but some continued exposure to volatile assets is nearly always appropriate' are obviously not pithy enough for short quips. The problem with short quips like Bernstein's is that they almost universally lack appropriate context, which is what drives nearly all aspects of personal finance.
Last edited by willthrill81 on Wed Oct 13, 2021 1:16 pm, edited 1 time in total.
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Re: Question about Bernstein's Stop Playing the Game

Post by HomerJ »

willthrill81 wrote: Wed Oct 13, 2021 1:14 pm The problem here is that statements like 'It's probably a good idea for most investors whose portfolio reaches a certain multiple of their annual expenses to reduce their exposure to volatile assets, such as stocks, as the negative impact of downside risk is likely greater than the positive impact of upside potential, but some continued exposure to volatile assets is nearly always appropriate' are obviously not pithy enough for short quips. The problem with short quips like Bernstein's is that they almost universally lack appropriate context, which is what drives nearly all aspects of personal finance.
LOL.

Precisely. :)
A Goldman Sachs associate provided a variety of detailed explanations, but then offered a caveat, “If I’m being dead-### honest, though, nobody knows what’s really going on.”
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Re: Question about Bernstein's Stop Playing the Game

Post by Red Spot »

As an eternal pessimist and ultra-conservative "investor" I really shouldn't frequent this site as we never actually played the game.
Fortunately our (retired) income stream of Pension plus SS comfortably exceeds our budget (essential and dicretionary).
So by Boglehead's definition our "investing" is solely for the benefit of our heirs and the State of Massachusetts
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Re: Question about Bernstein's Stop Playing the Game

Post by delamer »

dbr wrote: Wed Oct 13, 2021 12:16 pm
Cheego wrote: Sun Oct 10, 2021 1:32 pm So, what would an AA look like if we stopped playing?
So that is a really good question and I think the answer is not all that easy to find in Bernstein.

I may be misrepresenting his ideas but I think I would try to construct it something like this:

1. Examine your estimated spending and divide your expenses into the two categories of essential and discretionary. I suppose somewhere that spending has to be inflated over time and not just be the first year of retirement spending.

2. Place between 20 and 25 times of your (inflation corrected) essential spending into fixed income assets. Fixed income assets could mean an inflation indexed annuity or a TIPS ladder, but now there gets to be a bunch of apples to oranges discussion. An inflation indexed annuity might price out at 25 times the spending intended to cover but now the retirement is allowed to be life. A 30 year TIPS ladder is only 30 years but needs a real yield of 1.5% from 25x and needs a real yield of 3.0% from 20x.

3. Invest the rest of your assets in equities and plan on whatever discretionary spending you can support from that, however you figure that out.

4. An implication is that to retire you need 20-25 times your essential spending assuming there is no discretionary spending and much more than that if you want more. Note that a typical 4% estimate for a 30/70 to 100/0 portfolio would have you retire on a portfolio of 25x your essential and discretionary spending.

This all by itself does not define an asset allocation. We don't know how essential and discretionary spending compare to one another for anyone in particular. We also don't know the total portfolio size so we don't know how large "the rest of your assets" is. A model might be discretionary is 25% of essential and that you can support that from equities at 4% SWR. In that case the asset allocation would be either 24/76 or 20/80.

I think I am being very unfair to Bernstein, so maybe someone can boil down what he actually proposes.
You missed an element.

The amount to be put in cash equivalents is based on residual essential expenses.

(Residual essential expenses) equal (Total essential expenses) minus annuities (Social Security, pensions, and other annuitized income).

Not sure why the amount set aside for discretionary spending needs to add “much more” to a nest egg. That’s totally dependent on how much discretionary spending you want to do. And what you mean by “much more.” If you invest $100,000 in stocks that is intended as a vacation fund, you’ll probably get a lot of $10,000 vacations before you run out of money.

The obvious question about the Bernstein proposal is whether it is possible to purchase investments that do not risk principal but keep pace with annual inflation, over a long period like 20 to 25 years. Maybe not. Putting 10 years of residual essential expenses in cash equivalents while replenishing it in years that the rest of the portfolio does well, would let many people sleep well.
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Re: Question about Bernstein's Stop Playing the Game

Post by hudson »

In an earlier discussion W. Bernstein said that his portfolio was 50/50.
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Re: Question about Bernstein's Stop Playing the Game

Post by Finridge »

Valuethinker wrote: Wed Oct 13, 2021 4:39 am
Finridge wrote: Wed Oct 13, 2021 1:15 am A helpful experiment I did in getting comfortable with what the proper asset allocation was for me was to use cFIREsim.com to backtest different asset allocations. I was focusing on different mixes of stocks and bonds. But then, just for kicks I backtested an allocation consisting of 100% cash. At even moderate time horizons (like 5-10 years) this is usually the riskiest AA of any, posing a greater risk then 100/0 or 0/100 and anything in between. And over longer time horizons it was uniformly the riskiest AA. With an all cash AA, between spending and inflation, the portfolio just goes down down down. I found this to be eye-opening.

And over longer time horizons, high stock AA's, even 100/0 did really well, often outperforming more mixed allocations, and this was especially the case if you used a conservative "safe withdrawal rate" (for example, if you used a SFR of 3% or 2% instead of the "standard" 4%. That is to say, that if you have a lower than normal SWR, an all-cash AA is not at all unreasonable.

But understand how backtesting works and what its limitations are. Nobody ever knows what the future will bring...
An all cash asset allocation is very exposed to unexpected inflation.

That said, it probably outperformed bonds and equities over the 1966-1980 period ie the longest period of sustained inflation in peacetime in US history. (TIPS & ibonds didn't exist in that time period-- TIPS date from 1998, not sure re ibonds).
For sure, 1966-1980 was a "dark age" for investors. But even there--EVEN THERE-- a stock and bond portfolio beats cash. Starting with $1,000,000 cFIREsim.com reports the following for 1966-1980:

Stock and Bond Portfolios:

- 100% stocks, no bonds, no cash - ending portfolio: $303,836
- 75% stocks, 25% bonds, no cash - ending portfolio: $305,056.
- 50% stocks, 50% bonds, no cash - ending portfolio: $292,873.
- no stocks, 100% bonds, no cash - ending portfolio: $237,524.

All Cash Portfolio:
- no stocks, no bonds, 100% cash - ending portfolio: $41,981.

An all cash portfolio almost always drops like a rock. It will almost never out-perform a stock and bond portfolio over an intermediate or long-term time horizon. If you look at the data, the difference is shocking.


This is using cFIREsim.com, changing the asset allocations as listed above, but keeping of its other assumptions, and doing a single simulation, with 1966 as the start year. The retirement date is set for 2021 with 2035 as the retirement end year (to force the simulation to end at the end of 1980).
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Re: Question about Bernstein's Stop Playing the Game

Post by secondopinion »

HomerJ wrote: Wed Oct 13, 2021 12:56 pm
dbr wrote: Wed Oct 13, 2021 12:35 pm
JoeRetire wrote: Wed Oct 13, 2021 12:26 pm
HomerJ wrote: Wed Oct 13, 2021 10:35 am
JoeRetire wrote: Sun Oct 10, 2021 1:34 pm

0/0/100
Can we try not to be so flippant when fairly new posters ask serious questions?

Especially those with under 100 posts.
Not flippant at all. No idea why you would say that.
In defense of "not flippant" I think Bernstein seriously proposes 0/0/100 for stocks/bonds/annuities-ladders. This interprets the game as being invested in assets that are not stable in inflation indexed value but subject to valuation in a market. An annuity once purchased is independent of future market values and income from a maturing TIPS is set at the face value of the bond and not affected by TIPS market prices once purchased.

My personal opinion is that "stop playing the game" is probably the flippant expression here, but in fairness to Bernstein I think what he really means is to not count too much on big returns in risky stocks, which is wise advice.
A response to a new poster should include more context and explanation, if possible. I would suggest we explain WHY we give a certain answer to a new poster.

Annuities are not-inflation indexed, and therefore not free of risk. A 0/0/100 annuity would be riskier than a portfolio with some stock funds in it.

If you've hit your number ("won the game"), there's no longer any need to keep a high stock allocation (and the risk of a crash that goes along with it). I will agree that "STOP playing the game" is not the greatest expression ever, and can be confusing. You probably shouldn't stop investing in stocks, but you can certainly cut back.

So let's explain it and talk about it. Let's explain Sequence of return risk, and why it might be a good idea to have a lower stock allocation as you enter retirement. A big crash right as you start pulling from your portfolio can hurt your portfolio survival. When young and working, you can just wait for the market to recover. When you are retired, you need to pull money every year even if the market is down.

Taking some risk off the table make sense. Having some money in safer assets to draw upon while you wait for the stock market to recover is a smart move.

Taking ALL your money off the table is the wrong idea, but his main point is that once you have enough money, the goal should switch to preserving the money, not necessarily growing it.

By definition, once you have "enough" to retire, you don't NEED "more". It's more important to play it safe than to maximize growth.

For most people.

No rule is universal.
I go as far as "STOP playing the game" and treat the money as serious business, and suggest people do it now. Different take to the saying, but it is far more relevant. Those who can afford the risk can continue to be in stocks and other risky ventures despite the intended meaning. If I won handedly very early, I doubt I would retire; I would just continue to amass wealth to the point where the portfolio is runaway despite what I withdraw for my needs. It could go wrong; but if I were to be way ahead of schedule, why not aim for the stars?
bb
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Re: Question about Bernstein's Stop Playing the Game

Post by bb »

It seems like working 10 more years to get to SS vs living off 2-3% withdrawals from a 60/40 allocation might not be a good trade off in order to take an LMP approach for a younger retiree.
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Re: Question about Bernstein's Stop Playing the Game

Post by SquawkIdent »

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Cheego
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Re: Question about Bernstein's Stop Playing the Game

Post by Cheego »

SquawkIdent wrote: Sat Oct 16, 2021 9:29 am Have you ever read this…

www.forbes.com/sites/rickferri/2015/02/ ... irees/amp/
Just did. Basically, Rick says..."Retirees and those almost retired shouldn’t care what their highest level of risk tolerance is because they shouldn’t be investing anywhere near it. There is no economic reason for a person to take more investment risk than necessary once they’ve accumulated enough money for retirement. The focus should be on the minimum amount of risk needed to achieve an income required in retirement.

Pre-retirees and retirees don’t have the same goal assumed by Peter Bernstein in his seminal 60/40 article. Their focus is on conserving wealth and generating income. This shifts the conversation to a different subject, which eventually shifts the center of gravity for the ideal allocation to something other than 60/40. I propose the center of gravity for those who have accumulated enough for retirement to be 30% stocks and 70% bonds."


But I wonder what the quantifiers are for "enough for retirement".
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Re: Question about Bernstein's Stop Playing the Game

Post by willthrill81 »

bb wrote: Sat Oct 16, 2021 8:59 am It seems like working 10 more years to get to SS vs living off 2-3% withdrawals from a 60/40 allocation might not be a good trade off in order to take an LMP approach for a younger retiree.
Those who can fund their expenses from 3% withdrawals or smaller arguably have no historically driven need for a LMP approach at all. Over nearly all 20+ year periods, those with such low withdrawals would have seen their inflation-adjusted portfolio balance grow, usually very substantially and sometimes by leaps and bounds.

The question of trade-offs is a very apt one. I have long argued that a 65 year old working for another 5-10 years in order to go from 4% withdrawals to 3% is likely a very poor trade-off unless they truly love working for money.
“Good and ill have not changed since yesteryear; nor are they one thing among Elves and Dwarves and another among Men.” J.R.R. Tolkien, The Lord of the Rings
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Re: Question about Bernstein's Stop Playing the Game

Post by Jack56 »

Bernstein gave his advice about quitting the game right after the GFC. The world is different now with the risk of high and persistent inflation. In this environment it seems risky not to have substantial exposure to assets that will increase in value with inflation rather than a high exposure to "safe" assets such as bonds and cash. TIPs of course could help but the problem with them is that outside of a retirement account they are tax inefficient and they are difficult to understand. Holding them as part of a fund, even a low cost fund with Vanguard, means that a substantial portion of your return will go to pay expenses. I don't think that "quitting the game" in today's environment is a prudent strategy.
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Re: Question about Bernstein's Stop Playing the Game

Post by willthrill81 »

Jack56 wrote: Sat Oct 16, 2021 2:37 pm Bernstein gave his advice about quitting the game right after the GFC. The world is different now with the risk of high and persistent inflation. In this environment it seems risky not to have substantial exposure to assets that will increase in value with inflation rather than a high exposure to "safe" assets such as bonds and cash. TIPs of course could help but the problem with them is that outside of a retirement account they are tax inefficient and they are difficult to understand. Holding them as part of a fund, even a low cost fund with Vanguard, means that a substantial portion of your return will go to pay expenses. I don't think that "quitting the game" in today's environment is a prudent strategy.
To be clear, there have been long periods in the past where fixed income has lost out to inflation on a pre-tax basis. From 1941-1981, 10 year Treasuries had a real return of about -1.6%.

That said, I agree that we must be careful to not let concerns about short- or mid-term volatility cause us to thoughtlessly drive up the long-term risks of inflation, greater than expected longevity, insufficient assets to cover spending needs, etc.
“Good and ill have not changed since yesteryear; nor are they one thing among Elves and Dwarves and another among Men.” J.R.R. Tolkien, The Lord of the Rings
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Re: Question about Bernstein's Stop Playing the Game

Post by Cheego »

When I started this thread, I had already been thinking about switching from my current bond funds to a single TIPS fund (this, in a taxable account).

I just posted a question about it here... viewtopic.php?f=1&t=360272&p=6278244#p6278244

Any suggestions at that link are greatly appreciated.
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Re: Question about Bernstein's Stop Playing the Game

Post by SquawkIdent »

Cheego wrote: Sat Oct 16, 2021 2:24 pm
SquawkIdent wrote: Sat Oct 16, 2021 9:29 am Have you ever read this…

www.forbes.com/sites/rickferri/2015/02/ ... irees/amp/
Just did. Basically, Rick says..."Retirees and those almost retired shouldn’t care what their highest level of risk tolerance is because they shouldn’t be investing anywhere near it. There is no economic reason for a person to take more investment risk than necessary once they’ve accumulated enough money for retirement. The focus should be on the minimum amount of risk needed to achieve an income required in retirement.

Pre-retirees and retirees don’t have the same goal assumed by Peter Bernstein in his seminal 60/40 article. Their focus is on conserving wealth and generating income. This shifts the conversation to a different subject, which eventually shifts the center of gravity for the ideal allocation to something other than 60/40. I propose the center of gravity for those who have accumulated enough for retirement to be 30% stocks and 70% bonds."


But I wonder what the quantifiers are for "enough for retirement".
I think it means this…

You have multiple legs to your retirement stool and your portfolio is just one or more legs.

You can meet your income needs with a lot of help from those other sources (pensions, annuities, social security, part time job, etc.) and the need to withdraw from your portfolio is conservative. IE…you’re withdrawing 2-3% per year and not 7%.

It’s a very subjective question as what I think the next person won’t.

Does that help?
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Re: Question about Bernstein's Stop Playing the Game

Post by willthrill81 »

Cheego wrote: Sat Oct 16, 2021 2:24 pm
SquawkIdent wrote: Sat Oct 16, 2021 9:29 am Have you ever read this…

www.forbes.com/sites/rickferri/2015/02/ ... irees/amp/
Just did. Basically, Rick says..."Retirees and those almost retired shouldn’t care what their highest level of risk tolerance is because they shouldn’t be investing anywhere near it. There is no economic reason for a person to take more investment risk than necessary once they’ve accumulated enough money for retirement. The focus should be on the minimum amount of risk needed to achieve an income required in retirement.

Pre-retirees and retirees don’t have the same goal assumed by Peter Bernstein in his seminal 60/40 article. Their focus is on conserving wealth and generating income. This shifts the conversation to a different subject, which eventually shifts the center of gravity for the ideal allocation to something other than 60/40. I propose the center of gravity for those who have accumulated enough for retirement to be 30% stocks and 70% bonds."


But I wonder what the quantifiers are for "enough for retirement".
We discussed Rick's article awhile back in this thread.

Frankly, I think that it's a bad piece and said why in that thread.
“Good and ill have not changed since yesteryear; nor are they one thing among Elves and Dwarves and another among Men.” J.R.R. Tolkien, The Lord of the Rings
Kevin K
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Re: Question about Bernstein's Stop Playing the Game

Post by Kevin K »

willthrill81 wrote: Sat Oct 16, 2021 3:17 pm
Cheego wrote: Sat Oct 16, 2021 2:24 pm
SquawkIdent wrote: Sat Oct 16, 2021 9:29 am Have you ever read this…

www.forbes.com/sites/rickferri/2015/02/ ... irees/amp/
Just did. Basically, Rick says..."Retirees and those almost retired shouldn’t care what their highest level of risk tolerance is because they shouldn’t be investing anywhere near it. There is no economic reason for a person to take more investment risk than necessary once they’ve accumulated enough money for retirement. The focus should be on the minimum amount of risk needed to achieve an income required in retirement.

Pre-retirees and retirees don’t have the same goal assumed by Peter Bernstein in his seminal 60/40 article. Their focus is on conserving wealth and generating income. This shifts the conversation to a different subject, which eventually shifts the center of gravity for the ideal allocation to something other than 60/40. I propose the center of gravity for those who have accumulated enough for retirement to be 30% stocks and 70% bonds."


But I wonder what the quantifiers are for "enough for retirement".
We discussed Rick's article awhile back in this thread.

Frankly, I think that it's a bad piece and said why in that thread.
Thanks for that link willthrill81. I agree with your comments in that thread.

Dr. Bernstein's advice to stop playing when you've won the game, as I recall, came in part from having to deal with numerous high net-worth clients during the GFC who despite having filled out detailed risk-assessment questionnaires panicked and wanted to throw in the towel when the stock market cratered. But the assets he recommended back then for a won-the-game/LMP portfolio - individual TIPs and SPIA's - would have to be replaced with 100% iBonds to offer a real rate of return today.

I especially enjoyed rereading the Rick Ferri article because I just completed a portfolio "second opinion" review with a protégé of Rick's as I turn 65 this year and wanted to take a fresh look at assets, SS claiming and withdrawal strategies. His baseline recommendation was, unsurprisingly, 30% stocks (evenly divided between VTI and VXUS) and 70% bonds (50% VGIT, 20% VTIP) at retirement, then spending down the bonds (starting with the VTIP) until SS claiming at 70 and ramping up the equities to 60-70% (i.e. the well-known Kitces rising equity glide path). Not a bad recommendation but perhaps an inelegant one considering the risk-adjusted returns and drawdowns of several less conventional allocations, including the Larry (Swedroe) Portfolio and the PP-inspired Golden Butterfly:

https://www.portfoliovisualizer.com/bac ... ation8_2=7

Anyway as you pointed out willthrill81 one size doesn't fit all in assessing what "winning the game" means.
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Re: Question about Bernstein's Stop Playing the Game

Post by xxd091 »

Just saw this thread-U.K. investor
Aged 75 retired 18 years
Been 30/65/5 for many years now -equities/bonds/cash-5% is 2-3 years living expenses in cash
Withdrawals have been mostly from the equities side as we have had many good years and downturns have been short lived
All bonds are in tax free wrappers -pensions and ISAs( a U.K. only tax free savings vehicle)
Vanguard Global Bond Index Fund hedged to the Pound as only bond fund
Vanguard Global Equities Index Tracker Fund as only equities fund
Will be this way to the finish I think
Rick Ferri seemed to get the balance right for me
xxd091
PS simple cheap and easy to understand especially as I get older!
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