Portfolio Management

First off, this is Usenet. Your "profile" may be accessible on Google Groups, but Google Groups is only one way to access this newsgroup and the newsgroup has been around (as have some of us) a lot longer than Google Groups.

Thanks for pointing that out, though. Since I never read this newsgroup via google (except every once in a while to search the archives), I'd have never seen your profile had you not said anything.

That said, while it's nice for folks to be forthcoming about whether they work in the industry or not, don't worry about certain folks who rant about "disclosure" here. Not all of us think that professionals are necessarily a complete waste of money, and, frankly, I'm glad to have folks here who work with the non-DIY investors. Most of us here are do know more than the average person on the street, and sometimes it seems easy to forget what it was like to not have known, say, the difference between a bond and a stock or between a money market fund and a brokerage account.

Moreover, contrary to some claims, while some folks can do just fine selecting their own funds and investments, not everyone either can or wants to spend even the minimal amount of time necessary for a basic plan. It really doesn't have to be as complicated as many folks seem to want to make it, but even so, there are some who just can't seem to get their head or motivation wrapped around even, say, the For Dummies books. For them, there's no question that hiring a pro makes at least more sense than just leaving their cash (if they've managed to save any!) in the mattress.

(And some with substantial net worth probably could use some help with at least tax and/or estate planning if not necessarily with the investing itself).

That all said, let's not be naive. Advisors make a living - often quite a comfortable one - off of their clients. In some cases, it's money well spent, but it's far from a given, and no matter how you slice it, that money is coming from somewhere.

I respectfully differ. Even at age 30 a fixed income allocation of 20 percent is just fine. Volatility will be less and he only gives up a small amount of return. If there is a bear market for equities, his losses will be smaller and he'll be less tempted to abandon what has been to date a sensible long term investment strategy.

Of course, we're older, but I was very glad to have had some bond exposure in 2001. Not only did we not take the same beating as many who were more aggressively invested, but we also benefited from being in at the beginning of a bond boom. In my opinion, being diversified includes not only a spectrum of equity classes, but also bonds.

Elizabeth Richardson

Were you just as pleased while your bonds lagged behind the market run-ups? Thumper

Well, yes. A truly diversified portfolio is less volatile. Than means less thumping on the way down and less exuberance on the way up. To really take advantage of market swings requires impeccable market timing. I am fully aware that I don't have that kind of prescience. And, as I said, we're older. I believe the closer you get to retirement, the less exposure to equities you'll want, although I also believe you should never entirely give up your equity exposure.

Elizabeth Richardson

And for those who are not readers of every post here, it was stated in anouther thread that the 4% annual withdrawal number, to ensure that you would not outlive your savings at retirement, is base d on a 60/40 mix of stocks to bonds. So while it's *easy* to see you would have been better off just staying fully invested from the mid 90's through 2005, the numbers work out differently during drawdown cycles in retirement. You can't just 'ride it out'.

JOE

I believe the closer you get to retirement, the less exposure to

I tend to agree. See below re age.

I am guessing one would have to do a Monte Carlo analysis, to see what outcomes one would get at a 4% withdrawal rate? This would test that portfolio against different possible outcomes in terms of bond and stock returns, over the, say, 35 years you might live in retirement.

My impression, and I've never sought out the tools to actually check, is that in a world where long bonds yield 4.5%, 4% is probably too high-- 3.5% is a more likely number?

This is one of the reasons why I think Social Security income is going to be an important factor for most Americans. They will live a very long time due to advances in medical technology, and in all probability investment returns of the last 25 years were anomalously high, relative to likely future returns. SS has a degree of indexation (to wages) which is really not 'buyable' in a private sector context (you can invest in TIPS, and be proofed against inflation, but not wage inflation, AFAIK; stocks do offer that form of protection, but they are risky).

There are arguments about the solvency of the SS system, *which I don't want to restart here* but I think the history of the 1980s under Reagan shows that those problems will be solved (by a mixture of benefit cuts and tax increases). Those who wish to discuss these in more detail can do so, perhaps, in other fora (forums?) or by email.

The reason I asked is because I often hear people whine about being left behind in a protracted market run up because they were invested in bonds. Thumper

"Thumper" wrote

What do you say to them?

I'd suggest you read some of the studies on this, Google "trinity study" and decide for yourself. These analyses were done using MC, and in the end, it was observed that the most survivable account (i.e. one you wouldn't outlive) used a 60/40 mix and 4% initial drawdown. Since then there have been many variations on the theme, for example, you can use slightly higher rate of withdrawal if you do not take an inflation adjustment after a down year. Also, at a certain age, given the right interest environment, you can convert some portion to an immediate annuity. This isn't addressed by Trinity. Scott Burns has multiple articles on this topic as well.

JOE

I can assure you that in our household SS is important in determining retirement income for the long haul; in fact, it was important in determining that we could retire at a younger age than normal. In these early years of retirement we are withdrawing something more than 4%, more like 4.5-5.5%. However, when I start drawing SS (2-4 years), that number will fall below the 4% threshold and stay below for several years, perhaps indefinitely, although I can't accurately forecast 10 plus years out.

Elizabeth Richardson

Perhaps the Trinity study is the basis for an article on safe withdrawals published in Worth magazine ten or so years ago. I was rather impressed with the approach and I know at least one of the mutual fund sites incorporated that approach with their online investment tools.

I don't know much about Monte Carlo analysis but my perception of market behavior has become that it is a non-stationary random process. That means that the distribution function for returns and all it's statistics change with time. If that is true, the results of the last hundred years or so of data give little assurance as to what the future "could" hold.

While such analyses may give a recipe for one's best shot of portfolio survival today, I think they should be viewed with the understanding that the results may be way off later on. It would be interesting to see a MC model that included multiple distribution functions, including some that do not seem reasonable today but yet could occur.

My skepticism is reflected in an asset allocation which would make a financial advisor wretch:)

JB

"JB" wrote

Given that still others "could occur," how would this be an improvement or interesting? I think it would be just more speculation, with no more value than using strictly historical numbers.

It seems to me that we are all rolling the dice on any model that claims precision. I think people should think more in terms of betting on U.S. and world industries: What are the chances that they will all be wiped out? That people will cease to want more and better goods and services? That population growth will stop? That company earnings will not keep up with inflation?

We can calculate and analyze until we drop, but that won't eliminate the risk because it doesn't address the problem. The problem is insufficient savings that forces the retiree either to draw on principal or have no inflation protection or both.

Accordingly, my take is that the best solution is not a clever withdrawal idea based on assumptions (calculations), but saving more money. As for how much more to save, my target is to save enough so that the dividend yield on a basket of dividend paying stocks (today around 2.1%) equals the desired income. My experience has been that over my remaining lifetime these blue chip stocks will provide increasing income and increasing net worth.

I have no desire to die broke. Rather, my plan is to live well and die comfortable. Also, no, this is not bullet proof. Nothing is.

-HW "Skip" Weldon Columbia, SC

one example I have read about recently was taking returns from

1960-2006 and processing info, then reversing returns (2006-1960) and testing this. The numbers were "real", they just occurred ina different order. Because 2000-2002 is "earlier" in draw down phase, this gives a good indication of how a bear market could wreak havoc on a draw down plan.

I'm with Skip, the more I can live off dividends, the better I am doing.

Skip, does this mean you're investing only in taxable accounts or a Roth? I ask, because as I understand the rules on 401k and Trad IRA accounts would require one to withdraw both principal and earnings.

Elizabeth Richardson

jIM, I am working to get that article available to us becuase I found it to be such a valuable lesson. For the time it is labelled "broker/dealer use only" which causes compliance problems for me, but I am hoping to have something viable soon.

"jIM" wrote

Ditto.

Does "the literature" even give much attention to this "alternative" for retirement?A certain relative drilled into me this notion of investing for dividend income etc., emphasizing how the dividend increases of large cap companies typically have far exceeded inflation. Otherwise, I do not think I would have caught onto it.

By contrast, drawing down from one's portfolio at a certain rate seems well-covered in the media, books, etc.

Granted, the dividend investment approach disregards diversifying in one's retirement. On the third hand, as a rule, as one grows older, one is supposed to shift to a less diverse, but more conservative, portfolio.

I track the dividend increases of my portfolio and also put the historical five-year and ten-year per annum averages on my portfolio spreadsheet. The weight averaged dividend increase of my blue chip stocks has been about 13% each year for the last five years, and over 23% for the last ten years. But critics might be right in asserting that my portfolio lacks diversity and therefore its principal will not keep up with a well-diversified, carefully allocated one, if history repeats.

I do not think about it too much. As others pointed out, at a certain point in personal financial planning, the "finessing" becomes hair splitting and a crap shoot.

The S&P 500 historical average, annual dividend increase, using Shiller's data since about 1929, has been around 5%.