Announcement

Collapse
No announcement yet.

Taxable fund mix

Collapse
X
 
  • Filter
  • Time
  • Show
Clear All
new posts

  • #46





    jfoxcpacfp wrote: otoh, permanent loss in an appropriately diversified equity portfolio is always a human achievement, of which the market is incapable. That is a historical fact and history is the best (really the only true) guideline for equity behavior that we have. Anything beyond is conjecture.

    This is a seriously dangerous notion.  Permanent loss (or rather loss over a human lifetime) is possible, otherwise equities are riskless.  What we know from past performance is the average return and standard deviation of returns.  We can’t expect the 146 years of historical data on US equities to represent the full range of outcomes for US equity returns, so we have no basis for concluding that permanent impairment is impossible. 
    Click to expand…


    Please tell me of one documented instance of “permanent loss in an appropriately diversified equity portfolio” – I’m all ears.
    Click to expand...


    Because something hasn't happened in the last 146 years, basically two human lifetimes, it can't ever happen in a human lifetime?

    Comment


    • #47


      Because something hasn’t happened in the last 146 years, basically two human lifetimes, it can’t ever happen in a human lifetime?
      Click to expand...


      Sure. Let's also say the Dow will go to 100,000 next year. Or zero. Just because it's never happened, you know.

      It is only logical to reason that an appropriately diversified equity portfolio is incapable of permanent loss. Ownership of equities in the stock market represents ownership of real shares of tangible assets - successful businesses, industries, metals,real estate, etc., not poker chips. If permanent loss were possible in an appropriately-diversified equity portfolio, it would mean that nobody is willing to bid for ownership of valuable assets against others and that all owners would be willing to let their business interests fall to zero before selling shares to other willing buyers. Even real estate eventually recovers, although it is highly illiquid and undiversified.
      Our passion is protecting clients and others from predatory advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

      Comment


      • #48







        Because something hasn’t happened in the last 146 years, basically two human lifetimes, it can’t ever happen in a human lifetime?
        Click to expand…


        If permanent loss were possible in an appropriately-diversified equity portfolio, it would mean that nobody is willing to bid for ownership of valuable assets against others and that all owners would be willing to let their business interests fall to zero before selling shares to other willing buyers.



        Click to expand...


        This isn't correct unless you are unwilling to take on any risk.  The expectation of an investment can be positive even if there is probability that it will go to zero.  Let's say a $1 investment has a 50% chance of going to zero and a 50% chance of going to $5 in one year.  The expected value of such investment is:

        • EV = -$1 + 50% x $0 +50% x $5 = $1.5


        Everyone should take that bet, but maybe they wouldn't put their entire net worth into it.

        Comment


        • #49


          This isn’t correct unless you are unwilling to take on any risk.  The expectation of an investment can be positive even if there is probability that it will go to zero.  Let’s say a $1 investment has a 50% chance of going to zero and a 50% chance of going to $5 in one year.  The expected value of such investment is: EV = -$1 + 50% x $0 +50% x $5 = $1.5 Everyone should take that bet, but maybe they wouldn’t put their entire net worth into it.
          Click to expand...


          You and I have very disparate ideas about the risk of investing. You are looking at it as a math professor solving a single equation (your example has nothing to do with an appropriately-diversified equity portfolio, btw). I am using logic.
          Our passion is protecting clients and others from predatory advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

          Comment


          • #50







            This isn’t correct unless you are unwilling to take on any risk.  The expectation of an investment can be positive even if there is probability that it will go to zero.  Let’s say a $1 investment has a 50% chance of going to zero and a 50% chance of going to $5 in one year.  The expected value of such investment is: EV = -$1 + 50% x $0 +50% x $5 = $1.5 Everyone should take that bet, but maybe they wouldn’t put their entire net worth into it.
            Click to expand…


            You and I have very disparate ideas about the risk of investing. You are looking at it as a math professor solving a single equation (your example has nothing to do with an appropriately-diversified equity portfolio, btw). I am using logic.
            Click to expand...


            I was just providing a simple example that everyone could follow.  Have a look at Monte Carlo simulations of the market if for whatever reason you don't believe me that long stretches of negative returns are possible.  I guess you are saying you don't believe the market is random.  If that's true, I think you are wrong.




            , it would mean that nobody is willing to bid for ownership of valuable assets against others and that all owners would be willing to let their business interests fall to zero before selling shares to other willing buyers. Even real estate eventually recovers, although it is highly illiquid and undiversified.
            Click to expand...


            Above you mention that nobody would buy a business if there was a probability that the investment would go to zero.  Of course investments go to zero all the time, and they don't recover.  People still bid on them despite that probability.  I assure you that the weighting of the probability of outcomes (including zero) is a serious input into many investment decisions by professional investors.  EV is not some textbook concept only applicable in the classroom.

            EDIT:

            To put some more "meat on the bone" about how equity value can be destroyed in today's environment, as shown below, debt to EBITDA (earnings before interest, taxes, depreciation, and amortization) is now higher than ever before.  EBITDA is a typical measure of a company's cash flow from operations.  If a depression-like earnings downturn impacts these companies now, the equity value of these businesses could be easily permanently impaired because the debtors may foreclose on the businesses, wiping out the equity value forever.

            Comment


            • #51


              It is only logical to reason that an appropriately diversified equity portfolio is incapable of permanent loss
              Click to expand...


              It is only logical to reason that any kind of equity portfolio is capable of loss during periods of time that are material to the investment objectives of human beings (who grow old, have unexpected expenses, health problems, suffer accidents, job loss, etc.).  Loss does not have to mean worthless (although it may), but where present value is less than a previous value.  It doesn't matter if the loss is not permanent - the loss can be for a period of time sufficiently long to cause much pain and sorrow to anyone who had an inadequate understanding of the risk they were incurring when purchasing equities.  Even if they have a sufficient understanding, I am not sure the pain would be much less.

              What exactly is your appropriately diversified equity portfolio?  VTI and VXUS both hit bottoms in February 2009 - it isn't really possible to diversify more than a market-weighted global portfolio.  You say the loss was not permanent?  It may not have been for your hypothetical investor who lives forever and never has liquidity needs that cannot be satisfied with a two-five year emergency fund, but it was devastating for many.  Do you feel like you know enough about CardinalsFan from this thread to responsibly recommend that he/she ratchet up their equity allocation?  A new person might read this thread and not realize that what you are recommending is outside of mainstream thought on the matter.  CardinalsFan would have been better served asking his question on Bogleheads - he would receive more reasonable advice than what has been given here.


              I am using logic.
              Click to expand...


              It is interesting that your logic would lead you to conclusions that are so far removed from model portfolios recommended by nearly everyone else.  I'll say it once again, CardinalsFan started this thread with a plan that most informed people would consider very reasonable.  In fact, he was planning to have an equity allocation that was very similar to the plan of WCI himself!

               

              Comment


              • #52
                You folks are really straining to prove your point.

                Again, I am talking about an appropriately-diversified equity portfolio, not a single company. Owned, of course, according to the dictates of a financial plan. I should have mentioned that the portfolio is made up of index mutual funds and ETFs.

                Perhaps @Donnie or @Phantasos could give me an example of why my mother, or my sons, for that matter, should not own such a portfolio. I am still waiting for answers to my questions. (And, really, it's not because WCI says so - c'mon!)

                My purpose in continually hammering this theme is not because I think I'm always right. Hopefully, I outgrew that in my 40s, but it used to be a big problem, I'll admit (thanks, Dad!) It is to encourage thought and consideration beyond the sometimes lemming-like followings of certain trains of thought that can be an issue in these situations. WCI is a strong personality. I think he is, quite frankly, brilliant in many ways. But I do not always agree with him nor with the mainstream. I don't think my recommendation is a "seriously dangerous notion". I have yet to hear a realistic refutation.

                Over 90% of loss in investing is due to behavior. Lest you ask, I base that on anecdotal evidence over 38 years as a financial advisor, preparing and advising on tax strategies, first as a CPA and later as a fee-only CFP. Yet what is mostly discussed here is the importance of low fund costs and the awful danger of using an advisor who charges AUM. The irrelevance of low cost funds and AUM when investors cash out and/or stay on the sidelines because they are trying to time the market is barely touched upon.

                I credit this mostly to the complacency resulting from the absence of a bear market since 2011 (the start of this website) combined with surface knowledge learned on this and other websites. Most physicians simply don't have the time or inclination to devote to the study of personal finance that those who participate here do. It will change and, when the next bear or correction occurs, it won't matter that your portfolio is made up of 100% Vanguard funds. I believe this is true based upon the numerous conversations I have had with the non-participating viewers of this website. It's actually scary to me.

                What will matter in the next big drop is the behavior. As @Zaphod has stated, a small allocation to bonds really won't make a difference, at least for most, when your portfolio has dropped 30% instead of 40%. Being grounded in historic market behaviour and staying the course - whether you need the guidance of a trusted advisor or whether you have the confidence to stick it out alone - is what ultimately will determine whether you can respond appropriately or not. And whether you are permanently impairing the chance that you will be able to meet your goals, including retirement, as you had permanently planned.
                Our passion is protecting clients and others from predatory advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

                Comment


                • #53
                  Johanna, I actually agree with you that a larger allocation to equities than the "age in bonds" or other rules of thumb is appropriate for younger people, especially for those who have high paying jobs.  I don't agree with your reasoning why, and I don't agree with you that the market will always go up or that negative returns over 30 years aren't possible because they haven't happened.

                  What you are advocating market timing.  If the market is more likely to go up after a recession, then it is more likely to go down after a bull market.  That is classic market timing thinking, and that's what you are suggesting.  It is wrong and dangerous to downplay the risks of investing in equities by telling people that over a sufficient time frame the market will always go up.

                  There seems to be a misunderstanding of the role of diversification in portfolio theory.  A properly diversified portfolio does not eliminate risk, it eliminates (or at least minimizes) idiosyncratic risk.  Systematic risk exists in everything except the mythical "risk free" asset.  Non-zero systematic risk means that you can indeed lose money in a properly diversified portfolio.

                  Adding bonds to a portfolio does reduce portfolio volatility at the expense of lower expected return.  It is a little silly to say that adding bonds does nothing to your portfolio.  The standard deviation of returns for bonds is way less than equities as shown below for example over the last 20 years.  Every 10% you add to your portfolio reduces portfolio volatility by a calculable amount.  These are pretty basic portfolio concepts.

                   

















































                   
                  Name Ticker VTSMX VGTSX VBMFX Annualized Return Daily Standard Deviation Monthly Standard Deviation Annualized Standard Deviation
                  Vanguard Total Stock Market Index Fund VTSMX - 0.76 -0.23 8.44% 1.21% 4.44% 15.38%
                  Vanguard Total International Stock Index Fund VGTSX 0.76 - -0.19 4.98% 1.21% 4.96% 17.17%
                  Vanguard Total Bond Market Index Fd VBMFX -0.23 -0.19 - 5.21% 0.26% 0.99% 3.45%

                  Comment


                  • #54
                    This is the problem of sustained success without corrections -- Any investment thrown on the ground returns 10%+ without blinking and head/shoulders above traditional return averages.

                    Heck, 10% annual is underperforming by a significant margin for the past 3 years.

                    One should be VERY careful modeling futures based on past 5 year performance.

                    Is the 3 fund Boglehead style conservative?  Sure.  It can also be balanced with an more aggressive tax deferred/529 funds that OP has too if he wants to skew it that way.

                    That said, at 35, debt free with high income earner, ANY REASONABLE financial plan will probably work with reasonable end goals.

                    I believe this forum with its higher income cohort allows for a more aggressive investment stance as well as diverse investment opportunities like real estate and to points of leveraged investments and options; but believe an equally vocal conservative group balances out.

                    Comment


                    • #55




                      This is the problem of sustained success without corrections — Any investment thrown on the ground returns 10%+ without blinking and head/shoulders above traditional return averages.

                      Heck, 10% annual is underperforming by a significant margin for the past 3 years.

                      One should be VERY careful modeling futures based on past 5 year performance.

                      Is the 3 fund Boglehead style conservative?  Sure.  It can also be balanced with an more aggressive tax deferred/529 funds that OP has too if he wants to skew it that way.

                      That said, at 35, debt free with high income earner, ANY REASONABLE financial plan will probably work with reasonable end goals.

                      I believe this forum with its higher income cohort allows for a more aggressive investment stance as well as diverse investment opportunities like real estate and to points of leveraged investments and options; but believe an equally vocal conservative group balances out.
                      Click to expand...


                      Though I agree with the vast majority of what you state, I would offer a differ perspective on your last sentence.  In particular to this forum, the ability to be more aggressive from an investment standpoint is a by product of a high income, rather IMO it is the bond like profession of a physician.  Unless a physician takes a multi year 'break', does something illegal, gets a state license revoked etc. the income may vary, but the ability to attain/create a position is not usually a factor for most physicians due to the training involved (a PhD in physics still isn't a medical physician not matter how smart they are).

                      As an example, my son is 11 y.o. and is a first degree black belt in Tae Kwon Do (TKD).  In four odd years, he should be in position to earn money as a teenager teaching TKD to students within the school he attends.  Would you rather work 6 or 8 hours a week for movie money getting $15 to $20/hour or $9/hour at McDonalds (and he loves cheeseburgers)?  The per hour difference between the two is due to training, you don't teach TKD without a lot of training and the pool of potential employees is rather small versus McDonald's.

                      Comment


                      • #56
                        @ajm184 - agreed  -- high achievers will make hay with whatever and wherever they do.

                        That said, I would argue from a purely financial view, physicians are a poor ROI for the amount of work effort compared to other fields we could apply efforts towards because of the pure underlying aspect of being a high achiever.

                        Comment


                        • #57
                          removed
                          My Youtube channel: https://www.youtube.com/channel/UCFF...MwBiAAKd5N8qPg

                          Comment


                          • #58




                            What will matter in the next big drop is the behavior. As @zaphod has stated, a small allocation to bonds really won’t make a difference, at least for most, when your portfolio has dropped 30% instead of 40%. Being grounded in historic market behaviour and staying the course – whether you need the guidance of a trusted advisor or whether you have the confidence to stick it out alone – is what ultimately will determine whether you can respond appropriately or not. And whether you are permanently impairing the chance that you will be able to meet your goals, including retirement, as you had permanently planned.
                            Click to expand...


                            Johanna, I understand how a 100% equities position is manageable and even desirable for a young investor with a long earning horizon.  However, I still don't understand how this would be advisable for someone nearing or in retirement.

                            Please consider the following example.  Suppose you are one year away from retirement and need $60,000 per year in retirement income.  You have a total portfolio of $2 million, so you are looking good with an anticipated 3% withdrawal rate. You have 1.8 million in equities and 200K (3 years of living expenses) in cash/CDs.  Let's say in the year of your retirement, equities drop 50%.  Your total portfolio drops 45%.  You don't sell and live off your cash reserves.  However, let's say the bear market putters around near its nadir and takes 10 years to fully recover (unusual, but not completely out of the question).  What do you do when your cash reserves run out?  Your portfolio is significantly depleted, perhaps to around 900K, so do you try to live off 30K per year?  Do you go back to work?

                            Now suppose that you have a 60:40 allocation of stocks to bonds in your non-cash portion in the year of retirement.  The market drops 50%, but your total portfolio drops around 25%.  If the bear market takes 10 years to recover, you will again run out of your cash reserves, but you will still have around 1.3 million in your portfolio, which might allow you to live off 40K per year, still difficult but certainly better than 30K per year.  Are you not in a more sustainable position with your 60:40 allocation than your 100% equities?

                            Perhaps I'm missing a critical concept here. Thank you for your thoughts.

                            Comment


                            • #59
                              The math is right; but the premise of spend, savings and goals in the scenario aren't.  The 60:40 allocation still fails.

                              The failure isn't the portfolio's makeup, it's the overall plan.

                              Could liken it to a practice that folds up in new era blaming the EHR that caused the failure of the clinic and physician burnout.  More likely than not, the failure came from the inherent inefficiencies of the clinic and it couldn't adapt to the new scenario presented in the changing landscape of healthcare.

                              Comment


                              • #60




                                Johanna, I understand how a 100% equities position is manageable and even desirable for a young investor with a long earning horizon.  However, I still don’t understand how this would be advisable for someone nearing or in retirement. Please consider the following example.  Suppose you are one year away from retirement and need $60,000 per year in retirement income.  You have a total portfolio of $2 million, so you are looking good with an anticipated 3% withdrawal rate. You have 1.8 million in equities and 200K (3 years of living expenses) in cash/CDs.  Let’s say in the year of your retirement, equities drop 50%.  Your total portfolio drops 45%.  You don’t sell and live off your cash reserves.  However, let’s say the bear market putters around near its nadir and takes 10 years to fully recover (unusual, but not completely out of the question).  What do you do when your cash reserves run out?  Your portfolio is significantly depleted, perhaps to around 900K, so do you try to live off 30K per year?  Do you go back to work? Now suppose that you have a 60:40 allocation of stocks to bonds in your non-cash portion in the year of retirement.  The market drops 50%, but your total portfolio drops around 25%.  If the bear market takes 10 years to recover, you will again run out of your cash reserves, but you will still have around 1.3 million in your portfolio, which might allow you to live off 40K per year, still difficult but certainly better than 30K per year.  Are you not in a more sustainable position with your 60:40 allocation than your 100% equities?
                                Click to expand...


                                First of all, I would not be comfortable with a scenario this tight for a client unless s/he is above NRA. Since you didn't mention SS income, I presume this is an early retiree. $2M is far from adequate. In addition, what most people fail to realize is that the average bear market since the end of WWII has lasted between 11 and 12 months. The longest, which arrived just after the end of WWII, lasted 36.5 months. You can plan for 10 years, but why not 15 or 20 years? When you start down this trail, you have to pay attention to history and the logic of bear markets.

                                A bear market of 10 years would horribly disrupt the bond market - the whole world would be experiencing a meltdown. Many bond issuers would default. You can't eat gold, either. It is ok to imagine such unlikely scenarios as long as you stay grounded in reality and probability.

                                Here are 3 much more likely scenarios for a typical planning client:

                                One

                                • Client retires at 55. Since this is an early retirement, we might set aside 3 years' cash reserves for normal living expenses.

                                • Client plans to spend $50k/year on travel for the next 3 years, a life-long dream. We keep the first $50k in cash and buy $100k of high quality corporate bonds set to mature $50k in 1 year and $50k in 2 yrs.

                                • Bear market occurs, lasts 3 years (again, unlikely)

                                • Client cuts spending, not because he has to, but because this is the typical reaction when the economy sinks. 3 years of cash can stretch to 4. He might delay travel plans for a year or 2.

                                • Not wanting to spend cash, client decides to work part-time. Not because he has to, but because we planned for this when he retired and he continues to be uneasy about spending his savings.

                                • Client might also set up a HELOC because the house is paid off, nobody is buying real estate, low rates, etc. Totally unnecessary, but, he thinks, why not?

                                • Bear ends a full 3 years later, cash is switched off and equities are turned back on. Client begins googling Mediterranean cruises and the Great Wall of China.


                                Two

                                • Client retires at age 65.

                                • Client and spouse have SS payments of $4k/mo.

                                • Client needs an extra $2k/mo. for retirement living expenses and sets aside a minimum of $48k.

                                • Bear market comes along, except they've decided they are retired for sure, no part time work (and no need).

                                • Etc.


                                Three

                                • Same as scenario 2, but client has plenty to live on (she's worked with a financial planner for several years in preparation for this stage)

                                • Client has abundance of assets and doesn't want to take RMDs - would rather pass assets on to next generation.

                                • Bear market comes, client begins converting pre-tax retirement accounts to Roth IRAs at a huge discount.

                                • Age 70.5, client no longer has to take RMDs, or they are minimal

                                • Client leaves pre-tax IRAs to charity for a nice estate tax deduction and taxable accounts and Roth IRAs to children, who are in high tax brackets. Taxable accounts get stepped-up basis.


                                We have clients in all 3 situations and we are all waiting for and expecting the next bear - it is a discussion we have at least annually. You can plan with a survivalist mentality and live a reduced life or prepare with prudence and good judgment and enjoy the abundance you've worked, planned, and saved for. Of course, you can do a little of each, but that just doesn't happen to be what we believe is best for our clients. To each his own, and that is the way it should be.
                                Our passion is protecting clients and others from predatory advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

                                Comment

                                Working...
                                X