Taxable fund mix

[Live Free MD]

jfoxcpacfp wrote:

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.

Click to expand...

Thank you for your thoughtful and detailed response.  I understand your point that it is essential to have a comprehensive plan, and it is important to exercise flexibility with that plan in an early retirement situation.

However, I don't understand your assertion that $2 million would be "far from adequate" for an early retiree with $60,000 of spending per year.  Very few recommend a safe withdrawal rate less than 3% unless you are only planning to live only off your dividends and interest.

ERN did an excellent analysis of safe withdrawal rates in an early retirement scenario, and a 3% withdrawal rate essentially never failed. That doesn't mean it couldn't, but I'm not sure it would be necessary to recommend less than a 3% withdrawal rate. https://earlyretirementnow.com/2016/12/07/the-ultimate-guide-to-safe-withdrawal-rates-part-1-intro/

Thanks again, and have a great weekend.

[jfoxcpacfp]

Live Free MD wrote:

However, I don’t understand your assertion that $2 million would be “far from adequate” for an early retiree with $60,000 of spending per year.  Very few recommend a safe withdrawal rate less than 3% unless you are only planning to live only off your dividends and interest. ERN did an excellent analysis of safe withdrawal rates in an early retirement scenario, and a 3% withdrawal rate essentially never failed. That doesn’t mean it couldn’t, but I’m not sure it would be necessary to recommend less than a 3% withdrawal rate. https://earlyretirementnow.com/2016/12/07/the-ultimate-guide-to-safe-withdrawal-rates-part-1-intro/ Thanks again, and have a great weekend.

Click to expand...

You're right - theoretically, it is possible and I shouldn't have jumped so quickly. The thought of someone trying to make it through 40 - 50 years of retirement on $2M of savings, part of which is in cash, and sticking to $60k/year without knowing what future healthcare costs may be doesn't make me personally comfortable but I'll agree that it should be just fine those who would be happy with a minimal lifestyle. fwiw, though, that's just not representative of any of our (current) physician clients and I don't expect it to change much. For example, we typically model a minimum cushion of $5M at death to leave for charity, next generation, etc., or about $1.5M in today's dollars when adjusted for 3% inflation. Not peanuts, but not much wealth to pass along if that happens to be a goal.

I apologize for the knee-jerk reaction, poor form on my part.

[jfoxcpacfp]

Phantasos wrote:

The most important historical fact is that past performance does not necessarily predict future results.  Japan was a developed economy (not a third-world banana republic), and how has their stock market performed over decades?  Oh, that could never be us?  The reason risk is rewarded, is because it really is risk.

Click to expand...

I'm sorry I missed this earlier as I had expected to see Japan enter the conversation. There’s no more rapidly aging population in any major economy on the planet than Japan’s. Japan never even had a postwar baby boom – the country was simply too devastated – with the result that its age mix is significantly older than ours. This is true even in ways that are not immediately obvious, as – for instance – the growth of population under age 25 in Japan is actually negative, even as ours is positive. In other words: not just more and older old people, but fewer young people.

Some problems with Japan that we don’t share 

And, of course, I continue to recommend an appropriately-diversified equity fund portfolio, which nullifies your point.

Phantasos wrote:

Your 80 year old mother, who you have said has the same portfolio as you and your children, has a life expectancy of 10.1 years.  Would it be a good idea for her to hold this portfolio if we had a 10 year outlook for our financial markets that was similar to the year 2000?  If you die, and you have losses in your portfolio – that is rather permanent in my book – you can’t just wait for the market to recover.  I wouldn’t fault the person who died for inflicting this permanent loss, but rather the person who placed them in a portfolio that was (by most informed opinions) inappropriate for their age and risk tolerance.  Over select periods of time such a person with a short life expectancy will do very well.  Over other periods of time they would die impoverished.

Click to expand...

My mom plans to use zero of her portfolio. In fact, she converted it all to a Roth in 2010 - 2011 at bargain prices. What would it matter if we had a 10-year outlook similar to the year 2000? (Stocks during that period were merely reverting to the mean after a 2 decade-long bull market, allowing investors a once-in-a-lifetime opportunity to invest, by the way.) Her heirs will be most grateful that she has not followed your conventional wisdom about bonds. When she eventually goes on to meet her reward, it won't matter a whit to her if her portfolio is going through yet another bear market. Any decline won't be permanent until someone chooses to make it permanent.

"Age and risk tolerance" is a poor substitute for planning.

[Donnie]

jfoxcpacfp wrote:

Phantasos wrote:

The most important historical fact is that past performance does not necessarily predict future results.  Japan was a developed economy (not a third-world banana republic), and how has their stock market performed over decades?  Oh, that could never be us?  The reason risk is rewarded, is because it really is risk. 

Click to expand…

I’m sorry I missed this earlier as I had expected to see Japan enter the conversation. There’s no more rapidly aging population in any major economy on the planet than Japan’s. Japan never even had a postwar baby boom – the country was simply too devastated – with the result that its age mix is significantly older than ours. This is true even in ways that are not immediately obvious, as – for instance – the growth of population under age 25 in Japan is actually negative, even as ours is positive. In other words: not just more and older old people, but fewer young people.

Some problems with Japan that we don’t share 

And, of course, I continue to recommend an appropriately-diversified equity fund portfolio, which nullifies your point.

Phantasos wrote:

Your 80 year old mother, who you have said has the same portfolio as you and your children, has a life expectancy of 10.1 years.  Would it be a good idea for her to hold this portfolio if we had a 10 year outlook for our financial markets that was similar to the year 2000?  If you die, and you have losses in your portfolio – that is rather permanent in my book – you can’t just wait for the market to recover.  I wouldn’t fault the person who died for inflicting this permanent loss, but rather the person who placed them in a portfolio that was (by most informed opinions) inappropriate for their age and risk tolerance.  Over select periods of time such a person with a short life expectancy will do very well.  Over other periods of time they would die impoverished. 

Click to expand…

My mom plans to use zero of her portfolio. In fact, she converted it all to a Roth in 2010 – 2011 at bargain prices. What would it matter if we had a 10-year outlook similar to the year 2000? (Stocks during that period were merely reverting to the mean after a 2 decade-long bull market, allowing investors a once-in-a-lifetime opportunity to invest, by the way.) Her heirs will be most grateful that she has not followed your conventional wisdom about bonds. When she eventually goes on to meet her reward, it won’t matter a whit to her if her portfolio is going through yet another bear market. Any decline won’t be permanent until someone chooses to make it permanent.

“Age and risk tolerance” is a poor substitute for planning.

Click to expand...

Since the above issues were obvious, I trust you made a fortune shorting the Nikkei back in 1989.  In retrospect, we can all see that Japan had the issues responsible for the 30 year bear market that you mention.  The trick is to see it ahead of time.  It is naive to think that no issue could plague the US markets over the next 30 years. I know, I know, the US is the best.  ROW equities are terrible.  USA! USA!

I think you provide a lot of good advice and respect your opinion, but I am struggling to wrap my head around your point of view here.  I assume you are maximally levered given US equities are a sure thing over [5] years?

[StarTrekDoc]

Japan is nowhere close to USA market for a single factor -- savings rate.   We are horrible savers with barely 6% historically and even after the great recessions, barely touching 10%.    While the Japanese routinely are Boglehead minded at saving rates of 20-40%--leading to deflationary crisis that they have had for quite awhile now.

Unless Boglehead+WCI become a national fad, markets have nothing to worry.

As for throwing out wild assertions, don't see any mention of leveraging anything, just advocating a more aggressive balance that's rooted in good statistics and planning that doesn't cut it close on presumptions.   vs others on this forum have done the full advocating of leveraging/margins that are arguably outside of mainstream investing.

 

 

[Donnie]

StarTrekDoc wrote:

Japan is nowhere close to USA market for a single factor — savings rate.   We are horrible savers with barely 6% historically and even after the great recessions, barely touching 10%.    While the Japanese routinely are Boglehead minded at saving rates of 20-40%–leading to deflationary crisis that they have had for quite awhile now.

Unless Boglehead+WCI become a national fad, markets have nothing to worry.

As for throwing out wild assertions, don’t see any mention of leveraging anything, just advocating a more aggressive balance that’s rooted in good statistics and planning that doesn’t cut it close on presumptions.   vs others on this forum have done the full advocating of leveraging/margins that are arguably outside of mainstream investing.

 

 

Click to expand...

My point was why stop at 100% equities if equities are guaranteed to go up over any reasonable time frame as has been mentioned.  The comment was tongue-in-cheek.  I am fairly sure jfox is not recommending leveraging equity investments.

Japan's savings rate was much higher than the US savings rate for decades prior to 1990, and Japan's stock market was on a tear until then.  Unless you start accurately predicting all other "bubbles," it really doesn't serve much purpose to explain after the fact why one bubble occurred and why that won't happen here.  Another bubble you don't know about could very well be forming in the US despite our efficient market.  Japan had a very efficient market back then too.

[Zaphod]

Donnie wrote:

StarTrekDoc wrote:

Japan is nowhere close to USA market for a single factor — savings rate.   We are horrible savers with barely 6% historically and even after the great recessions, barely touching 10%.    While the Japanese routinely are Boglehead minded at saving rates of 20-40%–leading to deflationary crisis that they have had for quite awhile now.

Unless Boglehead+WCI become a national fad, markets have nothing to worry.

As for throwing out wild assertions, don’t see any mention of leveraging anything, just advocating a more aggressive balance that’s rooted in good statistics and planning that doesn’t cut it close on presumptions.   vs others on this forum have done the full advocating of leveraging/margins that are arguably outside of mainstream investing.

 

 

Click to expand…

My point was why stop at 100% equities if equities are guaranteed to go up over any reasonable time frame as has been mentioned.  The comment was tongue-in-cheek.  I am fairly sure jfox is not recommending leveraging equity investments.

Japan’s savings rate was much higher than the US savings rate for decades prior to 1990, and Japan’s stock market was on a tear until then.  Unless you start accurately predicting all other “bubbles,” it really doesn’t serve much purpose to explain after the fact why one bubble occurred and why that won’t happen here.  Another bubble you don’t know about could very well be forming in the US despite our efficient market.  Japan had a very efficient market back then too.

Click to expand...

I dont think the point is predicting bubbles. The major point between the US and Japan is we are very different on any front, most importantly demographics. And as much as everyone hates it, demographics as destiny has yet to have a good counter. Japans bubble was absolutely massive as well, much larger than the tech/GFC combined even. Again, not about predicting bubbles, but the US certainly isnt Japan. Whatever our problems will be, the shock and the recovery would be different because of those things.

[Hatton]

Japan's problems as I recall were rooted in a tremendous property bubble, stock bubble, followed by a demographic collapse. Hopefully we will avoid a perfect storm like that here.  Back to the point.  Diversification across all accounts is certainly important at any age.  I think it is prudent to have some bonds and well as cash equivalents.  I think Johanna is advocating a Bucket Strategy.  Christine Benz posts about this on Morningstar personal finance columns.  Most people will be ok if you have 5 years worth of bonds (corporate, muni, treasury), money funds, and cash.  If you have that then you can invest the rest in anything you want.  This is where goals come into play.  I would caution that behavior is an unknown factor for relatively young investors.  Until you have survived a downturn without panic do not go 100% equities with no emergency fund.

[docnews]

Very interesting topic. Thanks for the differing insights.

I think it boils down to those who consider Emergency Funds a separate topic from Invested Funds and those that are trying to look at All Funds (savings not spendings).

Those who are young, want more risky assets but are often unaware of their need for more fixed assets. Do you really think a 30 year old is predicting the cost of job changes, home/auto repair, or health costs? Physician job stability and jump to high income can allow more risky assets since more emergency funds are in a sense coming in the next pay check if they live with plans to save >20%. But for the average American, I think the reason the sell at a lost is that they need the money when the economy tanks because they have too many fixed costs and not enough fixed savings.

Those who are older want more fixed assets but are often unaware of their need for more risky assets. Can you really predict how long you personally will live? Those who are older and saved well can often afford to take less risk but longevity is still a risk. I think most 60 year olds think they will pass by 80 but most will not.

So more practically it is best to consider the whole picture aka All Funds. And the more I ponder it the more I think fixed percentage of safer funds makes sense. When your young in your career, $50k on the sidelines as an emergency fund or in bonds will often be 20 to 40% (all your funds if totaling $250k to $500k). When your old in your career, $500k in cash/fixed assets will make you more comfortable retiring to avoid sequence of return risk when your total assets are $2.5mil to $5mil.

I think the debate on how liquid your non-equity position is really the underlying debate here. Ironically the jfox allocation in this debate seems super risky (100% stock), but when looking at the Total Funds, is MORE conservative than many of the other posters because she is advocating avoiding bond risk and holding large 1% interest savings (in a sense an Emergency Fund of 5 years instead of 3 months).