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  • docnews
    replied
    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).

    Leave a comment:


  • Hatton
    replied
    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.

    Leave a comment:


  • Zaphod
    replied







    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.

     

     
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    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.
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    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.

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  • Donnie
    replied




    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.

    Leave a comment:


  • StarTrekDoc
    replied
    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.

     

     

    Leave a comment:


  • Donnie
    replied





    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. 
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    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.


    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. 
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    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.
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    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?

    Leave a comment:


  • jfoxcpacfp
    replied


    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.


    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.

    Leave a comment:


  • jfoxcpacfp
    replied


    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.
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    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.

    Leave a comment:


  • Live Free MD
    replied



    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.

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    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.

    Leave a comment:


  • jfoxcpacfp
    replied




    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?
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    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.

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  • StarTrekDoc
    replied
    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.

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  • Live Free MD
    replied




    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.
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    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.

    Leave a comment:


  • Antares
    replied
    removed

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  • StarTrekDoc
    replied
    @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.

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  • ajm184
    replied




    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.
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    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.

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