Scott Burns' Co on the PP

[sophie]

The comparison of the 60/40 returns to the 25x4 PP indeed isn't fair, because the owner of the 60/40 needs to hold cash. How much isn't clear, but most would recommend a sizeable enough chunk that it's a significant fraction of the stock/bond portfolio. Similarly, the 60/40 owner has to decide when to liquidate volatile assets during the drawdown phase.

Let's assume that our hypothetical Boglehead retiree holds 5 years expenses in cash, which is a common recommendation, and 20 years expenses in the 60/40 investment, as opposed to our hypothetical PP owner who simply holds 25 years expenses in the 25x4 PP. The actual Boglehead portfolio, then, is 20% cash, 48% stocks, and 32% bonds.

If this Boglehead were smart, instead of holding 20% cash and 32% intermediate bonds which entirely changes the risk/return profile of the intended 60/40, they'd hold 20% long bonds and 20% cash. This achieves the risk/return of the 60/40 while holding 5 years of cash.

That's part of the issue with the 60/40: the bond allocation is an "index" containing a mix of Treasuries and corporate bonds plus things like mortgage-backed securities, junk bonds, and other mystery items. Total bond funds like Vanguard's are great, but they only serve to dilute volatility somewhat - unlike Treasuries, they don't provide negative correlation with stocks. Frankly I never really understood the point of a bond "index", when what you want out of it is safety.

A more interesting way to do a 60/40 is exactly what you suggested, or using intermediate Treasuries as in the Desert Portfolio. Oddly enough, this difference between Treasuries and other types of bonds isn't recognized over at that other investing forum. We learned that from Grandpa Harry.

[MachineGhost]

Go to your room young whippersnapper!

Oh yeah? You and what army???

[MachineGhost]

That's part of the issue with the 60/40: the bond allocation is an "index" containing a mix of Treasuries and corporate bonds plus things like mortgage-backed securities, junk bonds, and other mystery items. Total bond funds like Vanguard's are great, but they only serve to dilute volatility somewhat - unlike Treasuries, they don't provide negative correlation with stocks. Frankly I never really understood the point of a bond "index", when what you want out of it is safety.

It's more the low-moderate duration than anything else. Treasuries are also the majority allocation. Not my first fund choice for safety, but it manages to work. If I was going to throw in some Grade A corporate bonds to mitigate soveriegn risk, I would pick a much purer fund though than a total market. Surprisingly, there's a real dearth of funds like that. The one PS mentioned from Vanguard is far from ideal but its as relatively clean as you can get. I also dig Reub's Wellesly also but its 66% bonds/33% stocks so it dilutes your greed. But the bonds are of higher quality than PS's off the top of my head.

When the gooroos say a 50/50 allocation will survive the worst case 4% SWR historically, they are definitely not talking about 30-year Treasuries.

EDIT: Just came across this...

We used a simple benchmark for our analysis: a balanced ETF model portfolio of 60% stocks (NYSEARCA:VTI) and 40% bonds (NYSEARCA:BND). This is #39, indicated by the green arrow on Figure 2, below. This 60-40 balanced allocation performs better than many of the 65 allocations, but is still outpaced by 9 tactical portfolios with dynamic allocations and 3 strategic portfolios with fixed allocations. The yellow-bordered region in Figure 2 contains these portfolios with lower risk and higher return. These include Templeton Global (#56, GIM), a Harry Browne-inspired ETF portfolio (#42) and Vanguard Wellesley (#31, VWINX), all indicated with orange arrows.



http://seekingalpha.com/article/1970041 ... m-drawdown

[KevinW]

The comparison of the 60/40 returns to the 25x4 PP indeed isn't fair, because the owner of the 60/40 needs to hold cash. How much isn't clear, but most would recommend a sizeable enough chunk that it's a significant fraction of the stock/bond portfolio.

Hear, hear.

The time spent accumulating the cash emergency fund needs to be account for too. The prototypical Boglehead advice is to first save about 1 years' expenses in cash, then start investing. If you consider the case of a young professional starting out broke with no debt and a 20% savings rate, they'll spend 4 whole years investing in 100% cash. In the fifth year they'll be roughly 80% cash and 20% in an "age in bonds" portfolio. So if this scenario started at age 22, at age 27 they are 80% cash, 5% bonds, 15% stocks. This is a very low-return portfolio, which really ought to be factored into lifetime returns and "the power of compound interest."

Honestly, I think financial authors and pundits are so accustomed to giving advice to people that have already accumulated some wealth, that they completely overlook checking whether their advice actually works for people starting from scratch.

[dualstow]

I like to keep an eye on overall pp gains without the cash component. Just one cell on the spreadsheet.

You're a GenXer? I thought you were at least 75!

I am very wise beyond my years.

Wise-ass beyond your years, you mean.

[Dieter]

The comparison of the 60/40 returns to the 25x4 PP indeed isn't fair, because the owner of the 60/40 needs to hold cash. How much isn't clear, but most would recommend a sizeable enough chunk that it's a significant fraction of the stock/bond portfolio. Similarly, the 60/40 owner has to decide when to liquidate volatile assets during the drawdown phase.

Let's assume that our hypothetical Boglehead retiree holds 5 years expenses in cash, which is a common recommendation, and 20 years expenses in the 60/40 investment, as opposed to our hypothetical PP owner who simply holds 25 years expenses in the 25x4 PP. The actual Boglehead portfolio, then, is 20% cash, 48% stocks, and 32% bonds.

If this Boglehead were smart, instead of holding 20% cash and 32% intermediate bonds which entirely changes the risk/return profile of the intended 60/40, they'd hold 20% long bonds and 20% cash. This achieves the risk/return of the 60/40 while holding 5 years of cash.

That's part of the issue with the 60/40: the bond allocation is an "index" containing a mix of Treasuries and corporate bonds plus things like mortgage-backed securities, junk bonds, and other mystery items. Total bond funds like Vanguard's are great, but they only serve to dilute volatility somewhat - unlike Treasuries, they don't provide negative correlation with stocks. Frankly I never really understood the point of a bond "index", when what you want out of it is safety.

A more interesting way to do a 60/40 is exactly what you suggested, or using intermediate Treasuries as in the Desert Portfolio. Oddly enough, this difference between Treasuries and other types of bonds isn't recognized over at that other investing forum. We learned that from Grandpa Harry.

There are some 'over there' who talk about only using Treasury's on the bond side, but yeah, the majority are Total Bond.

Would be nice if my 401(k) had any sort of all-treasury bond fund option other than TIPS though.

[sophie]

The comparison of the 60/40 returns to the 25x4 PP indeed isn't fair, because the owner of the 60/40 needs to hold cash. How much isn't clear, but most would recommend a sizeable enough chunk that it's a significant fraction of the stock/bond portfolio.

Hear, hear.

The time spent accumulating the cash emergency fund needs to be account for too. The prototypical Boglehead advice is to first save about 1 years' expenses in cash, then start investing. If you consider the case of a young professional starting out broke with no debt and a 20% savings rate, they'll spend 4 whole years investing in 100% cash. In the fifth year they'll be roughly 80% cash and 20% in an "age in bonds" portfolio. So if this scenario started at age 22, at age 27 they are 80% cash, 5% bonds, 15% stocks. This is a very low-return portfolio, which really ought to be factored into lifetime returns and "the power of compound interest."

Honestly, I think financial authors and pundits are so accustomed to giving advice to people that have already accumulated some wealth, that they completely overlook checking whether their advice actually works for people starting from scratch.

Brilliant, KevinW. The only wrinkle is that the age in bonds portfolio will get a bit of a head start through the young professional's retirement program. Not much of one though. Between car purchases, student loans and saving for a house, retirement savings will likely only be up to the company match, or a single digit rate, and taxable cash will be earmarked for spending rather than invested, for probably quite a few years, into their thirties in most cases.

Here's an interesting simulation for somebody to do (Tyler): contrast early investing strategies for money outside of the main employer 401K - this can include Roth IRAs. Option A: 3 months cash cushion then start a 25x4 PP. Option B: 1 year cash cushion then start an 80/20 portfolio. At various starting years, what are the annual portfolio returns over the first 10 years?

[Tyler]

Here's an interesting simulation for somebody to do (Tyler): contrast early investing strategies for money outside of the main employer 401K - this can include Roth IRAs. Option A: 3 months cash cushion then start a 25x4 PP. Option B: 1 year cash cushion then start an 80/20 portfolio. At various starting years, what are the annual portfolio returns over the first 10 years?

Hmm... interesting problem. I like the idea of quantifying the effect of the traditional emergency fund on a startup portfolio. I'll have to think about that.

[KevinW]

The only wrinkle is that the age in bonds portfolio will get a bit of a head start through the young professional's retirement program. Not much of one though.

True.

What is the "default" advice for a young professional starting a PP from scratch? Browne said to maximize tax efficiency, but hold gold directly, so I think he'd say to hold gold coins directly (taxable) and put the rest in the 401(k) with match. I think I'd suggest something different, holding cash in taxable for emergency liquidity, and putting the other 75% in 401(k with match, at least until there are many months' worth of taxable cash accumulated.

Between car purchases, student loans and saving for a house, retirement savings will likely only be up to the company match, or a single digit rate, and taxable cash will be earmarked for spending rather than invested, for probably quite a few years, into their thirties in most cases.

Yes, starting at a 20% save rate at 22 is a rosy scenario. Without getting into the blame game of "why," the fact is that most of my friends didn't have the means to start saving until their 30s, and some are just getting started in their 40s.

[curlew]

Well, since you're not greedy for gains like we were everything should be all right then.

Quite the contrary, but y'all priced me out of the market. I've had to resort to desperate measures!

Are you saying that my generation got all the gains and now there's nothing left for you? If so, then I have to say that for someone showing such erudition in all of his posts, even though I sometimes don't know what you are talking about, that sounds pretty damn stupid.

To quote Gordon Gecko, "Greed, for lack of a better word, is good".

And as Thomas Sowell said, "Blaming economic crashes on greed, is like blaming plane crashes on gravity".

Every generation wants to better their lives and yours is no different (I still have a millenial living under my roof which is shaking my confidence but I still believe this is true).

[MachineGhost]

Are you saying that my generation got all the gains and now there's nothing left for you? If so, then I have to say that for someone showing such erudition in all of his posts, even though I sometimes don't know what you are talking about, that sounds pretty damn stupid.

...

Every generation wants to better their lives and yours is no different (I still have a millenial living under my roof which is shaking my confidence but I still believe this is true).

At the moment yes. 2% nominal returns over the next 10-12 years on 50%+ of a portfolio isn't gonna fund any of my investment goals. And I can't possibly save any more than the 50% I am already! So while I wait for values to revert back to common sense levels so I can load the boat, I'm getting older. The Baby Boomers didn't have to wait to do that. They got everything handed to them as they went along in life. And neither did they have to face the damn reality of a turgid job market, QEternity, negative yields, perpetual bonds and helicopter money. I can begin to understand why suicide rates are so high in Japan.

For the ordinary person that is nowhere as intelligent as my fine self, imagine how they are feeling if I am feeling frustrated. To be fair, most of the frustration is because I can't be completely lazy and just do the vanilla PP because of the permament loss of capital risk. It's not that big of a deal, but at first it was just equity, but now it is bonds, so the game the Baby Boomer's have been playing all along is rapidly running out of steam. I've no intention of being the bagholder.

[dualstow]

The Boomers were enviably lucky in many ways, but this is different than saying that we are hurting because of the Boomers.
Which do you mean?

[Reub]

MG, you've got to quit feeling sorry for yourself. You sound like one of Obama's/Hillary's/Bernie's sheeples.

[MachineGhost]

The Boomers were enviably lucky in many ways, but this is different than saying that we are hurting because of the Boomers.
Which do you mean?

Last I checked, its the Baby Boomer's and their policies that are all over government? It's that selfish, entitlement mentality primarily, best exemplified by Slick Hilly. The 60's was the equivalent of giving women the right to vote in the 20's, only much, much, much worse. So here we are.

[MachineGhost]

What are you blathering about? I grew up poor during Viet Nam and the stagflation of the 70's. My parents sacrificed mightily to put myself and my 2 siblings through college and grad school, where we all worked our asses off to get a leg up. We lived well below our means in adulthood to make better lives for our children. Quit whining. Every generation has its own set of difficulties.

I'm not whining per se, just pointing out who is responsible for the economic and politcal mess we're currently in. Part of the Baby Boomer shtick is not taking responsibility, or haven't you noticed? I don't have much faith of a corrective U-turn without a crisis because that is just human nature. But Baby Boomers are anything if not egotistically stubborn about their way or the highway.

Don't get me wrong, I have even worse concerns about Generation Y & Z. There is no way we're going to survive with our American values intact without a huge reset that forces everyone to refocus on what really matters instead of stupid, banal shit like Pokemon Go.

[MachineGhost]

MG, you've got to quit feeling sorry for yourself. You sound like one of Obama's/Hillary's/Bernie's sheeples.

I can have a pity party now and then to vent some steam. Want some tea with your crumpets?

[curlew]

The Baby Boomers didn't have to wait to do that. They got everything handed to them as they went along in life.

Our employment situation was admittedly much better, at least compared to the current generation (we only had to compete against Smith and Jones, not Patel and Kapur). But other than that, I'm not even going there.

[MachineGhost]

The Baby Boomers didn't have to wait to do that. They got everything handed to them as they went along in life.

Our employment situation was admittedly much better, at least compared to the current generation (we only had to compete against Smith and Jones, not Patel and Kapur). But other than that, I'm not even going there.

Well, in our current capitalist world, employment is everything, so being underemployed or unemployed completely derails the American Dream that your generation was able to take full advantage of without having to really try.

And seriously, higher levels of tech gadgets to make us all lazier and more hedonistic is really not an "improvement". It's just more self-indulgance, which admittedly, the Baby Boomers pioneered as well.

I'll go back into the corner and put on my dunce cap now!

[barrett]

MG, Just jumping in to say that if you are really saving 50% of your income, you may not need great investment returns. That is a great savings rate. A vehicle for growing them modestly in real terms should do the trick, especially because you don't seem like the kind of guy who needs a lot of luxury. And can't you sell CA real estate (not sure if you own) at some point and go live somewhere cheaper?

As a baby boomer myself, I am grateful that the awesome economy of 1982 to 2000 (2007?) at least partly coincided with my career. But didn't you get at least part of that benefit as well?

[Reub]

If he stopped buying supplements he'd be saving 99% of his income with the way that he eats.

[curlew]

And seriously, higher levels of tech gadgets to make us all lazier and more hedonistic is really not an "improvement". It's just more self-indulgance, which admittedly, the Baby Boomers pioneered as well.

I'll go back into the corner and put on my dunce cap now!

Since you enjoy generation bashing (personally I think there is probably a kernel of truth just like with most stereotypes but usually way overblown), try this on .....

why-gen-x-doesnt-get-millennialsor-boomers
https://www.psychologytoday.com/blog/go ... or-boomers

A couple of quotes you probably won't like....

Some writers have gone so far as to put most of the blame for the economic downturn on Gen-X shoulders: Greg Smith, a senior executive at Goldman Sachs, blamed the meltdown of the financial industry to the toxic Generation-X culture that was prevalent at Goldman.

The largest percentage of households in foreclosure belonged to those in Generation X—in particular, Gen-Xers who had high average household income ($59,500) and years of education (14.8 years). It seems counter intuitive that a well-educated and affluent group of families would lead the foreclosure charge. Yet this group of households made up more than one in 10 foreclosures. How do affluent families end up in foreclosure?

[MachineGhost]

MG, Just jumping in to say that if you are really saving 50% of your income, you may not need great investment returns. That is a great savings rate. A vehicle for growing them modestly in real terms should do the trick, especially because you don't seem like the kind of guy who needs a lot of luxury. And can't you sell CA real estate (not sure if you own) at some point and go live somewhere cheaper?

As a baby boomer myself, I am grateful that the awesome economy of 1982 to 2000 (2007?) at least partly coincided with my career. But didn't you get at least part of that benefit as well?

Yes and no (nothing lasting).

[MachineGhost]

If he stopped buying supplements he'd be saving 99% of his income with the way that he eats.

That's probably true! But, whats the point of money unless you spend it to improve your quality of life?** I don't want to turn into a typical 70+ year old that neglects his health and lives a deadly lifestyle. Misery may love company and social signaling delusions, but I think I have a little more self-respect than that.

** Stuffing your piehole with glutinous abandon so you develop a pregnant look and diabetes, etc. is not improving your quality of life. All food is software and all software has long-term consequences. You can fool yourself up until that point you come down with a deadly disease from being a fucking idiot. Being truly wise isn't limited to just finances.

[MachineGhost]

why-gen-x-doesnt-get-millennialsor-boomers
https://www.psychologytoday.com/blog/go ... or-boomers

Pretty interesting, but inccurate. I think the writer is just self-justifying her generation. Baby Boomers are currently the most materialistic generation the world has ever seen. America is not essentially a giant shopping mall monoculture without that generation solely driving it. Attributing materialism to Gen-X (or even Millennials) who can't even participate to the full extent that the Baby Boomers did, rings hollow. I'll entertain that maybe Gen-X suffer from Baby Boomer envy as a result of dramatically less opportunity, but Millennials realized the futility of their position altogether and became what the Baby Boomers must deludedly think themselves are. For the record, I have much more in common with Millennial thinking than Baby Boomers or whatever passes for Gen-X and I attribute that due to growing up completely infused with PC and Internet technology (as a very early adopter) which the latter two generations did not en masse. The anarchy and freedom of creative self-expression just makes you much, much more liberal and open minded. By way of example, I would get along best with PS on here than anyone else.

Millennials don't distrust authorities, as we did. Maybe that’s because the Boomers are now the authorities, and we’ve worked hard to keep their trust.

That would be very provocative if actually true, but I doubt that is accurate either. For one thing, Baby Boomers breeded Gen-X, not the Millennials. Gen-X breeded the Millennials. So if the writer got that basic data incorrect... But there may be overlap between the Boomers and Gen-X for Millennials just as there was between Swing and Boomers for Gen-X.

BTW, Millennials were generally born from 1980 to 2000. The oldest is now 36 year old. All the kids and teeny boppers you see nowadays are Gen Z.

[curlew]

Baby Boomers are currently the most materialistic generation the world has ever seen.

That's pretty funny because it is the exact same thing the Baby Boomers were saying about their parents, while they "dropped-out, tuned-in, and turned on".

It may be that we were a bunch of selfish, spoiled brats demanding our own way but at least we managed to do something with our narcissism that no generation before or after has yet accomplished - getting the American Empire to withdraw from a war due to dissent at home. I'm a Vietnam vet myself but I would like to see a memorial on the mall in D.C. beside the Vietnam memorial to all the pot-smoking hippies who did their part.

(I think we are getting way off topic and maybe better give it a rest, at least in this thread).