Age tilted PP

[Hal]

Just some musing on the PP and interested in some opinions.....


1. Equities and Bonds give a potential of a real return on capital, so they are investments.

2, Gold and Cash (to a lesser degree) are stores of wealth, so they are savings.

3. Elderly people typically cannot tolerate large drawdowns on their investments as they don't have the time to wait for a recovery

4. Younger people are the opposite of point 3.


So given those premises (and if they are correct! )

Elderly People (say 80 year old) have a PP allocation of 30% Equities and Bonds and 70% Cash and Gold

Young People (say 20's) have allocation 70% Equities and Bonds and only 30% Cash and Gold, with a sliding scale between these two age groups.


So basically you would have a "Benjamin Graham" 50/50 Equity/Bond "Investment portfolio" and a 50/50 gold/cash "savings portfolio".
The ratio of the two portfolios varying as your age increases.

All comments welcome!

[mathjak107]

Age based investing is really poor way of doing things. That is why the target funds are really bad at doing it . In fact there is no standard as to what is right.

A 65 year old who has a pension that covers their expenses and is investing for legacy money for the kids can still be 100% equities.

A 25 year old that bails out every time there is a large drop is not the person to have high equity allocations.

In fact some one who is a long term investor would hurt them selves investing by trying to mitigate short term dips which may be meaningless with bonds and gold and permanently reducing their longer term gains. There is no logic there.

30/70 has already failed way to many times in retirement trying to deliver a 4% inflation adjusted income to be a safe bet.
Run it through firecalc and success rate is only in the 80% range.


So there are lots of individual factors that determine what we do. Our pucker factor, time frame for the money and individual needs determine how we should invest.

Wall street tries to cover its butt by investing by age but it really is not the right thing to do.

Right now i am retired and keep about 30% in the butterfly.

Then i keep 5 years of draw in the fidelity insight income model , which is about 23% equity and the rest assorted bond funds
I have another 5 years in the insight growth and income model which is a 60/40 mix. That covers years 6-10.

All the rest is in the insight growth model which is 100% equity. That feeds us from year 11 out to 30 plus years.

I like the idea of having a bit set a side in something bullet proof and the rest in optomized portfolios based on when we need the money to eat with.

[sophie]

Just some musing on the PP and interested in some opinions.....
3. Elderly people typically cannot tolerate large drawdowns on their investments as they don't have the time to wait for a recovery

4. Younger people are the opposite of point 3.

No they aren't. Drawdowns are a problem for several reasons. First, people panic and sell, thus locking in the losses. It's even worse for people who are trying to actively manage their assets. Lest you think you're immune, I've seen numerous threads of late by people who are clearly in the "buy high, sell low" camp. They're buying assets that are doing well (small cap stocks) and finding rationales to reduce or eliminate allocations of gold and bonds (perceived as doing poorly).

Second, portfolio drawdowns are hard to recover from. The PP does surprisingly well in part because it avoids those big drops. Think of the math: if your portfolio drops by 50%, you need a 100% gain to recover to the initial value.

Third, the classification of people as "younger" and "elderly" in terms of financial status is not so clear. What you mean is "accumulating" vs. "drawing down" phases. Yes, you might well accumulate steadily for the prescribed 40-50 year working lifespan. But, things happen: job loss, major illness, disability, etc. In each of the stock market debacles in the past 20 years, there have been lots of stories of people who lost jobs, which is more likely to happen during a market crash, and were forced to dip into retirement accounts. That meant they were forced to sell assets that had lost much of their value, then pay a 10% early withdrawal penalty on top of that. People who thought they had a secure retirement were suddenly left with nothing. (BTW I was one of those people at one time...nothing like experience to teach you that this can happen!)

The whole point of the PP is to avoid risking that kind of devastation. If it means sacrificing a point of CAGR, that's a trade-off I'm willing to make. Obviously each person must decide for themselves, but you have to understand what it is you're giving up.

A last point: if you check the PP's performance over the years, you'll find plenty of instances where cash was the winning asset.

[Hal]

Appreciate your insights Sophie and Mathjak,

Reality always trumps theory. Thanks for the reality check Sophie on what happens when things "do" go wrong.
I note you both run a PP, and any extras can be done outside that.

Especially like the Mathjaks method of having different portfolios for different timelines.

If I do make any changes, it will be outside the PP. It's good to get these scenarios sorted out before/if they happen

Hal

[Hal]

<snip>
Yes, the volatility of #2 was terrible. But for investors with a long timeline, a higher equity allocation could make sense. The differences between 1 and 2 are not one percentage point; they are utterly life-changing. PP's and similar conservative portfolios may make more sense for the retired (or close to retired).
<snip> (My italics)

Desert,

That quote should be framed for all to see. It was exactly what I was pondering about when I wrote the original post. It is up to the individual to make the decision, but the question of 100% PP or not has to be asked

[barrett]

What I don't like about a portfolio that is heavy in gold and cash is that it has already been shown that it can be bad from a sequence of returns risk perspective. You can test it out on Tyler's site (http://www.portfoliocharts.com).

For a person in the draw down phase a bad first few years can be devastating. There are underlying economic reasons that gold does well when stocks do not and vice versa. If you've got that all figured out, then tilting a portfolio or even eliminating an asset class (or two or three) can make sense.

I have realized that I don't know what the hell is going to happen so I hold all four PP assets. I don't obsess about the percentages but feel that I have enough of each to moderate my returns over what I hope will be a long retirement.

[sophie]

Sorry Desert but your post is misleading on several levels. First, the stock market # hides some serious time-dependent variations in return.

S&P 500, 1/1/1972 to 12/31/2016: annualized CAGR 10.38%
S&P 500, 1/1/1998 to 12/31/2016: annualized CAGR 6.45%

I don't have time to do this, but a plot with various start times vs CAGR would show the full extent of this variation. Relying on that 10% return could get you in serious trouble if you go with a 100% stock investment with the idea of relying on it for retirement income. This of course is why retirement portfolios, Boglehead or otherwise, include bonds in the mix. Which means that in practice, nobody would actually get that 11% annual return. What you should be comparing the PP to is a more typical stock/bond mix, which will have lower returns than implied above.

Interesting to know how many of us with non-PP investments in our 401Ks would switch to a PP if the rules of the 401K allowed for it. The post implied that people are doing this by choice, but I don't think that's the case. Personally, if I had the option I'd switch my retirement account to either the PP or one of its variants (e.g. golden butterfly) in a heartbeat.

p.s. Barrett, what did you mean by "sequence of returns risk"? Please elaborate?

[mathjak107]

The only important time frames are the ones that mean something to you.

Looking at the growth model i follow from insight which is documented , from 1987 to now it averaged just under 11% with just a bit lower beta than the s&p 500. The s&p clocked in at a little over 10%. The difference between the two with a 100k invested is about 430k.

Being retired only our long term money for eating in 11-30plus years is in the growth model. The rest is split between the income and growth and income model

[barrett]

p.s. Barrett, what did you mean by "sequence of returns risk"? Please elaborate?

I'm sure you are familiar with the concept, Sophie, so you must know it by a different term. Here is a short explanation from Investopedia:

http://www.investopedia.com/terms/s/sequence-risk.asp

Don't have Craig & MT's book handy but they also talk about it somewhere in the first 30 pages or so.

Basically two different retirees (people drawing down from investments) can start with the same amount of money and get the same average return but, depending on what sequence those returns are in, they will have drastically different outcomes. What can really kill a nest egg is to be withdrawing from it at the same time its investment value is taking a hit.

Again, I am sure you know this, but if you have another term for it, please share. Thanks.

Note: Edit was to remove a misleading example.

[sophie]

Ah, I got it, thanks barrett!

We collectively obsessed about that in another thread, where several of worked on spreadsheets to simulate the PP and other portfolios in the withdrawal phase. But I still don't understand...what about gold and bonds were you specifically concerned about.

My main conclusion from that thread is that only rarely, if ever, do people save enough for a 4% withdrawal rate and then park it into a single portfolio and maintain that for 30 years or more. If that were the case, there'd be a lot of exceedingly wealthy octogenarians out there. Maybe there are and we just haven't noticed. Either that, or this isn't normal human behavior. It's pretty easy to slip into market timing/portfolio tinkering mode. Gambling is intrinsic to human nature for whatever reason.

[barrett]

But I still don't understand...what about gold and bonds were you specifically concerned about.

It was Hal's suggestion that holding 70% in gold and CASH had not been a good idea historically. You can see if you use Tyler's site that that combination underperformed for a couple of decades starting in 1981. And, although it's too early to tell, another bad timeframe for that mix likely started in 2013.

[sophie]

OK I got it now. I think Hal was recommending 30% stocks, 70% gold + cash - missed that. Sounds sorta like the Desert portfolio, although he didn't specify how much gold should be in the mix.

If I were calculating whether I could go ahead and retire with a pot of savings that theoretically meets projected post-retirement expenses, I think I'd first make all the big purchases I can think of, like new clothes, travel gear, household items, updated kitchen etc, and then I'd want to stash a year's expenses on the side in cash. And also I'd establish some easy online job like manuscript editing, or maybe consulting, to cover any shortfalls. Don't think converting the majority of my savings to cash would be on the list though.

[sophie]

Desert, yes you did say that a 100% TSM portfolio is volatile. But you also implied that the 11% return is guaranteed with a "long enough timeline". You needed to make clear that the length of said timeline had better be at least 25 years, during which time you must guarantee that said person will not have any need to touch those retirement funds. I gave an example of an 18 year period in my post in which annual CAGR was only 6%.

It's just the difference between theory and real life. In theory, a 100% TSM investment sounds great. Unfortunately real life is a bit messy and unpredictable.

[Hal]

Hello Sophie et al

Just to clear up any misunderstanding.

Initially I was considering a PP on the edge of the rebalance bands, so

Option 1. (15% Gold, 15% Cash) =30% "Store of value ie savings" plus "35% Shares, 35% Bonds" =70% "Investments"

or

Option 2. (35% Gold, 35% Cash) = 70% "Store of value" plus "15% Shares, 15% Bonds" = 30% "Investments"

however, thanks to everyones useful input, I personally would stay with a standard 4 x 25 PP and make any additional weighting via a variable portfolio.

Now that being said, my "reality check" is this......

If I did not have a large equity exposure when I was young (which was due to dumb luck, not great financial insight) there would be NO way I could look forward to retirement in a few years.

Reality check No 2. My elderly mother currently has a PP where half the allocation (2x25%) is in overvalued Shares (near 2008 peak) and overvalued bonds (at historic high price). If we did not have a large cash allocation outside the PP, we would have no meaningful buffer in case of unforseen expenses due to the small total amount of her assets.

So to summarize my thoughts:

1. Core position in standard 4x25PP, "BUT"

2. A variable portfolio may be prudent depending on your personal situation. Eg: Age, health, unusually high or low equity valuations, job security etc. While a variable portfolio can be thought of as a way to make outsized returns, it can also be used as a "safety net".

Now I would especially like to thank everyone because of their open mindset and not just saying "Insert Portfolio Name Here" is the one and only option to consider.

(A now enlightened)
Hal