PP-like alternative portfolio for conservative retiree

A place to talk about speculative investing ideas for the optional Variable Portfolio

Moderator: Global Moderator

Kevin K.
Executive Member
Executive Member
Posts: 516
Joined: Mon Apr 26, 2010 2:37 pm

PP-like alternative portfolio for conservative retiree

Post by Kevin K. » Wed Oct 06, 2021 5:16 pm

I guess this post could also have been titled "what would you invest in if you couldn't do the PP?"

I have a retired friend who lives mostly on social security but also wants to be able to withdraw 3-4% a year from their nest egg. They're risk-averse and couldn't handle a deep or long-lasting drawdown. They have no interest in owning gold.

I've thought about just recommending a conservative all-in-one fund like Vanguard's Target Retirement Income which also has the advantage of automatic rebalancing which eliminates investor monkeying/behavioral errors and kind of disguises the volatility of the assets but it's hard to recommend something with 70% bonds and no real assets. Any ideas?
Kbg
Executive Member
Executive Member
Posts: 2815
Joined: Fri May 23, 2014 4:18 pm

Re: PP-like alternative portfolio for conservative retiree

Post by Kbg » Wed Oct 06, 2021 5:40 pm

There has been quite a bit of research on allocations and safe withdrawal rates (SWR). If one sticks with a high bond allocation due to risk averseness it actually ends up hurting you in the long run. Another key factor is how long is the expected retirement period? Both are directly related.

A middling vanilla stocks/bonds allocation of say 70/30 to 30/70 all will generally work with lower risk than going 100% stock. If the person is younger then probably want to go more to 70/30, older then more to 30/70.

I would look more toward the Vanguard Life Strategy funds which have the same expense rate as the Target Date funds but you can dial their risk meter more precisely via a fixed allocation and then just leave it there.

OBTW...most recent studies indicate 3.25 to 3.5 to be closer to a SWR than 4%.

Note: The above topic get's pretty complex pretty fast. My experience is for most folks who don't really care for finance a set it and forget it approach is good. You may want to head over to Bogelheads...much has been written there on this topic. If you want a really deep dive, then head over to EarlyRetirementNow.
User avatar
I Shrugged
Executive Member
Executive Member
Posts: 2062
Joined: Tue Dec 18, 2012 6:35 pm

Re: PP-like alternative portfolio for conservative retiree

Post by I Shrugged » Wed Oct 06, 2021 7:17 pm

Could do a lot worse than simply using the Wellesley Fund.
User avatar
vnatale
Executive Member
Executive Member
Posts: 9423
Joined: Fri Apr 12, 2019 8:56 pm
Location: Massachusetts
Contact:

Re: PP-like alternative portfolio for conservative retiree

Post by vnatale » Wed Oct 06, 2021 7:38 pm

I Shrugged wrote:
Wed Oct 06, 2021 7:17 pm

Could do a lot worse than simply using the Wellesley Fund.


Looks like it only dropped 10% from September 2008 to February 2009...
Above provided by: Vinny, who always says: "I only regret that I have but one lap to give to my cats." AND "I'm a more-is-more person."
Kevin K.
Executive Member
Executive Member
Posts: 516
Joined: Mon Apr 26, 2010 2:37 pm

Re: PP-like alternative portfolio for conservative retiree

Post by Kevin K. » Wed Oct 06, 2021 7:42 pm

Good suggestions all around. Thanks very much!
User avatar
Xan
Administrator
Administrator
Posts: 4392
Joined: Tue Mar 13, 2012 1:51 pm

Re: PP-like alternative portfolio for conservative retiree

Post by Xan » Wed Oct 06, 2021 8:24 pm

It also sounds like buying an annuity might be something worth considering.
User avatar
vnatale
Executive Member
Executive Member
Posts: 9423
Joined: Fri Apr 12, 2019 8:56 pm
Location: Massachusetts
Contact:

Re: PP-like alternative portfolio for conservative retiree

Post by vnatale » Wed Oct 06, 2021 8:59 pm

Xan wrote:
Wed Oct 06, 2021 8:24 pm

It also sounds like buying an annuity might be something worth considering.


I think it was Bernstein that wrote that buying an annuity was just like buying a bond from an insurance company?

Am I remembering correctly?

That swayed me from every considering buying an annuity.
Above provided by: Vinny, who always says: "I only regret that I have but one lap to give to my cats." AND "I'm a more-is-more person."
User avatar
Tyler
Executive Member
Executive Member
Posts: 2066
Joined: Sat Nov 12, 2011 3:23 pm
Contact:

Re: PP-like alternative portfolio for conservative retiree

Post by Tyler » Wed Oct 06, 2021 10:00 pm

Kevin K. wrote:
Wed Oct 06, 2021 5:16 pm
Any ideas?
I Shrugged wrote:
Wed Oct 06, 2021 7:17 pm
Could do a lot worse than simply using the Wellesley Fund.

I'm not really an actively-managed mutual fund kinda guy, but if I had to choose 1 fund for my money I'd pick the Vanguard Wellesley fund. And it's what I recommend to people who just want to put their money in one place and not worry about it. It has low costs, has been around forever (since 1970), and has a great track record.

Since you're asking for a retired friend, here are its withdrawal rates:

Image
Kbg
Executive Member
Executive Member
Posts: 2815
Joined: Fri May 23, 2014 4:18 pm

Re: PP-like alternative portfolio for conservative retiree

Post by Kbg » Thu Oct 07, 2021 8:29 am

+1
pp4me
Executive Member
Executive Member
Posts: 1190
Joined: Wed Apr 29, 2020 4:12 pm

Re: PP-like alternative portfolio for conservative retiree

Post by pp4me » Thu Oct 07, 2021 8:46 am

Wellesley was my second choice before deciding on the PP. I remember reading a heated debate between the two on some forum I can't remember. It was between Craig, MT, and someone who called himself "Cute Fuzzy Bunny" which was a real misnomer since he was quite a nasty character. I thought they both had good arguments but ultimately I decided that Wellesley wasn't diversified enough to function as an all-weather type of portfolio.
Kbg
Executive Member
Executive Member
Posts: 2815
Joined: Fri May 23, 2014 4:18 pm

Re: PP-like alternative portfolio for conservative retiree

Post by Kbg » Thu Oct 07, 2021 8:54 am

Tyler,

Can you generate the same chart using Wellesley and a pinch of gold say 10-20%?
User avatar
Tyler
Executive Member
Executive Member
Posts: 2066
Joined: Sat Nov 12, 2011 3:23 pm
Contact:

Re: PP-like alternative portfolio for conservative retiree

Post by Tyler » Thu Oct 07, 2021 10:05 am

Kbg wrote:
Thu Oct 07, 2021 8:54 am
Can you generate the same chart using Wellesley and a pinch of gold say 10-20%?
Here's an older thread with several charts (including the WRs) for that portfolio. If you squint, 80% Wellesley and 20% Gold looks a lot like the Permanent Portfolio structurally and acts a lot like the Golden Butterfly. IMO, it's a good choice for any retiree.

https://gyroscopicinvesting.com/forum/v ... php?t=9633
Kevin K.
Executive Member
Executive Member
Posts: 516
Joined: Mon Apr 26, 2010 2:37 pm

Re: PP-like alternative portfolio for conservative retiree

Post by Kevin K. » Thu Oct 07, 2021 10:21 am

Kbg wrote:
Thu Oct 07, 2021 8:54 am
Tyler,

Can you generate the same chart using Wellesley and a pinch of gold say 10-20%?
As it happens, Tyler did just that awhile ago in response to a thread I started about possibly using Wellesley as one's variable portfolio. Here's the link:

viewtopic.php?f=10&t=11196#p206084

While "gold" is a four-letter word to most Bogleheads (and my retired friend, unfortunately) adding it to the venerable W improves SWR's and reduces sequence-of-returns risk considerably - to the point where as far as I can tell it's been pretty much a wash between - what shall we call it? - "Golden Wellesley?" - and the Golden Butterfly. Who besides Tyler would even think to add gold to Wellesley? Brilliant stuff and of course the idea of offending a few Bogleheads by adding their least-favorite asset class to one of the most venerable of Vanguard's funds makes it all the more appealing. ;D

I think straight Wellesley for my friend will be just fine, not only because of its simplicity but because they're in a low enough tax bracket that W's tax-inefficiency is a non-issue. When I ran the numbers it really did show that the traditional advice to only own Wellesley in a tax-advantaged account is sound: they call it "Wellesley IncomeFund" with good reason and tax efficiency in no way factors into how it's run.

As is obvious I really like and admire W too but perhaps like pp4me decided that it just wasn't as robustly-constructed as the Golden Butterfly. Its stellar track record reflects a huge tail-wind in bonds, decades when skilled bond traders could generate some alpha in the corporate bond market AND easy access to large-cap value stocks paying fat dividends. And then there's the active management and style drift issue. Wellington Management Group has a deep bench and is unlikely to make sweeping changes in Wellesley but a friend of mine (finance writer Darrow Kirkpatrick who runs the "Can I Retire Yet?" website) and who owns a big chunk of W (he publishes his portfolio and its returns every year on the site) has been grousing for years about Wellington's new ways of searching for alpha (he's the kind of guy who reads every word of the annual report of every fund he owns). Ironically he was moving in the direction of switching from W into one of Vanguard's LifeStrategy funds that are all-index and passively managed, but Vanguard unfortunately has made frequent changes in those funds that haven't paid off (e.g. increasing their international stock allocation to 40%, including a big chunk of international bonds) and just recently announced they're considering adding private equity to the stock allocation of several of their target retirement funds. Self-managed Golden Butterfly or a simple 3 fund (VTI, VXUS,VGIT) with (for me, not my friend) a ~15% slice of gold in lieu of some of the stocks sounds a lot more appealing.

Thanks again to everyone participating in this thread for the discussion.
Last edited by Kevin K. on Thu Oct 07, 2021 2:27 pm, edited 1 time in total.
User avatar
Tyler
Executive Member
Executive Member
Posts: 2066
Joined: Sat Nov 12, 2011 3:23 pm
Contact:

Re: PP-like alternative portfolio for conservative retiree

Post by Tyler » Thu Oct 07, 2021 10:39 am

Thanks for posting that other thread, too. Clearly I've been beating the Wellesley/Gold drum for a while. :)

As an aside, I totally agree with you that some of the Vanguard style drift changes with a few funds lately have been perplexing. The worst offender was when they completely switched strategies for a Metals/Mining fund to "Global Capital Cycles". Of course, if you didn't like that new strategy you just had to eat any tax consequences to sell. So yes, there's definitely a benefit to cooking your own portfolio from scratch index ingredients rather than depending too heavily on others to do it for you. Even companies like Vanguard are more fickle than they want you to think.
Kbg
Executive Member
Executive Member
Posts: 2815
Joined: Fri May 23, 2014 4:18 pm

Re: PP-like alternative portfolio for conservative retiree

Post by Kbg » Thu Oct 07, 2021 11:23 am

Thanks and awesome...not there yet, but at some point we all will face mental decline and a set and forget is something we should all ponder I think.
Kbg
Executive Member
Executive Member
Posts: 2815
Joined: Fri May 23, 2014 4:18 pm

Re: PP-like alternative portfolio for conservative retiree

Post by Kbg » Thu Oct 07, 2021 3:59 pm

Desert,

Are you a BRK investor? Curious as to your thoughts if you are.
User avatar
vnatale
Executive Member
Executive Member
Posts: 9423
Joined: Fri Apr 12, 2019 8:56 pm
Location: Massachusetts
Contact:

Re: PP-like alternative portfolio for conservative retiree

Post by vnatale » Thu Oct 07, 2021 6:31 pm

Desert wrote:
Thu Oct 07, 2021 4:39 pm

Kbg, I'm not at this point. I've thought about it a few times over the years, but never pulled the trigger. I'll have to take another look.

How about you, are you a BRK investor?


When I first came to this forum and asked some questions I got a lot of replies. But most of them were peppered with acronyms, which, at the time, meant nothing at all to me.

Therefore, it'd be helpful for the rest of us if we were all told what "a BRK investor" is!
Above provided by: Vinny, who always says: "I only regret that I have but one lap to give to my cats." AND "I'm a more-is-more person."
User avatar
Xan
Administrator
Administrator
Posts: 4392
Joined: Tue Mar 13, 2012 1:51 pm

Re: PP-like alternative portfolio for conservative retiree

Post by Xan » Thu Oct 07, 2021 6:49 pm

I went to google.com and discovered that they are referring to the stock symbol of Berkshire Hathaway.
User avatar
vnatale
Executive Member
Executive Member
Posts: 9423
Joined: Fri Apr 12, 2019 8:56 pm
Location: Massachusetts
Contact:

Re: PP-like alternative portfolio for conservative retiree

Post by vnatale » Thu Oct 07, 2021 7:37 pm

Xan wrote:
Thu Oct 07, 2021 6:49 pm

I went to google.com and discovered that they are referring to the stock symbol of Berkshire Hathaway.


So is it best that people use acronyms and if any of us who don't know what they are talking about want to know what they are talking about......to then each of us individually do our own internet search on the acronym?

Or, should each of us refrain from using acronyms that might not be known by all reading that acronym?

The latter seems a lot more efficient and more likely for the reader to comprehend.

I long ago learned that insuring proper communication is not the responsibility of the reader / listener....but the responsibility of the communicator.
Above provided by: Vinny, who always says: "I only regret that I have but one lap to give to my cats." AND "I'm a more-is-more person."
User avatar
Hal
Executive Member
Executive Member
Posts: 1349
Joined: Tue May 03, 2011 1:50 am

Re: PP-like alternative portfolio for conservative retiree

Post by Hal » Sat Oct 09, 2021 11:51 pm

Just resurrecting this thread ;)

Wondering if you have any suggestions for a friend. Situation is...
1. Looks like he will lose his job due to mandated vaccination (background only; up to him & his family)
2. Asked what he should do with his retirement fund. Being actively managed.
3. Has very little financial knowledge & doesn't want to get involved at the moment

What would you say would be "good enough" until he can get his life sorted out?

My off the cuff suggestion....
1. 50/50 International Shares/International fixed interest in retirement fund (ala Ben Graham)
2. 25% Gold outside retirement fund to get minimum Ulcer Index
3. Avoid Cash option, not in Treasuries, subject to Bail-In & not covered by deposit insurance

giving 26% Gold, 37% International Equity, 37% International Fixed Interest (Hedged)

Go for it !
Attachments
Screen Shot 2021-10-10 at 3.13.59 pm.png
Screen Shot 2021-10-10 at 3.13.59 pm.png (41.49 KiB) Viewed 5434 times
Screen Shot 2021-10-10 at 3.21.45 pm.png
Screen Shot 2021-10-10 at 3.21.45 pm.png (84.36 KiB) Viewed 5434 times
Aussie GoldSmithPP - 25% PMGOLD, 75% VDCO
User avatar
dualstow
Executive Member
Executive Member
Posts: 14231
Joined: Wed Oct 27, 2010 10:18 am
Location: synagogue of Satan
Contact:

Re: PP-like alternative portfolio for conservative retiree

Post by dualstow » Sun Oct 10, 2021 11:19 am

Kevin K. wrote:
Wed Oct 06, 2021 5:16 pm
I guess this post could also have been titled "what would you invest in if you couldn't do the PP?"
•Risk-averse
•no gold
•less than 70% bonds
•wants to withdraw 3-4%

I like your initial idea of the Target Retirement fund, Kevin. Maybe if they could handle a bit more risk, you could adjust the retirement date. I own the 2035 just to see how I’m doing against it (i.e. I flagellate myself when I’m not beating it). It’s 70-75% stocks, so maybe something between that and the one you had in mind.
Sam Bankman-Fried sentenced to 25 years
User avatar
seajay
Executive Member
Executive Member
Posts: 430
Joined: Mon Aug 09, 2021 11:11 am

Re: PP-like alternative portfolio for conservative retiree

Post by seajay » Thu Nov 18, 2021 6:21 pm

SCV/Gold/10yr Treasury thirds. 3% PWR. For non-US, US$ stock, domestic treasury, gold ... three currencies (domestic, US primary reserve currency, gold global currency), three assets (stock/bond/commodity). I call it EquiTri .. equal thirds.
Kevin K.
Executive Member
Executive Member
Posts: 516
Joined: Mon Apr 26, 2010 2:37 pm

Re: PP-like alternative portfolio for conservative retiree

Post by Kevin K. » Thu Nov 18, 2021 9:10 pm

That’s an amazing portfolio seajay. “The Golden Swedroe”? I initially thought your chosen backtesting time frame was responsible for the results but that’s not so. Impressive - though I’ve never met a retiree who could live with that kind of tracking error.
D1984
Executive Member
Executive Member
Posts: 730
Joined: Tue Aug 16, 2011 7:23 pm

Re: PP-like alternative portfolio for conservative retiree

Post by D1984 » Fri Nov 19, 2021 1:14 am

Kevin K. wrote:
Thu Nov 18, 2021 9:10 pm
That’s an amazing portfolio seajay. “The Golden Swedroe”? I initially thought your chosen backtesting time frame was responsible for the results but that’s not so. Impressive - though I’ve never met a retiree who could live with that kind of tracking error.
The returns on this one are actually pretty amazing. Four potential issues I see arising, though:

1. The tracking error was the first thing I noticed (and I saw that you noted this as well)...I don't know if anyone could stand and hold a portfolio that from 1996 to 1999--despite providing positive real returns for four year the period as a whole--returned less than a decent money market fund or 6-month CDs did...especially when the stock market as a whole was up 20 or 30% each of those years, US LCG was up 24% to 40% a year, and tech stocks were turning in 70 or 80 or 100% annual returns. Maybe try adding 1% TQQQ to this portfolio and take out 1/3rd of one percent of each of the other assets LOL? I am actually only halfway joking about that; I can't think of any other fund that would help remedy the tracking error issue in years like 1975, 1976, 1983, 1988, 1989, 1991-1999, 2003, 2004, 2007, and from 2009 to 2021 as well as this one would; also, I have backtested results for TQQQ back to the early 1970s (unfortunately only annual until 1998 and then monthly from then) if one were to want to try adding it.

2. Gold returns during the early years (1972 to 1974) were possibly artificially inflated due to gold coming off the decades long fixed price of $35 an ounce (i.e. some of the returns that likely would've happened from the early or mid-1960s onward all instead got shoved into 1971-1974 since from 1960 to early 1968 gold was artificially kept fixed at $35 per ounce). Solution? Backtest this using the "nerfed gold from 1970 to 1974" series I mentioned elsewhere on this board; I did annual backtesting on this SCV/gold/10-year Treasuries combo using that series and the returns were still pretty good for 1972 to 1974.

3. Will SCV continue to provide as much premium over TSM or large growth or large blend as it historically did from 1926 to the mid-2000s? I've seen reputable estimates that the SCV premium is now reliably expected to be about 1/2 to 1/3rd of what it historically was. In other words, SCV will still probably outperform large cap stocks over the long run but not by as much as it has in the past. The only solution I can think of for this one is maybe to focus on a mutual fund or ETF targeted the smallest and valueist (valuey-est?) parts of the SCV market.

4. Rather than 10-year Treasuries I'd probably use an intermediate-term Treasury fund like VFITX (or VFIUX); PV only goes back to 1972 and thus misses the huge interest rate rise from roughly 1955 to mid-1970 where 10-year Treasuries would've done worse than ITTs and thus would've hurt portfolio performance relative to ITTs; furthermore, ITTs still would've done almost as well as 10-year Treasuries during the late 1981 to year-end 2020 falling rate bond bull market.
User avatar
seajay
Executive Member
Executive Member
Posts: 430
Joined: Mon Aug 09, 2021 11:11 am

Re: PP-like alternative portfolio for conservative retiree

Post by seajay » Fri Nov 19, 2021 3:25 am

SCV was more a data mined choice. More generally just holding TSM along with a 3 Treasury ladder is 'good enough' as a 3% inflation linked annuity type alternative income production machine best suited for the financially indolent who are less inclined to track their ongoing portfolio value, with the added benefit that you retain access to or can pass on capital that otherwise would have been 'spent' buying a annuity. Maybe for the Aunt Doris type individual who might be reluctant to buy a annuity, would prefer to keep their money in cash deposit accounts but is aware of the inflation risk and withdrawal/spending (drawdown) erosion that entails and as such is interested in a simple conservative alternative.

As a 3 year treasury matures each year dropping around 11% of the total portfolio value into your cash account withdraw a inflation adjusted amount of the prior years 'income' (relative to the initial 3% of the total portfolio value drawn at the start of retirement) and rebalance the portfolio back to thirds, reinvesting the 'cash' into another 3 year treasury. Quick and relatively simple.

Backtesting to the late 1800's for a average 25 years retirement (age 60 to 85) and at the end of 25 years a 1% chance of having just half of the inflation adjusted portfolio value still available (worst case), 98% chance of having >66%. 66% chance of having >100% of the inflation adjusted start date portfolio still available. i.e. to pass onto heirs/children.

If a unexpected high expenditure event arises having a third in average 1.5 year duration treasury bonds can be called upon without likely losing much if investment valuations are generally down at the time. And where Treasury 'deposits' are pretty much fully guaranteed no matter how much is 'deposited'.

Three currencies (for non-US = domestic currency in treasury bonds, US$ in US stocks, gold global currency), three (stocks/bonds/commodity) assets, all equally weighted. Whichever might be sinking and you only have limited exposure (and are buying more/averaging-in). Whatever is soaring and at least you held some and took some profits.

The downside is that of low wealth expansion probabilities, just a 5% chance of ending 25 years with > twice the inflation adjusted start date portfolio value (in contrast to stock heavy portfolios that are more inclined to leave many multiples).
Post Reply