Setting VP size

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ochotona
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Setting VP size

Post by ochotona » Sat Apr 27, 2019 11:20 am

PMWARD brings up an important point about understanding how much you can't afford to lose, and right-sizing that part of your portfolio, then you can play with the rest... if you have any left.

Fidelity has a table, "How much do you need to retire?" stated in multiples of your salary, so it's very easy to use for anyone. You do have to do some interpolation. Most would agree you can't lose the pile you need for a basic retirement. That's how I view it.
https://www.fidelity.com/viewpoints/ret ... -to-retire

When I do the analysis, I find I can't afford to lose 80% of my pile, but I can play with 20%, implying I can have about a 40% equity allocation overall, if the safe pile is HBPP. I arrive at 40% through other means as well, they all point to the same figure (drawdown tolerance, other analyst recommendations). Nice to get that confirmation.
Last edited by ochotona on Sat Apr 27, 2019 5:02 pm, edited 1 time in total.
pmward
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Re: Setting VP size

Post by pmward » Sat Apr 27, 2019 12:47 pm

Yeah, that's a good way to look at objective numbers and let that guide you.

For me, I've still got a ways to go in my accumulations, but I am currently saving a bit over 50% of my income, which made me very nervous when I was in an aggressive asset allocation. For behavioral reasons 40% stocks is a good number for me in the present so I also have a 20% VP. So in accumulations I'm looking mostly at optimizing the maximum drawdown and time to recover to a level I can stomach, and then within that range finding ways to maximize return. That just so happened to be pretty much a golden butterfly (though I do some active management over the VP, it's not a static allocation).

When I do hit my FI goal things will change. I do not plan to retire right away. I plan to probably work another 5-10 years or so, but that extra income from then on is all fun money. I'll use it to travel the world, buy a vacation home or two, help some family members out, etc. I'll also start extending my VP at that point with any new investment money, keeping my FI funds ("the money I can't afford to lose") in the PP and letting myself chase a bit more return with the remainder.

To me this overall game plan makes sense, especially since I do not trust the stock market at its current valuations. I just can't see assuming any more risk than I am in my last few short years of FI accumulations with stocks at their current valuations. Once I've reached FI, then I will have satisfied my need for safety and everything above that can take on additional risk.
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Re: Setting VP size

Post by Cortopassi » Sun Apr 28, 2019 8:47 am

Let me ask a basic question that hurt my returns for 20+ years. Why have a VP at all? I don't.

Why do you think you can do better than a fund or ETF? Do you have insider information? Do you think you can time the market? Read charts? See that head and shoulder or cup and handle, or moving average crossover that the computers and pros haven't already seen way before you?

Why do we feel that we should allow ourselves a VP to "play" with? Is it the excitement of gambling, trying to make more? I should have just taken $1000 a year instead and gone to the casino to get that out of my system.

I at times play Texas Hold Em with friends, maybe a $50 buy in. It is painful to sit down and bet literal dollars when they are sitting right in front of you.

But in the ether of my investments, I would routinely make huge, generally unresearched bets, and lose quite often.

It was crazy sitting down thinking about it.

I can say with near certainty that I will never own another option or single stock in my life again.
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Re: Setting VP size

Post by ochotona » Sun Apr 28, 2019 9:31 am

As soon as I wrote it I realized... "play" was the wrong word to use. All I mean is once you have the basics of your future retired life covered, you could add more risk to the portfolio to get more return, but that's optional. I'm with you on individual stocks and options. I just have broad-brush themes in ETFs... US, ex-US developed, emerging market.
Last edited by ochotona on Sun Apr 28, 2019 9:33 am, edited 1 time in total.
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Re: Setting VP size

Post by pmward » Sun Apr 28, 2019 9:32 am

Cortopassi wrote:
Sun Apr 28, 2019 8:47 am
Let me ask a basic question that hurt my returns for 20+ years. Why have a VP at all? I don't.

Why do you think you can do better than a fund or ETF? Do you have insider information? Do you think you can time the market? Read charts? See that head and shoulder or cup and handle, or moving average crossover that the computers and pros haven't already seen way before you?

Why do we feel that we should allow ourselves a VP to "play" with? Is it the excitement of gambling, trying to make more? I should have just taken $1000 a year instead and gone to the casino to get that out of my system.

I at times play Texas Hold Em with friends, maybe a $50 buy in. It is painful to sit down and bet literal dollars when they are sitting right in front of you.

But in the ether of my investments, I would routinely make huge, generally unresearched bets, and lose quite often.

It was crazy sitting down thinking about it.

I can say with near certainty that I will never own another option or single stock in my life again.
I counter your questions with more questions:

Why do you think that a "VP" *has* to be something that is actively managed?

Why can't a VP be a passively managed "fund or ETF"?

What is the difference between the Golden Butterfly and a PP with a 20% VP dedicated to small cap value?

Why would someone using a VP need to purchase options or individual stocks?

All of that aside, is there anything wrong with someone who has knowledge and skill in either technical analysis, quantitative analysis, macro-economic analysis, or just a deep general knowledge of a specific market from using that knowledge and skill in a VP with money they can afford to lose to try to generate alpha?
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Re: Setting VP size

Post by Cortopassi » Sun Apr 28, 2019 10:25 am

Pmward,

My comments are totally subjective based off my experience. I thought I had excellent knowledge of a few specific markets in the past where I made large bets. But without being on the inside, at least with individual issues, it was worse than flipping a coin, for me.

I agree on your other points. The term play money, or money you can afford to lose is generally used when talking about a VP, so I immediately think of something risky. It doesn’t have to be, you are correct.

I can decide, I suppose, that semiconductors are going to be a great long term investment. So buying a semi index fund might be a good VP. I would, however, caution on taking that to the next level, like saying AMD is a good bet and investing in a single issue. Or even the next step, I think AMD is going to have blowout earnings and buying a short term call option.

I did both of those things for a long time and did not do well. My experience, my opinions!
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Re: Setting VP size

Post by pmward » Sun Apr 28, 2019 11:36 am

Cortopassi wrote:
Sun Apr 28, 2019 10:25 am
Pmward,

My comments are totally subjective based off my experience. I thought I had excellent knowledge of a few specific markets in the past where I made large bets. But without being on the inside, at least with individual issues, it was worse than flipping a coin, for me.

I agree on your other points. The term play money, or money you can afford to lose is generally used when talking about a VP, so I immediately think of something risky. It doesn’t have to be, you are correct.

I can decide, I suppose, that semiconductors are going to be a great long term investment. So buying a semi index fund might be a good VP. I would, however, caution on taking that to the next level, like saying AMD is a good bet and investing in a single issue. Or even the next step, I think AMD is going to have blowout earnings and buying a short term call option.

I did both of those things for a long time and did not do well. My experience, my opinions!
No arguments from me on that. Anyone who is inclined to attempt to trade and speculate should keep the percentage allocated to active strategies low at first and prove you can generate alpha over a long period of time before committing more to it. More people will fail at active trading than will succeed, it's just kind of how it goes. Active trading isn't so much about picking winners, it's about managing your risk. Humans innately are very poor risk managers.

But, people can set a passive allocation as a VP, like in the Golden Butterfly. If someone has "the money they can't afford to lose" protected, and they have a desire to try to chase extra return with additional funds, that can be done passively by just allocating a VP to a buy and hold stock ETF. I think for the average Joe that would be reading this forum, this is the best way to partition a VP.
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Re: Setting VP size

Post by sophie » Mon Apr 29, 2019 7:28 am

I'm with Cortopassi...I don't see why you'd want a VP. For starters, by definition it's money you don't need to save. So why not go do something really fun or satisfying with it? Like, go tour Antarctica or climb Mount Everest, or remodel your house, or buy a cabin in the mountains, or make a huge donation to a foundation and get your name on a gold plaque somewhere. On that sort of list, "manage a VP" does not rank very high on the reward scale.

If I hit a savings # where I know I'm set for life, it'll either be one of the above (minus the mount everest climb) or I'll just put it into a stock fund like VTI.
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Re: Setting VP size

Post by mathjak107 » Mon Apr 29, 2019 7:57 am

it is not necessarily money you don't need to save ... it is money you may want to invest at a higher alpha potential ....it may be a bit more volatile that is all .

i have about 50% of my money in a pretty conservative income model which is about 25% equities ( s&p 500 index ) and the rest assorted duration bond funds and some gold at times ... the other 50% is in the insight 60/40 growth and income model ... they are both a very important part of our retirement plan .. i could sub the pp for the income model and it would be close but that still does not mean the growth and income model is any less important. the two together work out close to 40-50% equities at times .
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Re: Setting VP size

Post by Cortopassi » Mon Apr 29, 2019 8:37 am

I think we're all pretty much on the same page. Mainly that a VP is a somewhat/completely different asset allocation from a PP, but is still passive.

If we are talking active investing, trying to jump in and out of things based off whatever metrics, leveraged ETFs, options, etc -- that should be called the "AP" or Active Portfolio. Money you really, really can lose.

Winning the game, wouldn't that be nice! Not sure what that is. I see the previous generation living longer and being ill prepared for long term care, and right now any money they had hoped would be able to pass along is getting eaten up.

Doing something fun with some portion of your money is another great idea which I don't do enough of. Always trying to win the game...
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Re: Setting VP size

Post by sophie » Mon Apr 29, 2019 9:07 am

Well not if you are going by the Harry Browne definition. His definition of a VP, "money you can afford to lose", corresponds better with your "AP". Your VP is actually part of your core portfolio, that you choose to invest passively using a different strategy than the PP.

Harry was very clear that with the VP, you go for speculative win-big sort of buys because your goal is to beat your passive strategy. He then said that he personally didn't have a VP and saw no actual need for one. I don't either, but some people on the board love to tinker with investments and a VP would be a nice way for them to do it without risking their core savings.

The long term care issue is going to blow up big time over the next 10-20 years, because if most people can't manage a $4,000 water heater they sure as heck aren't going to be able to fund a $150K/year nursing home bill. That's why I'm thinking retirement savings should have two magic numbers: 1) 25x annual expenses and 2) 10x the cost of a high end nursing home per person. That's because I know of too many situations with people in a nursing home for 10 years or more, and you can't insure against it except by going the Medicaid route. Then couple that with a healthcare POA that specifies DNR/DNI/comfort care only should I ever get to the point of being unable to provide informed consent.
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Re: Setting VP size

Post by Cortopassi » Mon Apr 29, 2019 10:29 am

sophie wrote:
Mon Apr 29, 2019 9:07 am
...without risking their core savings.
Yeah, well that's the crux of it. I don't have anything that I wouldn't consider core savings, and I don't believe I will ever be in that position.

Sure, you can go on a vacation here and there, buy some man cave stuff, go out to eat, etc. but when you look at the long term care potential costs (which we have been because of older family members), I will never be able to get to that comfort level, so part of me pretty much say f*!k it.

The other part wants to not be any kind of burden to my daughters, because that is what is happening now (with older generation family members).
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