No where to hide

[iwealth]

mathjak,

Any thoughts on a dividend growth strategy as a means to fund a retirement?

Just some pros and cons off the top of my head..

Cons:
Lacks diversification
Crowded trade due to low interest rates
Total return is all that matters
No recession protection

Pros:
Relatively stable, predictable income (but fear the deep recession..)
Very tax-friendly return of capital
Don't touch principal (emotional benefit)
Increasing dividends provide decent inflation hedge, and they've done very well during the recent disinflationary period

If interest rates start a slow rise, at some point you'll see a flight from equity yield into fixed income. I figure your typical "dividend growth"  candidate will get hit hard in this scenario. But it won't necessarily reflect the health of the underlying business, so maybe it doesn't matter.

[Cortopassi]

A very pessimistic view, but I think Karl Denninger at the Market Ticker probably sums it up the best:

http://market-ticker.org/akcs-www?post=230208

If you are older than 40 and reading this...... you're likely to either be eating out of a dumpster in your old age or be (literally) eaten.

If PP long term in this environment is not going to work well enough, and if having too high of a weighting on stocks will be too volatile to handle...

Well, I guess I have been doing the right things otherwise -- maximizing my savings and salary, starting (trying) new businesses and ideas...

But it still scares the sh*! out of me to see my parents, in their 80s, going to the doctor sometimes multiple times a week and at least surviving decently with social security...

and knowing most likely neither of those will be there in the same form in 20-30 years.  I think that is a fact.

[mathjak107]

Recessions have always been part of the deal . In the accumulation stage standard weightings of intermediate term bonds are just fine.

They never last that long .

In retirement they are already included in the safe with drawal rate since it is already based on the worst of times in history.

The dividends can can be a double edge sword. Not having control of your taxes if in a taxable account can hurt.

Since i am down to working part time until july 30th i maxed out my 401k in the 6 months ditching a bunch of income. I was hoping to get a medical subsidy since i am 62.

We set aside 2 years of cash so i would hardly have any taxable income.

But we typically see about 60k of dividends and distributions from our funds so that dashed the hopes of zero capital gains brackets and medical subsidy.

Sometimes it is nicer to have as little non voluntary cash distributions as you can and that rules out heavy dividend portfolio's

[mathjak107]

well since the forum is quiet and i am the only poster , i will keep things active and add a few more opinions to the subject since i do enjoy discussing  investment philosophy .

i have changed my opinions through the years many times over because those a whole lot of  more informed people  than me have stopped me from believing my own bull-sh*t to be true..


while i couldn't run the numbers for the 4 part pp i did a quick comparion between some other very popular conservative funds that were around as long as prpfx .

did a quick comparison since 1982 of  prpfx  vs  funds like fidelity puritan . i have to say the price you paid  waiting for that next  calamity was quite high.

don't forget we had 3 major crashes ,  more recessions than i care to count as well as having in this  time frame one event that almost took down the entire financial system..

10k in prpfx grew to 71k today if i am reading the morningstar graph correctly , while fidelity  puritan , a nothing special balanced fund  grew to 235k  .

prpfx  vs one of the most popular conservative funds wellesly income was 71k since 1982 vs 295k today for wellesley.

that price of protecting against a calamity greater than the financial collapse in 2008 came with a very steep price .

remember in the financial world , if you didn't make the money that was the low hanging fruit in effect the thinking is you lost that money.


just something to consider when you weigh the costs of that insurance .

just remember keeping a few points a head of inflation may not give you that balance you need to retire in the manner you would like.

my investment philosophy for what it is worth has always been this:

i look at things as goals.

if one of my goals was to buy a house , i would invest as aggressively as i could since i didn't have the money yet anyway to buy that house.

if i lost some , no problem , i had no time frame anyway .

but once that goal is hit that money comes out of the risk  pool  and is ear marked for that goal.

what i don't do is leave it on the end of the stick like a carrot and chase gains that may cause me to lose that money which now i do have for that goal.

so tucking money away that met its goal in something like th pp makes a lot of sense.


but if you didn't reach that goal yet be it for a  house ,  or retirement money my feeling is you are shooting yourself in the foot protecting money that still needs to grow at a much higher rate of return.

i am  afraid of utilizing the pp for retirement right now.

because the pp owns volatile assets that can take many decades to cycle ,  a new  retiree spending down does not have an open ended time frame.  the outcome path is  set in the first 5 years and fully determined in the first 15 years.

if i am retiring now and yields rise and hurt bonds if market returns are weak for a while i can excessively spend down to much to soon.

since market cycles tend to be way shorter than interest rate cycles and gold cycles the less risky choice in my opinion  would be equities and a more conservative less interest rate sensitive bond mix.


the trinity study had more failure periods from using longer term 7-10 year  corporate bonds then bill bengans original  study which used shorter less volatile  5 year treasury notes .

just catching the interest rate cycle wrong had more failed time frames with intermediate term bonds , longer term bonds likely would have seen even more failures and that scares me about using the pp for retirement draw down at this point in time.

don't forget we are at the tail end of the interest rate cycle and it is only a question of when , not if rates will rise.

a 1% rise in interest rates on bond yields can see a 30% decline on long term treasury's while that 1% rise may not be a blip toward even slowing the economy again. the historical average is 6% for bonds and the economy hums along just fine .

one other point about bond yields and spending down.

it was  first brought to light by a joint study between dr wade pfau and michael kitces  that a rising glide path in to retirement may be the best choice.

that is reduce equity's down to 35-40% entering retirement and dollar cost average back in at the rate of increasing by 2% a year your allocation to equitys over the first 15 years.

that looked perfect until blanchett took a look at not the equity side but the bond side.

blanchett found that by studying the bond side that heavy bond allocation and chance of loss was so high that it hurt anything the equity side could muster upward. .

david's conclusion was the bond heaviness early on today would hurt success rates by causing to much early on spending down of assets compensating ..

well that prompted both kitces and pfau  to take another look at their study but focusing on the bond side .

they agreed blanchett was correct in his  logic.

they have since changed their belief to the fact while a rising glide  path has some pretty good points  they don't really hold true in this low interest rate high equity valuation time period and being to heavy in bonds at his point could present the biggest risk to retirement success rates..


keeping bonds to less interest rate sensitive types might offer the greatest chance of success at this stage.

anyway enjoy the rest of the holiday weekend .  being photographers my wife and i are headed up to harlem today to do some street photography . this should be interesting.

[mathjak107]

same problem , negative returns on bonds even with the short term can't support such low equity levels while spending down .

right now blanchett found the old  50/50 or 60/40 allocation kept while spending down equally from all parts still  worked best .

what most folks do not realize is the current safe withdrawal rates we use such as 4% inflation adjusted  and standard allocations like 50/50 , 60/40 , etc  already include the worst time frames ever.

the results are not based on average  returns .  they are based on all the horrible things the world and events has thrown at us over the last 146 years.

they have survived the world wars , the great depression , 20 years of slow markets , and then right on top of that soaring inflation for those retiring in 1966.

that is some pretty nasty events already baked in to the math.  if we wanted to run with average returns 6.50% would be the withdrawal rate. but for safety we don't assume average , we assume the worst .

realize as well ,  there is already a big safety factor built in too.

that factor not accounted for in the numbers is that according to tye bernick's study or the sun life study , retirees spend in a smile shape.

we spend more early on doing things and going places , then things fall off a cliff for a while when we slow the pace , then they pick up again later on when healthcare costs escalate.

retirees need a lot less inflation adjusting than they think since over time what they no longer do or buy covers a lot of the increases in the  costs of what they  still do buy or do..

the safe withdrawal rate study's rule out human behavior and inflation adjust every year driving up demand on portfolio's.

real life says that end up being over  kill and so that acts as a fudge factor for even worse case scenario's then we have had to play out with a bit more of a cushion.

[mathjak107]

so how would i utilize the pp if i was re-living things again ?

first off i would grow my money as aggressively as i could until about 6 or 7 years pre-retirement.

i would then use the pp to protect that money now that goals are just about met.

once i hit retirement i would move the PP back in to a standard retirement allocation that i knew already survived 146 years of  rolling time frames and use that through retirement if i needed 4% withdrawals.

if i needed 2% withdrawals or less i would go with short term bonds , tips and an immediate annuity down the road acting as a longevity insurance .


i also think if you need the full 4% it may be wise to incorporate immediate annuity's and life insurance with your own investing in to the mix.

may be use the annuity to cover non discretionary spending  , your own investing to cover the wants in life and inflation adjusting and the life insurance as tax free guranteed money for your wife or heirs.

i am still trying to get my arms around this stuff as each day  i learn more and more .

[iwealth]

Quite a few here are focusing on early retirement goals. What about someone looking to retire at say 40 years old? What are your portfolio allocation thoughts for such a person?

[mathjak107]

i never really gave it much thought. i hate giving opinions on situations i know little about since to retire so early i have to assume either you are getting the money elsewhere and not investing or have one whopper of a savings rate.

supporting 60 years of retirement potentially is very different from shooting for 30 .

i am not an adviser nor do i have enough knowledge to make personal recommendations.

i only speak in terms of the ressearch and studies i have read.

[barrett]

while i couldn't run the numbers for the 4 part pp i did a quick comparion between some other very popular conservative funds that were around as long as prpfx .

did a quick comparison since 1982 of  prpfx  vs  funds like fidelity puritan . i have to say the price you paid  waiting for that next  calamity was quite high.

don't forget we had 3 major crashes ,  more recessions than i care to count as well as having in this  time frame one event that almost took down the entire financial system..

10k in prpfx grew to 71k today if i am reading the morningstar graph correctly , while fidelity  puritan , a nothing special balanced fund  grew to 235k  .

prpfx  vs one of the most popular conservative funds wellesly income was 71k since 1982 vs 295k today for wellesley.

that price of protecting against a calamity greater than the financial collapse in 2008 came with a very steep price .

remember in the financial world , if you didn't make the money that was the low hanging fruit in effect the thinking is you lost that money.


just something to consider when you weigh the costs of that insurance .

just remember keeping a few points a head of inflation may not give you that balance you need to retire in the manner you would like.

mathjak,

Just quoted some of that massive post. Peaktotrough shows that a real PP (not PRPFX) gave an ending balance of around 123k, so not as good as Wellesley obviously. That is from the start of 1982 to today. PRPFX has well-known limitations that have been discussed frequently on here. Wellesley has been a great choice in retrospect.

I guess the main thing I want to say, though, is that you obviously love thinking about money and investing a lot, and have done terrifically well for yourself. My hat is off to you. But most of us who are in the PP are really just looking for something that is good enough. For example, we don't want to have to guess interest rate trends correctly. Many of us have tried to do what you did and failed miserably. Just take a look at the figures that Tyler has posted about how poorly the average investor (or, more correctly I believe, is the mean investor) has done over a long time span. I don't have the numbers in front of me but it's something like a 2% return, and I am pretty sure that is in nominal terms. In other words a lot of us have tried and failed to do what you have done. Should we keep trying? I would say no. We've either not put in enough time or have just interpreted the data incorrectly... or understood the data and got the timing wrong. Or...

You would seem to be an outlier way to the upside.

But please keep posting. Have gotten a lot already out of your posts on the Roth vs. Traditional thread. And if you are going to question the PP, you might as well do it here because at least we'll know what the hell you are talking about!

Ah, I see I am already several posts behind!

[Longstreet]

Directed primarily to mathjak, but all responses (without insult) welcome.

I'm very na�ve regarding financial studies.  I retired last year, my wife is working one more year.  We are able to save most of her income.  We live modestly, and for the foreseeable future, we should be able to meet expenses by using both of our social security checks and my pension, without touching our savings.  I self manage the funds in tax exempt (until withdrawal)  IRA's that were rollover 401k's with Vanguard & Fidelity and my wife is still contributing to her TIAA-CREF account.  I will be forced to take mandatory minimum withdrawals next year.  I have $650,000 in a modified PP (35% cash, 30% stocks, 25% LTB and 10% paper gold) and another $150,000 in a variable portfolio (all stock) including a heavy weight in health care (65,000), developed nations ex US (65,000), and REIT's (20,000).  These totals include a $100,000 emergency fund that is not in the IRA's.  My 35% cash allocation is my effort to be defensive.

Since I'll soon be moving from the accumulation  to the take down phase, what adjustments would you recommend, especially with the long term bond portion of the mix. 

Thank you   

[mathjak107]

BARRETT i would just becareful of the term you used " most of us want something that is just good enough "

as you will find when you reach that point no one ever got to the point of retiring and didn't wish they saved more.


now is the time to match your pucker factor to your investing and go as aggressive as lets you stay the course and sleep at night. you will rarely regret having more and long term odds of less are pretty slim unless you speculate. and don't invest,

[mathjak107]

Directed primarily to mathjak, but all responses (without insult) welcome.

I'm very na�ve regarding financial studies.  I retired last year, my wife is working one more year.  We are able to save most of her income.  We live modestly, and for the foreseeable future, we should be able to meet expenses by using both of our social security checks and my pension, without touching our savings.  I self manage the funds in tax exempt (until withdrawal)  IRA's that were rollover 401k's with Vanguard & Fidelity and my wife is still contributing to her TIAA-CREF account.  I will be forced to take mandatory minimum withdrawals next year.  I have $650,000 in a modified PP (35% cash, 30% stocks, 25% LTB and 10% paper gold) and another $150,000 in a variable portfolio (all stock) including a heavy weight in health care (65,000), developed nations ex US (65,000), and REIT's (20,000).  These totals include a $100,000 emergency fund that is not in the IRA's.  My 35% cash allocation is my effort to be defensive.

Since I'll soon be moving from the accumulation  to the take down phase, what adjustments would you recommend, especially with the long term bond portion of the mix. 

Thank you 

well i am retiring in 3 weeks and here is what i went with .  i was going to go pp but within 2 weeks decided against so much long term bond risk in uncharted waters just as i retire.
so the final version i decided on is a mix of active and etf .

the version as it stands now :


fidelity growth and income fund FDGRX - had this and blue chip growth for many many years.

fidelity blue chip growth FBGRX

vanguard total market index vti

vanguard veu all world index etf

vanguard vig dividend achievers etf

that is the equity side.

the bond side uses

vanguard admiral total bond fund (now only 10% of the portfolio)

fidelity floating rate high yield

vanguard bsv short term bond

vanguard vtip short term inflation proof bond etf

10% GLD GOLD ETF

10% CASH which represents 2 years of retirement withdrawals and some emergency money.

i toyed and toyed with so many different models until i came up with a mix of what i thought would cover the areas i wanted to cover with as little interest rate sensitivity as i could which is why i left reits out of the portfolio at this stage.

if inflation picks up i will swap total bond for a real return fund like fidelity strategic real return FSRRX . that carrys to much weight in areas geared for higher inflation to be used at this stage in my opinion.

the model works out to 50% in equities , 30% bonds , 10% gold 10% cash

[barrett]

BARRETT i would just becareful of the term you used " most of us want something that is just good enough "

as you will find when you reach that point no one ever got to the point of retiring and didn't wish they saved more.


now is the time to match your pucker factor to your investing and go as aggressive as lets you stay the course and sleep at night. you will rarely regret having more and long term odds of less are pretty slim unless you speculate. and don't invest,

Hmm. I don't think that bolded part is true. And as for my pucker factor, the PP is already plenty volatile for me. Striving for above average returns is what does most of us in. It's firewalls versus home runs. Enough is enough and thank you for the opportunity to have been born in the US in the 20th century.

[mathjak107]

above average returns is one thing . cutting the potential of your own returns to below average is another .

buying wellesley income or fidelity puritan as an example is hardly swinging for the fences.  they are still plenty conservative. but what they do not do is place large bets on remote possibilities .

to date every recession , depression and inflationary  period has been handled just fine by time . if you really have a long term view for your long term investment none of the above have been an issue to date.

you just need to match your pucker factor to that long term hold in my opinion.  since long term  markets are up 68% and down only 33% ,  investing with that in mind  makes sense.

it isn't about just 1 fund either , it is about an entire portfolio working as a team to give you the gains and volatility you need to meet YOUR GOALS  .

my intention is not to drive anyone away from  the pp.

my intention is to make sure they are not just drinking the kool aid and understand that traditional investing has gone through lots of scenario's over the long term and did just fine.

trying to invest and cover all the remote chances wil likely  leave you with below average returns and may be a big  short fall in meeting goals.

that is up to you to decide .

[iwealth]

my intention is to make sure they are not just drinking the kool aid and understand that traditional investing has gone through lots of scenario's over the long term and did just fine.

trying to invest and cover all the remote chances wil likely  leave you with below average returns and may be a big  short fall in meeting goals.

that is up to you to decide .

One of the main investment philosophy drivers around here is risk reduction with a more granular focus on peak to trough drawdown reduction. Don't focus on the fact that a certain portfolio lost 8% in 2008, focus on the fact that at one point it was down 30%. 

Assume you have two portfolio trajectory paths:

1) start with $1,000,000 -> fall to $700,000 -> rise to $1,200,000
2) start with $1,000,000 -> fall to $950,000 -> rise to $1,050,000

If you took a poll here asking what path you'd rather take over the course of a year, I'm sure #2 would win.

And the other main investment philosophy driver is wealth protection during those outlier events that don't concern you. So when you combine the desire for max drawdown reduction and wealth protection against all outlier scenarios I think you'd be hard-pressed to find a more appropriate allocation than the 4x25 PP.

That said, I think part of the "problem" with general acceptance of the PP is the dogmatic allocation. You hear a lot of whining from time to time about how 25/25/25/25 sucks and that it holds too much gold and it can't keep up with 60/40 during prosperity, etc, etc, despite agreement that the principle of investing for prosperity/recession/inflation/deflation conditions is sound.

40/20/20/20 makes for a nice aggressive prosperity tilt. Just as 20/20/20/40 makes for a nice conservative tilt. Some will claim that's what the VP is for, but I find that to be confusing for new investors looking for guidelines.

[mathjak107]

you can run all the hypothetical numbers you want  but at the end of the day  what matters is your own.

since i always liked the pp since i started back in 1987 my bench mark is the results i had.

if i went with the pp since 1987 my balance on 10k would be 67k today .


i didn't go that route , i went with the fidelity insight newsletter back then instead . that same 10k is 208k today in the newsletter model which for most of that time had 10-15% less volatility than the s&p 500.

so that puts it in to perspective as to my time frame.

[buddtholomew]

I am surprised to hear that the fixed income portion of the portfolio caused you the most concern. What is the weighted average duration of the FI allocation selected - short, intermediate, TIPS, floating rate and cash?

TLT + Cash/ST-bond could have lowered average duration to a more comfortable 5-6 years while still maintaining the benefits of longer duration treasuries.

INT investments are a good addition and in my opinion should be considered as part of the equity portion of the PP. As I mentioned previously, our portfolios are very similar:


Retirement
US Total Market, SCV, REIT (55%)
INT Developed, INT SC, Emerging Markets (45%)
IT-Bonds and Stable Value

Taxable
4x25PP + Cash to maintain 5.6 years AVG duration

Totals
50% equities, 40% Bonds (4.9 duration), 10% Gold

[mathjak107]

except for the 5-7 years of a small part in the total bond fund all bond funds are short term only.

[barrett]

mathjak,

Here's a question for you...

I have tried and failed to get great returns. I was lucky enough to at least beat inflation, but only just barely. That's over a 25-year time frame. Should I keep trying? Isn't this enough data to tell me I am not so great at this skill?

OK, I guess that is two questions.

[mathjak107]

i would seek a vanguard or fidelity newsletter and let them call the shots.  it worked for me and kept me from myself.

[iwealth]

Totals
50% equities, 40% Bonds (4.9 duration), 10% Gold

Budd, just a thought exercise here...if you could go back in time to 2011 before you invested in the PP, what would you have done instead and how would that affect your overall portfolio allocation today? You don't have the benefit of hindsight, the only difference is that you never learned about the PP.

And if you were starting a portfolio today, given the multi-year declines in gold and the recent decline in long bonds, do you think you'd feel more comfortable starting off at 50/40/10 knowing that you didn't invest in gold at its peak?

[D1984]

the failure periods for the bengan  study were 1907  1926 1937 and 1965-66. the 4% swr is based on starting your retirement in those  years .  they represent the worst periods to date although the hypothetical y2k retiree is on track to fail ..

the difference between bill bengans work and the trinity was bill used 5 year treasury bonds and the trinity used longer term coroporates. the trinity had more failure periods belive it or not using the more volatile longer term corporate bonds.

those were only 7-10 year bonds and they caused more failures tha the 5 year treasury's. i can only imagine if 30 year were used and you caught the cycle wrong.


so i am of the opinion that while having the long term bonds in the accumulation stage may be helpful , that can be a huge bet on rates in the decumulation stage that can hurt your retirement if you guessed wrong.

that is what led me to change course after realizing that a below average stock market and interest rates that are more likely to rise than not can be a deadly retirement combo today.

mot only are you depending on markets for gains but  if those gains are weak the longer term bonds can destroy them in a heart beat in a rising climate.  that can be deadly when spending down initially before some good up cycles provide a cushion.

I just re-ran some numbers on a 100% US stock portfolio starting in 1929 and then on the same portfolio but starting in 1926. 4% inflation adjusted (or deflation adjusted for some years) withdrawal was used on both portfolios.

The results for a portfolio starting at $100K in value on the inception date?

The 100% stock portfolio starting on 1-1-1929 would have ran out of money some time in 1953.

If one "cheats" by making the portfolio withdrawal from the 1929 start date portfolio at the very end of each year (in other words, by assuming that the owner of the portfolio basically got a one-year interest-free loan every year on January 1st to cover what would've been withdrawn from the portfolio and didn't have to repay it until December 31st at which point he then made the portfolio withdrawal to cover the loan repayment) then this stretches out the portfolio's longevity so it lasts until 1956. Still not 30 years.

All of the above assume no taxes, no commissions, and no mutual fund or ETF fees (had such financial instruments been in common use back then), etc...in other  words, real world results would have been even worse.

On the other hand, starting in 1926 (1-1-1926) and doing the 4% inflation-adjusted withdrawal at the beginning of the year, he has around $433K by 1953 and $895K by 1956 and the portfolio shows no signs of depleting any time soon even if he lives for 20 or 30 more years.

I used stock market return data from the Moneychimp market CAGR site listed earlier in this thread; inflation data were taken from MeasuringWorth.com at http://www.measuringworth.com/inflation/

I will post screenshots of the three portfolios mentioned (showing what years they end up depleted in) if you wish.

Given the above, I wonder why Kitces and Pfau said the 1929 portfolio lasted 30 years or more and the 1926 one failed.

[barrett]

i would seek a vanguard or fidelity newsletter and let them call the shots.  it worked for me and kept me from myself.

But those newsletters have writers and researchers that change over time.

I think you take for granted that you have a special skill set that gives you favorable investing results.

[Cortopassi]

I am 100% with barrett. 

I've been doing this for 25 years.  I have little skill at it, and I would get over run by emotions at the worst possible times.  I am the typical 2% average return person.

If I had a 50/30/10/10 like mathjak, I could guarantee when that next stock drop comes, I'd be itching to get out.

My intent is simply to continue saving as much as possible, into the standard PP, and basically hope that it works going forward.  I see there are a lot of thoughts and concerns on headwinds, the bond bull is over, stocks have to drop, gold will go below $1000 and stay there for years, the dollar will continue being devalued.

Hence my original title "No where to hide."

I am comfortable with 25% in each.  It may not win the day in returns, but lets me sleep at night.

[buddtholomew]

Totals
50% equities, 40% Bonds (4.9 duration), 10% Gold

Budd, just a thought exercise here...if you could go back in time to 2011 before you invested in the PP, what would you have done instead and how would that affect your overall portfolio allocation today? You don't have the benefit of hindsight, the only difference is that you never learned about the PP.

And if you were starting a portfolio today, given the multi-year declines in gold and the recent decline in long bonds, do you think you'd feel more comfortable starting off at 50/40/10 knowing that you didn't invest in gold at its peak?

Thanks for the thought exercise iwealth.
Mainly, I would have more in equities and fixed income and less in gold. So, the 10% now would have remained at 2.5% of overall portfolio.
It boils down to gold as this is the worst performing asset since 2011 peak. If I rebalanced out of gold or treasuries for that matter at the high, I would feel differently.