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If you are retired, does it really make sense to have much of your money in the stock market?
I don't care how skilled you are in investing. The stock market could crash, and you could lose a substantial amount of money. Retirement is not the time for that, I would think.
If you are retired, does it really make sense to have much of your money in the stock market?
I don't care how skilled you are in investing. The stock market could crash, and you could lose a substantial amount of money. Retirement is not the time for that, I would think.
It depends on what your time frame is, along with cash flow needs.
If you have a 20+ year time frame ( retired or not) and you want/need growth then stocks should be owned, heavily. Without risk, you can’t get growth. And without growth, your portfolio can be ravaged overtime by withdrawals and inflation.
There are indeed people (and financial blogger-type people) who contemplate the question of how much to invest in the market, and what is the lowest % one could use, and then how much nest egg would a person need to have *if* they wanted to be in the market at the lowest possible equity level, and meet their financial needs for their timeframe.
Months ago I posted such an article, written by the guest of a financial blogger, who outlined how he/his wife determined their allocation levels and nest egg for themselves for their retirement (no heirs, no future generations to be funded). They had a low equity allocation -- less than 20% as I recall.
That generated much disapproval in response, but there are folks who aren't trying to get as rich as they possibly can <gasp>, but are focused on their sufficient nest egg lasting them through their own retirement, up to age 100.
The underlying dilemma is a universal one, descibed by innumerable metaphors in our language. How do I get something for nothing? Or, more technically, how do I get incrementally more return, without incurring more risk? Or alternatively, how do I reduce the risk, without also reducing the return? This is all classical portfolio theory. Some theory! Now, how to put it into practice?
Consider the "efficiency frontier". Is it really a frontier? Can we find a clever combination of investments, piercing that frontier? Along comes a new idea; or perhaps a venerable and old one. Does it pierce said frontier? Or maybe it never did, and was never claimed to do so, but new interpretation meretriciously purports an undeserved supremacy? Or maybe the frontier remains impregnable, but this new (or old) idea merely does a better job of just approaching the frontier - already a good achievement, since other stuff that we've tried does demonstrably worse? Well, which is it?
And here's another thing that befuddles me. We talk about a portfolio lasting for say 40 years, with high reliability... But beyond that, we don't care, because we are going to be dead anyway. Oh, but that's so different from leaving "legacy money", or having the portfolio last in perpetuity?! Why do people think that these two criteria are so different? They're not! ... because of the magic of compounding. Consider the monthly payment on a 40 year mortgage, vs. an interest-only mortgage, the latter being as it were perpetual. The two monthly payments are actually pretty close.
The nice thing about the safe withdrawal rate is it does both pretty well by default . 90% of the time you end 30 years with more than you started.
because of sequence risk it works out that way since the order of the gains and losses coming in can see the same average return vary by 15 years.
Last edited by mathjak107; 07-29-2018 at 04:49 PM..
And history tells us the most common scenario has been prosperity..by a landslide.....investing is a probabilities game.
We have a saying in my drumming world. Your hands are only as fast as your worst foot.
It may not not matter how many good years you have in ratio to down years.
You can have 10 good years on your 100% equity portfolio but you are only as good as that 11th year if that is the recessionary one. Losing 50% in that year may have your balance much lower than a balanced portfolio or the butterfly /permanent portfolio at that point.
Now the recovery has to happen . This is where the house limit I spoke of comes in to play.
If you have many many years left and you can wait out the 100% equity position to go on to new highs than you have no house limit.
But if you are retired and spending that money down to live on ,depending how long that recovery takes you can hit that house limit. Your balance may still be higher at that point with the more defensive portfolio.
So you can see it is not really about the number of good years many times but it is more about the depth of the down years and the number of years to recover on an inflation adjusted basis.
Those who retired in 1965 had the greatest bull market in history within their time frame but it was to little to late. They already were forced to spend down to far by double digit inflation in the early years. So they hit the house limit and failed.
Even the greatest bull market in history could not save them since they had to little left to work on.
On the other hand if you were not spending down you had a pretty decent return despite the poor first 15 years since you had no house limit to hit.
This is why conventional thinking and running on old school thinking can get you because while it applies to the accumulation stage the decumulation stage has totally different issues to deal with
Last edited by mathjak107; 07-29-2018 at 05:07 PM..
We have a saying in my drumming world. Your hands are only as fast as your worst foot.
It may not not matter how many good years you have in ratio to down years.
You can have 10 good years on your 100% equity portfolio but you are only as good as that 11th year if that is the recessionary one. Losing 50% in that year may have your balance much lower than a balanced portfolio or the butterfly /permanent portfolio at that point.
Now the recovery has to happen . This is where the house limit I spoke of comes in to play. If you have many many years left and you can wait out the 100% equity position to go on to new highs than you have no house limit.
But if you are retired and spending that money down to live on ,depending how long that recovery takes you can hit that house limit.
So you can see it is not really about the number of good years many times but it is more about the depth of the down years and the number of years to recover on an inflation adjusted basis
In the last 100 years how many years has the market gone down more than 50%? none!
In the last 100 years how many years has the market gone down more than 40%? One!
In the last 100 years how many years has the market gone down more than 30%? Two!
In the last 100 years how many years has the market gone down more than 20%? Three!
Irrelevant . You don’t know the future. In fact since 2000 market volatility is nothing like prior time frames.. since 2000 for any given allocation the drops and potential drops have been far greater . It may not matter in the accumulation stage but it is a different story in the decumulation stage. For most of history we have not had high speed machine trading that can see 1200 points vanish in minutes.
A modest extended downturn is far more dangerous than a V-shaped steep drop like 2008. Don’t confuse betting on only prosperity in the accumulation stage where you have no house limit with the decumulation stage.
I don’t think as a retiree living on your portfolio you would feel to good with even a 15-25% drop in an extended down turn, I know I wouldn’t. Especially when it involves giving back a few hundred thousand dollars in the gains you got over the bull.
So the question is why would one want to subject themselves to that potential so late in a bull market when there are better ways in retirement to work around the problem.
Last edited by mathjak107; 07-29-2018 at 05:25 PM..
In the last 100 years how many years has the market gone down more than 50%? none!
In the last 100 years how many years has the market gone down more than 40%? One!
In the last 100 years how many years has the market gone down more than 30%? Two!
In the last 100 years how many years has the market gone down more than 20%? Three!
I like those odds!
Very simplistic.
You need to consider all the reasons growth occurred during those time periods and what drove prices including what the valuations were relative to earnings, sales etc... Today, we have very little similarities to what was going on prior to 1990's.
Valuations are very high. We have virtually zero population growth. We are heavily in debt as consumers and as a nation. Those things are going to weigh very heavily on any future growth and we can't just simply go into debt forever to drive growth which is what has been happening.
You sound like the guy at the Roulette table at the Casino that sees red 15x in a row and decides now is the time to put it all on black. Law of Independent Events.
Long term, equities are a great investment. If your time horizon is 10 years or less and you are heavy in equities like most of the boomers who saved very little and are counting on 15% gains to fund retirement spending you are going to wake up with a sore ass.
Irrelevant . You don’t know the future. In fact since 2000 market volatility is nothing like prior time frames.. since 2000 for any given allocation the drops and potential drops have been far greater .
You are correct I don't know the future
But making investment decisions based on a scenario that has never happened is not wise IMO
I like my investment position as is for now
"Potential for investment drops" is subjective
Just the fact that your concerns and fears are commonplace today tell
Me this bull has more to go.
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