Hi Guys,
Charles’ recent “Irrational Markets - Proof Positive” post prompted me to initiate this topic. That discussion highlighted the discordant opinions and recommendations made by supposedly financial and investment experts. The cacophony is loud, endless, and often much less than useful. Chaotic investing is a likely outcome.
The Charles post emphasized the mind-bending character of old wisdom saws like “Out of the mouths of babes comes wise insights, yet, only with age comes wisdom”.
If the latter is true, I have accumulated much wisdom. I guess you should seek investment advice from either young Wharton business school graduates or perhaps from older, more senior graduates. I listen to both, but weight them differently.
For many years, an industry agreement seemed to have been reached with regard to an acceptable retirement portfolio drawdown rate. Portfolio survival for an extended retirement period is the obvious goal.
These earlier studies mostly suggested something approaching a 50/50 mix of equity and fixed income holdings. High portfolio survival rates were estimated when withdrawal rates were limited to roughly 4% per year adjusted for inflation. The original work in this arena was done at Trinity University in 1998 and has been frequently updated.
Here is a Link to one readable update written by Wade Pfau in 2010:
http://wpfau.blogspot.com/2010/10/trinity-study-retirement-withdrawal.htmlThe Pfau analysis didn’t much change the earlier study findings. However, some concern over the current overpriced marketplace, coupled with a very low interest rate environment, has persuaded a few gurus to shorten the recommended drawdown schedule from the standard 4% rule-of-thumb to an even lower 3% annually.
Now for the controversial analysis and recommendation that wants to upset this comfortable apple cart. It will surely add to Charles’ distress over conflicting and competing financial advice. That’ll never change.
It is a retirement study from the Director of Research at the Putnam Institute. Here is the Link to this cart upsetting 16-page, 2011 release:
https://www.putnam.com/literature/pdf/PI001.pdfPlease give it a road test. It merges portfolio returns uncertainty with life expectancy probabilities for both men and women separately. The methodology deploys a novel Retirement Present Value (RPV) model to project portfolio survival likelihoods.
The RPV’s surprising and controversial output is that the retirement portfolio that offers the best survival prospects includes a much smaller fraction of equity holdings than does the original Trinity study and other follow-up Monte Carlo analyses. Check it out; controversy is good.
Personally, I’m not comfortable with the Putnam work product. The manner in which the “optimum” portfolio equity/fixed income mix was determined escapes me. Certainly a portfolio with only a single Index-like equity position is retirement dangerous because of its volatility (standard deviation). But fixed income is likely more dangerous because of muted annual returns.
The standing answer has been broad portfolio diversification that trades off a little annual return for a major decrease in overall volatility. Outcomes are definitely timeframe dependent, but I still trust this generic and time-tested approach.
You get to choose your own poison. My head spins off-axis as often as Charles’ does. Let MFO members know your thinking on this matter.
Best Regards and Happy Holidays.
Comments
Is this a case of focusing too much on a target far away when you are about to hit an obstacle right in front of you? I think so.
---Okay, we'll throw out the pension (assuming one exists) and social security monies and focus on the "drawdown" question. Regardless of studies as noted here and others I have read (I did not read the one linked here), the fact remains that for those attaining the magic 70.5 age, the IRS is going to force these folks to "drawdown", whether they choose to or not. Current calculations require about 3.66% for year 1 and increases thereafter.
As to asset mix. Well, we all have our own risks and rewards machine in place, eh?
To repeat; the simple 50/50 of VTI and BND provides the following averages:
---5 year = 9.9%
---3 year = 12.5%
---1 year = 10.6
---YTD = 9.35%
Yup. Not very diversified. Just a good place to have been and be right now, IMO; for a simple portfolio. If one is ahead of the above numbers, you're doing well with your money management.
Regards,
Catch