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If you really think there is a bond bubble, what should a 76yo retiree do if their AA is 37% stocks,17% cash,% 46 bonds? Add more cash or stocks? Or do nothing? Assumes SS and RMDs cover current fixed costs.
No one can give you 'the answer'. Here are some things to think about in developing your own answer:
1. At 76, presumably you are not trying to 'grow' your assets, and with your fixed costs covered, you re-invest the income, and presumably wish to conserve your assets. If that is the case, and you have 'won the game' -- meaning you have sufficient assets for your needs. Well, why keep playing the game, after the game is already won? If that assumption on my part is wrong, and you prefer to stay in the game, for whatever reason, then the answer is probably 'stay the course' -- so long as you will be copasetic with the results Mr. Market delivers.
2. If by 'bond bubble', you are implying the likelihood of a'popping' of the bubble, why stick around, at least in full-allocation mode? An investor can earn ~ 1% yield on near-cash or cash assets (e.g. "MINT", internet savings accts, etc.) Market-cap bond index products pay what now, something with a 2-handle in terms of yield? If the answer is you want the marginally higher income, that is a true answer. But consciously accept, stability of income may be at odds with stability of principal, especially when asset values are rich. You have to understand what is of primary importance to you, the income, or the value of your principal, then decide what to do.
3. If your 'bond bubble' diagnosis becomes reality and the bond market drops, expect stocks to fall in sympathy with bonds. Both asset classes benefitted from Q/E & ZIRP; IMO it would self-serving and delusional to expect that stocks will soar while/if bond prices drop. Often, stocks are more frenetic in their price moves than bonds. So reallocating principal from bonds to equities, probably won't DE-risk a portfolio. In fact, it may have the opposite effect.
4. Lastly, and I am sure you know this, a decision to buy, hold, or sell is never a 'final decision'. Circumstances may change tomorrow, and you can reverse your decision.
I'm about 25 years your junior. Still in accumulation mode, but expecting to retire early in 4 years. Except for the whole health-insurance issue, I could retire now, spend principal, and not have another worry. So, I've no intention of exposing all of my assets to the vississitudes of Mr. Market here --- which might risk delaying my retirement. Especially with most asset classes trading 'rich'. But that is me. You are in a different place. Your fixed costs are covered. The question is to what degree to you wish to expose your assets to Mr. Market -- and for what purpose? Does the marginal income/return you derive from holding rich assets adequately compensate for the risk of holding richly-priced assets? Ultimately, only you can answer that question. Nobody else can.
Edmond, Thanks very much. Sweet analysis. Especially #3 and your conclusion/personal status. This question was not for me per se but for my 76yo widowed mother. A financial adviser was suggesting going up on equities. He is sniffing around for business and I like to be logical. I could never have been as cogent in defending staying the course. Thanks again, Mike
I disagree, fwiw. And not only w/ Edmond's #3 and the likelihood of an adviser "sniffing around for business." You could go to Vanguard and everyone here would cheer yay for you and not impugn --- and you might well get identical advice.
It all depends on her wishes and goals, such as she has them, and presumably in part on yours for her. If she is truly well-covered cashflow-wise by the current situation, and one goal might be to grow the nut, and if at 76 and reasonable health the horizon seems distant enough, then there is no reason ("logical") whatsoever not to increase the equity portion, depending on sleep-at-night. If unanxiety is paramount, leave as is. If not paramount, and all is well-met for now as static, then sure, increase equities, prudently, in low-vol etfs or value-oriented etfs, perhaps all-US, and perhaps algorithmically churned, like CAPE. Lots of options.
But I disagree with the advice above and the presumptions about the adviser, I think. Is derisking an actual goal?
DM, Thanks for the note. The advisor's fees start at 1.00%-0.5% per year so that is a bit more expensive than VG. VG and some of the ROBOs charge 0.25% or less so his prices would give me pause. I am not sure if she would qualify for the lower rate based on asset size. I think she and I both talked about "sleep at night" levels. I think given time horizon, health, covered costs that 37% is just fine. I think Pfalu and Kitces (among others, forgive spelling errors please) have made arguments for rising equity values in retirement but I don't know if that would allow us to sleep at night. Regards. Mike
You pay that fee for their advice / guidance / allocative thoughts / reassurance during tough times / withdrawal number-crunching perhaps, etc etc. Not defending, just pointing out to compare apples only. You can do cheaper, sure. But if he is good and iff she follows the recommendations and moreover likes / needs to have a voice on the phone or whatever, then it is money well-spent. Always. No, it is not the cheapest way to go.
Comments
1. At 76, presumably you are not trying to 'grow' your assets, and with your fixed costs covered, you re-invest the income, and presumably wish to conserve your assets. If that is the case, and you have 'won the game' -- meaning you have sufficient assets for your needs. Well, why keep playing the game, after the game is already won? If that assumption on my part is wrong, and you prefer to stay in the game, for whatever reason, then the answer is probably 'stay the course' -- so long as you will be copasetic with the results Mr. Market delivers.
2. If by 'bond bubble', you are implying the likelihood of a'popping' of the bubble, why stick around, at least in full-allocation mode? An investor can earn ~ 1% yield on near-cash or cash assets (e.g. "MINT", internet savings accts, etc.) Market-cap bond index products pay what now, something with a 2-handle in terms of yield? If the answer is you want the marginally higher income, that is a true answer. But consciously accept, stability of income may be at odds with stability of principal, especially when asset values are rich. You have to understand what is of primary importance to you, the income, or the value of your principal, then decide what to do.
3. If your 'bond bubble' diagnosis becomes reality and the bond market drops, expect stocks to fall in sympathy with bonds. Both asset classes benefitted from Q/E & ZIRP; IMO it would self-serving and delusional to expect that stocks will soar while/if bond prices drop. Often, stocks are more frenetic in their price moves than bonds. So reallocating principal from bonds to equities, probably won't DE-risk a portfolio. In fact, it may have the opposite effect.
4. Lastly, and I am sure you know this, a decision to buy, hold, or sell is never a 'final decision'. Circumstances may change tomorrow, and you can reverse your decision.
I'm about 25 years your junior. Still in accumulation mode, but expecting to retire early in 4 years. Except for the whole health-insurance issue, I could retire now, spend principal, and not have another worry. So, I've no intention of exposing all of my assets to the vississitudes of Mr. Market here --- which might risk delaying my retirement. Especially with most asset classes trading 'rich'. But that is me. You are in a different place. Your fixed costs are covered. The question is to what degree to you wish to expose your assets to Mr. Market -- and for what purpose? Does the marginal income/return you derive from holding rich assets adequately compensate for the risk of holding richly-priced assets? Ultimately, only you can answer that question. Nobody else can.
Derf
Thanks very much. Sweet analysis. Especially #3 and your conclusion/personal status. This question was not for me per se but for my 76yo widowed mother. A financial adviser was suggesting going up on equities. He is sniffing around for business and I like to be logical. I could never have been as cogent in defending staying the course. Thanks again, Mike
It all depends on her wishes and goals, such as she has them, and presumably in part on yours for her. If she is truly well-covered cashflow-wise by the current situation, and one goal might be to grow the nut, and if at 76 and reasonable health the horizon seems distant enough, then there is no reason ("logical") whatsoever not to increase the equity portion, depending on sleep-at-night. If unanxiety is paramount, leave as is. If not paramount, and all is well-met for now as static, then sure, increase equities, prudently, in low-vol etfs or value-oriented etfs, perhaps all-US, and perhaps algorithmically churned, like CAPE. Lots of options.
But I disagree with the advice above and the presumptions about the adviser, I think. Is derisking an actual goal?
Thanks for the note. The advisor's fees start at 1.00%-0.5% per year so that is a bit more expensive than VG. VG and some of the ROBOs charge 0.25% or less so his prices would give me pause. I am not sure if she would qualify for the lower rate based on asset size. I think she and I both talked about "sleep at night" levels. I think given time horizon, health, covered costs that 37% is just fine. I think Pfalu and Kitces (among others, forgive spelling errors please) have made arguments for rising equity values in retirement but I don't know if that would allow us to sleep at night. Regards.
Mike