I'm just curious about your thoughts about what kind of risk is acceptable for a 49-year old about 15 years from retirement with a $1.1 million portfolio. I have very little debt (owe $120,000 on a mortgage on a $425,000 condo near Boston). Personally, I don't believe it makes sense to take any unnecessary risk so I've been about 40% bond funds, 35% equity funds, 25% cash. One of my goals has been to generate some income to help pay bills, etc. But I'm equally focused on capital preservation. Losing 25% of principle in one year is not acceptable to me at this point. If you are in a similar situation or feel comfortable providing input, it would be much appreciated. Thank you.
Comments
But seriously, any meaningful answer to this will depend on your income situation until you retire (how much and how likely it will continue) and whether you can save from it or need to supplement it from your savings and how much of that is in tax deferred accounts. Also what kind of retirement income you will need for your standard of living, etc.
If you Google for "retirement planner" you will find any number of tools that will let you plug in all of that information and give you an idea of how long it will last for your circumstances and requirements and what growth you might need for your portfolio to satisfy those requirements. You then construct a portfolio that potentially gives you that growth taking the minimm risk necessary for it. For example, if you need a 6-8% annualized growth, you will likely need a moderate allocation portfolio.
Or you could wait for someone here to do all that calculation for you.
Link related to your request,
The No-Frills Investment Strategy:
ftpress.com/articles/article.aspx?p=374500
A Quick Review of Relative Strength Investing
Here is the three-step procedure for managing your mutual fund portfolio:
Step 1: Secure access to data sources that will provide you with at least quarterly price data and volatility ratings of a universe of at least 500 (preferably somewhat more) mutual funds. (Suggestions have been provided.)
Step 2: Open an investment account with a diversified portfolio of mutual funds whose performance the previous quarter lay in the top 10% of the mutual funds in your trading universe and whose volatility is equal to or less than the Standard & Poor's 500 Index, or, at the most, no greater than the average fund in your total universe.
Step 3: At the start of each new quarter, eliminate those funds in your portfolio that have fallen from the first performance decile, replacing them with funds that are currently in the top performance decile.
So, Priorty 1: Modest MaxDD.
Priority 2: Some dividend.
Priority 3. Liquidity. You don't state it, but it's implied with your 25% cash holding.
While past is no guarantee of future
In your case, I might look for conservative fixed income funds with downside deviations and Ulcer indices less than 4% and for moderate equity oriented funds with these indices less than 7%, given the 40/35/25 allocation you mentioned.
That should help limit drawdown to somewhere between 12 and 16% (depending on whether the next decline is just bad or really bad, like 2008).
I set Miraculous Multi-Search to Great Owls only, Risk Group 1 & 2, Age Group 10 & 20, then sorted by APR. These two funds returned the highest APR while still honoring the downside index limits of 4%:
Then, I upped the Risk Group to 3, repeated search and came up with these three moderate equity oriented funds, which honor the 7% downside indices:
Hard to go wrong with any of these (although I believe VWELX is closed). Sleep easy, especially given your allocations, and low maintenance.
If you have more specific categories in mind, you can set the search criteria accordingly. Ditto if you want to consider younger funds. And other top performing funds that are not necessarily Great Owls.
Hey, you might also check-out a thread from last year: Four Funds for a Lifetime.
Plugged in risk 2 and 5,10,15 time frame.
http://www.mutualfundobserver.com/search-tools/accipiters-miraculous-multi-search/
BERIX
Berwyn Income
Conservative Allocation
8.2 APR % 20 years
-13.0 Maximum Draw down
2009-02 Date ?? not sure of time length but one of best in category
6.0 Standard Deviation
2 Risk Group Conservative Allocation
5 Best return in Conservative Allocation in all time frames 1-20 years
20 Year Record with little management turnover
http://quotes.morningstar.com/fund/f?t=BERIX®ion=usa&culture=en-US
BERIX Close to your current asset split with convertibles and preferreds in place of some of your equity %.
At least look at target maturity bond ETFs for a significant portion of your bond allotment (unless you already are in them). You might be made whole at maturity.
25% cash might be a good idea this quarter (perhaps up to the mid-term elections), but you need to average in to equities with some of your cash sooner or later, perhaps the dividend ETFs, considering your risk aversion. (Or you can put it in Berwyn.)
VWELX is limited to existing investors, company retirement plans (401k, etc.) with possible restrictions; but did close to new investors in March, 2013. Perhaps still available within Vanguard directly if one has an account there.....we do not; so I am not familiar with that circumstance.
So, what is your goal, an acceptable risk portfolio to grow your wealth 15 years from retirement or a sleep easy risk level because you already have the funds needed for retirement if you just keep principle plus keep up with inflation? To be honest, 1.1M sounds pretty good now, but it won't be all that great retiring with that in 2029 when you still may have 40 years to live.
You may have to better understand your goals and your retirement needs and maybe accept that a draw-down is part of investing long term. 15 years out you may need to accept that fact. 10 years out recalculate where you are. 5 years out of retirement - you need to reassess again.
But even if Vanguard had "closed" Wellington, it generally keeps its funds open to investors with $1M portfolios ("Flagship" investors). That said, investors who have access to funds that Vanguard has closed (either because they are Flagship investors or because they already have open accounts) are often limited to $25K investment/year. See, e.g. PRIMECAP: https://personal.vanguard.com/pub/Pdf/sp59.pdf?2210083223
With respect to the original question - I think that 40% equity is too low for someone 15 years from retirement. For example, using the old rule of thumb of (100 - age) for equity, that suggests 50% in equities. (The newer version is (110 - age), which indicates 60% equity). Another rule of thumb (these are all old "rules", take them for what they're worth) is a fairly static 60/40 in retirement with a 4% draw down. The point is not that these particular rules are good for every situation, but that even in early retirement a 50-60% allocation in equities may be prudent. 15 years from retirement suggests at least that much.
That said, VWELX seems to be a good suggestion - it is at the conservative end of these "rules of thumb", and a fine fund. If one does want to go more conservative, I agree with the suggestions made by others; Berwyn Income and Wellesley Income are excellent choices.
Finally, let me do one calculation: draw down. If we assume that Willmatt72 is keeping 25% in cash, the max draw down of the portfolio is only 75% of the max draw down of the remainder of the portfolio (the 25% cash having 0 draw down, and in fact earns a little interest).
Using the figures Charles provided, a pure Wellington/cash portfolio would expect to draw down less than 25% (barely - about 24%) based on its Feb 2009 "worst case" (weighted 3/4) and 2009 interest rates (about 2%, weighted 1/4). The "worst case" draw down for BERIX/cash (75/25) might be around 9 1/2%
(Late 2009 rates: http://www.consumerismcommentary.com/savings-account-interest-rate-roundup/)
First, it has been stated here at MFO that this type of interchange is dangerous among strangers, especially on the internet. So, I'll pretend we're, face to face, at the Mutual Fund Bar and Grill just down the street, having a casual chat; and we're playing "Devil's Advocate" with our portfolios.
You noted:
1. "I'm just curious about your thoughts about what kind of risk is acceptable for a 49-year old about 15 years from retirement with a $1.1 million portfolio.
2. I have very little debt (owe $120,000 on a mortgage on a $425,000 condo near Boston).
3. Personally, I don't believe it makes sense to take any unnecessary risk so I've been about 40% bond funds, 35% equity funds, 25% cash.
4. One of my goals has been to generate some income to help pay bills, etc.
5. But I'm equally focused on capital preservation. Losing 25% of principle in one year is not acceptable to me at this point."
>>>1. Our house is retired, so without prospect of inbound cash flow (no input to previous 401k, 403b, or Roth IRA) from active employment. Your house still has active cash flow from employment. This may help support your thoughts toward a moderate allocation mix for your investments; as that if the equity markets did slip too much for your comfort zone, you have the choice of either reducing these holdings or adding to the holdings via a dollar cost averaging (assuming you are doing this with retirement accts on a monthly basis.
>>>2. We're both in the same place with this aspect of running a controlled budget with our households. We have a good grasp of understanding between the wants and needs for our budgets.
>>>3. As you voice your portfolio mix, I eventually reply that your current allocation is very conservative. Of special note is the large cash position; which is effectly dead money if in money market or CD holdings. The money is not keeping up with inflation and future taxation. $275,000 of your portfolio is too much to have asleep at the investing wheel, IMO.
>>>4. Income generation goals. I mention that in this equity-centric investment world; most folks think about bonds or related (dividends) as income producing. This is likely true from a yield viewpoint; but not so if the bond/asset value is declining. Then the "income" could be moving backwards. I explain that our house views income from whatever method as the positive return on the invested monies, period. We care not whether the income is from a yield/dividend or the appreciation of the underlying value of the investment. Tis all positive cash flow to the accounts. An offered example was our investments into the high yield bond sector in early 2009. Wow!; look at those yields in the upper teens.....well, those yields faded really fast as money flowed back into the HY bond sectors. We didn't care about that, as the underlying values of the bonds was moving upward at a fast pace. Technically, we gained "income" from both ends of the investment.
>>>5. Capital preservation. Yes ! Not just for the older folks; but perhaps of more consideration for the older folks. 'Course the critical point here is whether one sells at the wrong time during a period of fear. Making up the value of losses in such a period is a problem for the young investor, too; as that money is now missing. The money will never be in the account again to live the happy life of ongoing compounding, a most profound grower of money. Yes, a young investor can replace the money with new money from their active employment; but this is not a plan that could be repeated many times without permanent damage to one's investment portfolio into the retirement years.
cman asked a critical question, too. Is this money in tax sheltered accounts? IMO, this would likely have some impact upon where your monies are invested and/or restrict money movements for reasons of current taxation. I am not qualified to comment about this area of investing; as our retirement portfolio is all tax sheltered at this time, so investment moves at our house do not consider current taxes. The cost basis going forward when the IRS requires beginning withdrawals will be what it becomes.
How active do you choose to be in monitoring your portfolio? Would you prefer the active managers in the balanced or moderate allocation funds area? Members here noted a few to review. Or perhaps a few etf's for your own mix?
cman, as well as others here have noted that asset allocation is pretty much impossible to determine for another. I will agree. You have already established a "comfort zone".
A kinda summary: If one invested 50/50, 10 years ago today, in VTI and AGG (not my favorite bond choice, but...) the combined annualized return would be 8%. 'Course one may have encountered what I call the "twitches"; as VTI traveled downward about -55% from October of 2007 through March of 2009. We're not a trading house; but do average about 1/3 of our portfolio moving around in any 12 month period.
We don't hold any "cash". In this equity-centric marketed investment world; our cash is always in a bond fund of some flavor. We view this "cash" placement in this light......If we were to park 25% of our portfolio in cash (I will presume money markets or CD's or other low yield/safe areas) for 12 months, we would calculate a forward loss of -3% for the period from a nominal inflation rate eating away at the value of that cash. We prefer to use a "calculated" risk of investing into a bond fund, index or etf and "take the chance" that the fund will not lose more than 3% in the same time frame. If this would happen, we are no worse off than the cash position would have returned. A large "cash" position for our house currently is PIMIX. A very narrowly focused bond sector at this time and the fund uses all of the tools available in the goody bag for results. But, we place the manager high upon our list of knowing what he is doing. A slow investment train to view passing by, without a doubt. But, this train just keeps traveling along; slowly and consistent (at this time), not stopping at the switching yards and lossing time (money).
Our house follows our holdings daily with a week ending review. This does not cause us to make quick changes to the portfolio; but does create, at least for us, an intuition as to trends. When we mix this review with what we consider in all other areas globally, this allows us to make determinations about any needed changes. Six weeks ago we were 40% equities; today that number is 15%. Our largest equity holdings are PRHSX and VSCPX. Other equities exist within LSBDX and FAGIX. The equity sales monies moved into TIP and other TIPs related funds available in other accounts. We felt that TIPs were oversold in 2013 and are still needed by pension and related groups. Even the lonely TIPs have a long term average return around 5%. 'Course, these may get further bumps upward depending on how silly events turn with Crimea, especially beginning again, this Sunday.
Our house's opinion is that the 30 year bond market rally still is not dead. Too many overhangs and deflationary pressures exist. But, we will carefully monitor this area, too. As you know; not unlike the equity markets, there are many flavors of bonds, many times moving in different directions.
Now, if only those I know and who ask; "How is the stock market doing...?" would recall that I always correct them to the fact that bonds do exist, too. Without the (larger dollar value) global bond market offerings, few equity companies would be able to do business or exist at all. Be assured that bond areas investors do well, too; over time.
NOTE: I began writing this prior to MikeM and msf replying, and your most recent post regarding your holdings.
Regards,
Catch
I appreciate the time you've taken to offer your input and feedback. I'm going to digest this and other posts this evening when I have more time to myself.
But, doubt I would change much if it were a larger sum. Like you, I want mainly capital preservation while earning a few % better than money markets or short term bonds would offer. We may both live a lot longer than we anticipate; so you don't want to remove risk (and potential growth) completely from the mix.
Edit (@ 3:54)I should have also mentioned inflation as the other big "?".
Lots of great suggestions from the others. Couldn't resist dropping by. Regards
Regards,
Ted
A note about the taxable status of the majority of the monies.
Add this to your list of things to do
Fidelity Personal Retirement Annuity
The above link is an overview with some other internal links and a short video.
This link is for the investment choices within the annuity.
Normally, I am not a fan of annuities; as sold by insurance companies. However, if our house were to inherit a sum of money beyond our current needs, we would fully review the above annuity plan in order to defer taxation. A few notes from my recall about this product......55 fund choices, no brokerage feature (so no stock, etf, index or other vendor funds available, except the few along with the Fidelity choices). The cost of the annuity is .25% added to the expense ratio of a given fund. No surrender or holding periods that lock up the money at a cost, as is common with annuities. Review the exchange restrictions among the funds; as there are limits as to how often one may move monies around within the annuity.
Fidelity is not the only company to offer a similar plan; but I don't have that MFO discussion at hand and short of time today.
The short term downside for this would be the taxation of the sale of current holdings in order to fund such a plan.
Anyhoo........perhaps something to review relative to your circumstance.
Take care of you and yours,
Catch
Wow! You are presently in a superb position still 15 years away from retirement.
Given the magnitude of your current portfolio, its asset allocation distribution, and your planned savings/contributions, that portfolio will grow with high probability until your retirement date. Unless you anticipate extremely high withdrawal rates, you already have a high likelihood of portfolio survival for a long (30 years or more) drawdown period.
As General George Patton said: “Take calculated risks. That is quite different from being rash.“ You need not be rash in this instance and need not accept any unwarranted risk.
You might want to explore some what-if options, or, after a provisional decision has been made, become more comfortable with that decision by doing a few parametric Monte Carlo simulations. Today, Monte Carlo simulations are readily accessible to an individual investor. Here are Links to two easily used Monte Carlo calculators:
http://www.portfoliovisualizer.com/
and,
http://www.moneychimp.com/articles/volatility/montecarlo.htm
I especially like the Portfolio Visualizer version. Please give it a test ride. However, its inputs are a little more complex than the MoneyChimp version and requires two sets of sequential inputs: a pre-retirement period and a during-retirement period.
The MoneyChimp simulation links the two segments into a single Monte Carlo simulation. It permits a user to specify estimated portfolio returns and volatility (standard deviation) both pre and post the retirement date. You might want to start your Monte Carlo work at MoneyChimp.
Please exercise either simulator to explore a range of what-if scenarios that are within your risk tolerance zone. A major output from each Monte Carlo case explored is an estimate of portfolio survival probability at the end of the study period. By changing the inputs you get to test sensitivity of this end result to whatever portfolio asset allocation and performance statistical assumptions you wish to examine.
After a bunch of runs, you can decide what asset allocation and what portfolio drawdown level puts you into an acceptable risk zone. I might be happy with a 95 % likelihood of portfolio survival whereas you might demand a 99 % success probability. You get to explore various asset allocation percentages, the returns statistics, and the drawdowns that allow you to reach your goals. Monte Carlo analyses is easy, informative, and fun to use.
Good luck. You have already been blessed with good fortune given your inheritance.
Risk can never be entirely eliminated in the marketplace, but it can be controlled. Complete outcome certainty is impossible. That uncertainty is precisely within Monte Carlo’s wheelhouse. It was designed to precisely address uncertain outcomes.
You are doing the necessary fact-finding task. Monte Carlo simulations will allow you to put your fact-finding into a likely outcome context; it’s just another tool to tilt the successful retirement odds a little more in your direction. It should increase your confidence level.
As a general rule, I do not believe that financial advice casually offered over the internet is either reliable or trustworthy. I am not offering advice here. I am simply giving you an alert that Monte Carlo tools are accessible, are easy to use, and might help you in making your investment decisions. Freedom to choose your toolkit is always in your corner.
Best Wishes.
Yes - of course. However, I thought in this instance the advice offered above by many was uniformly of very high quality. If anybody's trying to persuade willmatt23 to take any particular actions with regard to his assets, I missed it. The reflective nature and overall quality of advice above is, IMHO, a tribute to all those who chimed in.
We're only do'in the investment suggestion box thing.....
sug·ges·tion
/sə(g)ˈjesCHən/
noun
suggestion; plural noun: suggestions
1. an idea or plan put forward for consideration
Any and all disclaimers, and "hold harmless" notations should already be understood in advance.
Thank you for agreeing with my “general rule”. It is surely not an original thought, and not many would challenge it. When making that statement, I cast no aspersions about the quality or well intentions of the many fine MFO posts or posters on this topic.
But although I basically trust MFO participants, I make no investment decisions without completing some verification work.
As you know, “Trust, but verify” is an old Russian proverb that was made famous by President Ronald Reagan when confronted by Russian duplicity. Although I trust the MFO membership, that membership sometimes ventures opinions and assertions without citing references or analyses. Verification is a mandatory function.
That’s why the primary thrust of many of my submittals identify and emphasize investment tools, not my opinion on a specific investment. An expanded toolkit should help in the overarching investment decision making.
The Monte Carlo method is an outstanding tool when exploring retirement options. It was originally developed by Stan Ulam and John von Neumann in the late 1940s when addressing thermonuclear weapon issues. It was mostly not available to individual investors until the early 1990s when Bill Sharpe generated a version for his Financial Engines website. Today, just about everyone can access a respectable version that is user friendly.
I hope Willmatt72 and all you guys look into the tool and use it to gain insights that a few Monte Carlo calculations can provide. Today, thousands of cases can be randomly explored in just a few seconds so parametric and sensitivity evaluations are easily completed.
Best Wishes.