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February 20, 2013

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deegee

Syd, I am not that concerned about the bond funds I own dropping in value because their monthly yields move in the opposite direction as their prices. So if the value drops then their monthly dividends will rise again and that is fine with me.

With stocks, I have also adjusted my targeted stock/bond split in my IRA down from 55/45 (where it had been since the 1990s) to 50/50. As I move closer to being able to gain unfettered access to my IRA (in 10 years), I want it to be slightly more conservative over time. My taxable accounts are already bond-heavy because I use their monthly dividends to pay my bills (mortgage paid off in 1998).

Executioner

Nice work on paying off the mortgage! Too many bloggers compare the potential savings from mortgage payoff against the long-term historical average in the stock market, which is not correct because of the different risk characteristics of those two asset types. In your case you are correctly comparing the mortgage savings against other debt/cash assets (CDs, etc). Sounds like you made the right move in both 2008 and 2013.

retireby40

Paying off the mortgage is a good move. I'm a bit high on equity right now because bonds are just so unattractive. I need to move more to bonds or equivalent soon. Reviewing your asset allocation periodically and sticking to it is a good way to stay level headed.

Retired Syd

deegee: It does seem like there's no better time to get a little more conservative if you've been waiting for a good time to do that, doesn't it?

Executioner: It probably was a good move in 2008. But even if it winds up not being the perfect move now, I'm ok with that. There is the feel good aspect to consider.

RB40: You make me think of another good way of looking at this. It's kind of like I'm investing in a bond that will earn no less than 2.875% interest. Undoubtedly, the rate would have gone up in the future (it's a variable rate), so really, the "bond" interest I'm "earning" is even higher in the future years (as my rate would have increased.) A good way to "invest in bonds" when real bonds seem so unattractive right now, right?

Rick

Hi Syd (and Doug).

Belatedly, too bad about the Super Bowl, but the 49ers had a great run.

I used the 2008-2009 melt down to set an asset allocation that "fit" our risk tolerance and life objectives. I created a spreadsheet that has our maximum and minimum permitted allocations for cash, fixed, equity, and alternatives. That way, not matter how uncertain or confident I am in any environment I have my road map. In case anyone is interested, our "standard" allocation is 7% cash, 38% fixed, 47% equity, and 8% alternatives.

An observation on the fixed portion --- we view that more for safety than return (especially with current rates). We prefer to take our risk on the equity/alternative side, and use the fixed to sleep a bit easier (and have some dry powder in the event of cash needs/ reallocation).

Take care.

New at this

Great post....

Yep, I hate the pay-off-the-mortgage question because it pits my emotional desire to have no debt against my analytical side which suspects that borrowing money at 2.875% is going to feel extremely attractive by the year 2020, 2025, or so....(e.g. how can rates, which are affected by inflation, not go up when the Fed is doing so much printing...?) But similar to you, I landed on the "own our home free-and-clear" side, but this nagging feeling tells me I'm being a fool.....

Also have another observation on the allocation topic. If you log in to Fidelity's monte Carlo simulation tool, you'll find that you actually do a little better overall with a 50-40-10 allocation than a 60-30-10 when you're making annual withdrawals at the 3% level....Not exactly intuitive but that's how it played out in history......I've decided to accept this result, which also has the emotional benefit of making the roller coaster ride less exciting at moments like we all enjoyed in the 2009 timeframe....But would be happy to hear if other sources disagree with the Fidelity results as I'm betting my future on it....

All the best, New

Canadianmdinvestor.wordpress.com

You seem to choose your pictures for very specific reasons.

What is the symbolism for this one?

Risk? Is this a "personal pic" Just curious.

PS. Couple comments.
1. No debt is good. Removes a great source of stress.
2. I definitely agree that timing the markets is futile.

Great blog...

Retired Syd

Canadian MD: Great question! I don't always have a photo in my arsenal that exactly hits the mark I use only my own photos now, rather than on-line stock, so that limits me a bit. After I write the post, I go through my photos and look for something that I think might touch on the theme--this time I was thinking "do-over".

When I came across this one, I thought this was a little girl that kept wanting to do this over and over again, "Let's do that again! " I can hear when I see this photo.

Also it looks really scary to me, kind of like the stock market . . .

Retired Syd

New: So my mortgage was a variable rate, no way it would still be 2.875% in 2020 or 2025, at least that's my guess. So at least I can remove that worry from the equation.

So on that Monte Carlo simulation, does it matter what age you are--I'll have to go try it. In other words, do you get a different allocation if you think you've got 50 years to go vs. 30?

Retired Syd

Rick: Nothing better than a melt-down to teach you what your risk tolerance really is!

New at this

Syd - Haven't ever focused on the age question as always run it for 50 years (which intuitively should favor more equities)....But would love to get your, or anyone else's, take on rationale for going much above 50% equities....Model seems to deem it critical to not be much lower than 50%, but benefits peter out as you go much above....

deegee

I can't begin to imagine what it would be like to have a mortgage at 3%. My original mortgage, taken out in 1989 for my co-op apartment, was a 5-year ARM at 10.75%, later refinanced to a 6% 1-year ARM in 1992. It crept up to just over 8% by the time I paid it off in 1998.

Another story I like to tell about mortgages is the one my friend got in late 2011 for his co-op apartment. His mortgage principal was TWICE what mine was but because his interest rate was so low, his monthly payment was only 4% more than mine!

Cyclesafe

But the bucket allocations still reflect one's predictions. As as with gambling, being happy about having a winning bucket depends on being able to ignore the more numerous losing (or winning less) buckets.

And investing to risk tolerance is supposed to take care of the emotional element.

I've wondered why home equity isn't normally considered part of an investment allocation. For many people it is a significant portion of their net worth and is a (partial) diversification from other vehicles.

Bob Lowry

Isn't retirement a constant series of do-overs? Whether financial, emotional, creatively, or relational, this is the time of life when we are free to readjust as we see fit.

BTW, I wonder abut the bio picture at the top of the blog...the one with you in a floppy hat and the Playboy bunny symbol in the background. Is that a story?

Retired Syd

Bob: That's our annual pilgrimage to the Playboy Jazz Festival at the Hollywood Bowl. It's probably time for a fresher photo . . .

Cyclesafe: You're right, usually home equity is not considered, but I do sort of consider it, both in my "bond investment" argument above and also as a "Plan B" if I need to tap into it. I guess they (whoever "they" are), don't consider it because many people won't touch their home equity.

deegee: Wow, those are some scary numbers!

New: So my allocation might be based on pretty dated data. The Bengen models (summarized here: http://www.retailinvestor.org/pdf/Bengen1.pdf) show the sweet spot between 50 and 75% equities. 60% is kind of arbitrary, in that 75% "feels" too high to me (as 70% did in 2008/9) and 50% feels kind of low to me in today's interest rate environment. (60 is closer to the currently revised 110 minus your age approach in my case.)

I don't view it as much as a science, really. If I'm off, I have the equity in my house to tap into in later years. I doubt I'll want to live in a large 2-story house into my 80's and 90's anyway (if I could even make it upstairs to bed anymore!) And on my 100th birthday, 17 years of living expenses will be trapped inside the equity in my house. So, I've got a back up plan if this current 60% was off: reverse mortgage, sale and downsize, sale and rent, etc.

But I figure I'll be down to a 50/50 allocation in 10 or 15 years anyway, we'll see . . .

New at this

Thanks for the quick response, Syd. Can't open your attachment?, but per your earlier urging, I read Bengen's latest book (the title is something like "Conserving Clients Portfolios") where he shared all his research.... Had to read multiple times to really digest...., but his punchline seemed to align to Fidelity's monte Carlo simulation results which directionally imply you better have a Minimum of 50% equity, but benefits from going much beyond that kind of Peter out.....

I think your rationale makes sense for going with 60%....though my wobbly knees have landed me on 50%.....

Let's talk again about this during the next crash or bout of irrational exuberance... Depending on which one plays out first, the other can gloat for having gotten it right....

All the best, New

dgpcolorado

I must say that the news reports that suggest that the outflows from stock mutual funds over the last five years are slowing or even reversing has me somewhat concerned. It isn't exactly news that average investors are notorious for piling into the stock market at the highs and bailing out at the lows. So, this news might be a pretty good indicator that the market is topping.

However, since I am not a market timer, I try to ignore the impulse to do anything and just let what happens happen. Having a big slice of dividend paying stocks and funds makes it easier to ignore price fluctuations. Not to mention decades of experience with both bull and bear markets.

Syd, I've mentioned this to you before, but on the subject of asset allocation it is useful to consider that Social Security is an annuity that can be considered "fixed income". If people factor in the value of future SS payments as part of the fixed income portion of their portfolio they likely will find that they aren't as aggressively allocated as they thought.

On the other hand, I think it is better to ignore the equity in one's house unless the plan is to downsize and convert some of it to more liquid investments. The house is best considered to be a place to live not an investment. It does serve as something of an emergency reserve: if all else fails one can sell the house and use the equity to live on for a time. But I suppose one can consider a paid-off house as "yielding" whatever it would otherwise cost to rent a similar abode, less carrying costs such as property taxes and maintenance.

Retired Syd

DGP: The Social Security issue is a good point. If your Social Security checks cover, say 30% of your living expenses, that's like having 30% of your assets in TIPS (since it's roughly inflation adjusted). Now you're only talking about the other 70% of your living expenses coming from your nest egg. If you viewed it on the whole, and you wanted say an overall 50/50 split, you can "afford" to be a little more aggressive on your remaining assets; a 30/70 split on those assets, gets you roughly 50/50 when you take SSI into consideration.

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