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Please convince me that this strategy is wrong

Started by numbers, September 15, 2018, 07:34:35 PM

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numbers

I am very recently retired, and just now read the FS "Build a step stool, not a CD ladder" article.
I think that strategy for the FI couple may be too conservative.

Here is what I am doing, I know that most if not all Advisors would not agree, but convince me that I am wrong.

I hold, in cash and cash equivalents, 4 to 5 years of money I would need from my investments to cover living expenses. Thats just over 6% of my investable assets. The remainder of my investments are entirely invested in equity ETF's. 

When the next downturn comes I won't care because I won't need to sell anything unless it takes more than 4 or 5 years to recover.
Even then I could cut expenses, or even borrow a few bucks to live on while waiting for the recovery.
The 2000 down turn, recovered in 3 years, the 2008 downturn, the second worst ever, recovered in less than 2 years.

I know that in the long term the market always goes up, and that under normal conditions it goes up more than it goes down, so I am not concerned when it goes down, I wont be jumping off of any bridge. In fact because I know this I want to stay fully invested to keep growing the pot (for the kids, why not, I want to help them both FIRE by 50 yrs old).

I realize that if a person cant deal with a down turn my strategy would not work for them, but for me I think it's ok.

I'd like your opinions, am I wrong, what have I failed to consider?

Sam

Sure. Where are you are wrong it is that you have never been through a downturn as a retiree.  Therefore, you don't really know your true risk tolerance  until it comes. The number one goal as a retiree is to never lose money. Because once you start losing money, the pressure to go back to work increases.

The CD stepstool is to be utilized for your cash. It is not a overall investment strategy. It is the most logical way to go about taking a vantage of maximum short-term interest rates with the shortest duration. It makes no sense to get only a slightly higher return but locking your money away for years and years and years.

I say do whatever you think feels right. Nobody knows your entire situation, especially since the numbers have not been revealed. Good luck!
Regards,

Sam

numbers

I did not mean to imply that the step stool should be an overall strategy, in fact the ready cash in my portfolio includes a step stool set up exactly as described in the article (and I did it on my own, not having seen the article until today :))  - seeing it in print, that makes me feel I did well).

I think my strategy works for me because, I expect I would react to a downturn as a retiree exactly as I did when I was working.
I did not like it but I did not sell anything, kept pounding dollars into 401k and IRA knowing the turnaround was on the horizon. Now I would just sit tight and wait. I will not have lost anything if I do not sell anything.

It just seems that when we have years like 2013 and 2017 so much money is left on the table if one is not fully invested.

Anyway, I guess the test will be coming with, I hope, a downturn not as severe as 2000 or 2008.


defomcduff

Quote from: Sam on September 15, 2018, 07:50:34 PM
Sure. Where are you are wrong it is that you have never been through a downturn as a retiree.  Therefore, you don't really know your true risk tolerance  until it comes. The number one goal as a retiree is to never lose money. Because once you start losing money, the pressure to go back to work increases.

Agreed.  The biggest risk to your strategy is the psychological tendency to panic once you start seeing your nest egg reduced in a downturn.  You want to make sure the risk portion of your portfolio is small enough so that you can truly weather any storm and not panic.  Such a high fraction of equity seems risky from that perspective.  No right answer here, just a reaction.
DeForest
Boston, Massachusetts

Young And The Invested

It's about your personal risk preference and ability to control your behaviors when the going gets rough. If you have the discipline not to act counter to your personal best interests when prices in the market sour, you'd likely be fine weathering the storm. Your cash and cash equivalents derisk a bit but the main risks I see are: (1) being forced to return to work and hoping there's a job available to you as you will have been out of the workforce for 4-5 years and (2) not being able to take advantage of the downturn by putting more capital to work for you at cheap prices.
https://youngandtheinvested.com/

numbers

Right, one of the things that bothers me most is not having cash to invest in a downturn. But I can't have it both ways:

As I said I believe its better to be fully invested because more often than not the market is going up and I am participating, that also means less frequently when it is going down I cant buy more, so I don't benefit then. Net net I should come out a winner as the market  goes up more than it goes down  - and in the long run it always goes up.

Luckily and thankfully, I don't think I would ever have to go back to work, my nest egg would have to decline by 70% before I approach the point where it would affect my lifestyle.

Young And The Invested

#6
Or you could like my dad does and just contract part time.  That way he's got flexibility and supplemental income he considers lagniappe.  Negates both risks if you're fine with working part-time.
https://youngandtheinvested.com/

numbers

Just an FYI that might help someone...

This is an excerpt from a Market Watch article today.
Its why I am not tempted to sell in a downturn.

The greatest danger is being out of the market
From 1996 through 2015, the S&P 500 returned an average of 8.2% a year, yet if you missed out on the top 10 trading days because you were trying to time the market, the returns shrank to just 4.5%. And If you missed out on the top 20 trading days, your returns came in at just 2.1%.

Jsmith

Quote from: numbers on September 18, 2018, 01:34:13 PM
Just an FYI that might help someone...

This is an excerpt from a Market Watch article today.
Its why I am not tempted to sell in a downturn.

The greatest danger is being out of the market
From 1996 through 2015, the S&P 500 returned an average of 8.2% a year, yet if you missed out on the top 10 trading days because you were trying to time the market, the returns shrank to just 4.5%. And If you missed out on the top 20 trading days, your returns came in at just 2.1%.

Wow this is a crazy stat that I have never heard of, but I will absolutely be using when talking to others about timing the market.

Bonsai

I don't think you are wrong, I think you are right.  I currently hold $300,000 in cash for a downturn or about 4 years of living expenses (no debt) and about 8% of my liquid portfolio (real estate excluded).  In addition, I have a small military disability payment, a middling SSA retirement payment and dividends from my portfolio.  I have lived and invested through the dot.com bubble (2000) and the great recession (2008) and I feel mentally strong enough to keep investing when there is blood in the streets.  I am a big fan of Scott Burns, of Dallas Morning News and Couch Potato Portfolio(s) fame, who wrote:
      "Similarly, people who are well off, people who can easily pay all their bills and taxes from Social Security, pensions and    stock dividends, can afford to be 100% invested in stocks." 
I subscribe to Scott's observation and I am quite happy building the pot for the kids or charities -- when that time comes. 

numbers

Bonsai
I know one day means nothing, but today it was nice to earn just about 1% on 95% of my portfolio instead of on the 60% or 70% typically allocated to equities. Happy to hear from you, as I said almost everyone else does not like the strategy.

Jsmith
Today might have been one of those days.

Jsmith

Numbers,

It very well may have been one of those days. It always bums me out a bit thinking how I'm starting my career (and retirement nest egg) at the tail end of one of the greatest 10 year bull runs. I'm not going to let it affect me though and will continue to stuff my 401k and after tax brokerage account as much as I possibly can early on with limited other responsibilities.

numbers

Jsmith,
Don't give it a single thought, just pound that money in there. The fact that you are starting out so young, and already know what your doing will mean you will accumulate more money than you can even imagine.

I started late, putting money away mostly during the "lost decade", knowing that it had to be invested so that when the good times came I would be participating, they did come with this bull run.  Even though I started late I have more than I imagined. What might have been if I started in my 20's... mind blowing.

Also remember it will seem like slow going for many years, then all of a sudden you'll hit "critical mass" , the base will be big and then even "normal" returns will equal big bucks, and when you get one of those 20% or 30% years, its crazy, just crazy good.

And forget the down turns, in the accumulation phase you want a down market cause you're buying cheap.

Your situation makes me wish I had it to do over again.
Best of Luck


Jsmith

Numbers,
Thanks for the encouragement. I'm definitely trying to flood as much money as I can in all of my accounts, and if the market does end up pulling back some, then I will put even more away.

Best of luck with your continued saving too and hopefully there's some more good times ahead for all of us.

Bonsai

Jsmith:
I echo Numbers observations.  Do not lament future down periods.  Dollar-cost-averaging (DCA) is a great way build a portfolio for a newer investor.  Also, Warren Buffett advises one to buy when there is blood in the streets.  I don't argue with Mr. Buffett.