Author Topic: Meditations on Asset Allocation and Early Retirement  (Read 3012 times)

msilenus

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Meditations on Asset Allocation and Early Retirement
« on: July 06, 2013, 01:51:29 AM »
Stocks historically offer the greatest returns of any asset class, and diversification is trivial to achieve today, removing some of the risks that have plagued the asset class historically.  Sometimes an investor can beat stocks with real estate because leverage is so easy to come by.  We'll lump these two classes together with stocks and just say equities.  Most gamblers/investors would, naturally, wonder why you don't just dump all your money into equities, and shun commodities and bonds?  This maximizes your Expected Value (EV).  Our well-meaning friends, the financial advisors, come along and tell us that if we balance our portfolio across stocks and bonds, and rebalance diligently, we can preserve much of the gains, and remove most of the volatility.

Let us consider a balanced (in the traditional sense) asset allocation as a baseline.  Roughly speaking, a person opting for a portfolio with no fixed-income assets is risking having their retirement delayed by X years with respect to baseline, but they also have a chance of retiring up to Y years earlier, with the upside potential being somewhat greater than the downside.  That sort of proposition is frightening to someone who is targeting their retirement around the massive fixed-income boost SS eligibility provides, because they might be wanting to exit the workforce urgently at that age due to health issues.  Volatility, esp. market crashes, become the overwhelming concern.

To an ER practitioner, the risky proposition is more attractive partly because, ironically, there is less real urgency to exiting the mainstream workforce.  If you retire and the market collapses promptly, you're still young, not very detached from the workforce, and wealthy.  You can reenter the workforce as options open up, and rebuild very fast through part of the recovery.  If the market takes longer to crash, your capital gains between retirement and the next downturn will cushion the downturn for you.  These risks are also easy to mitigate through the use of emergency funds.  The spectrum of outcomes ranges from mild setback to roaring success, so risking a mild worst case scenario to maximize EV is more attractive than it is for a typical customer of financial planning services.

That’s not to say that an ER practitioner is without catastrophic risks, but the worst catastrophic risk to the ER practitioner could well be inflation, because it erodes your earning power in a way that could wait until you’re old and/or detached from the workforce to manifest.  Early retirement practitioners need assets to last a very long time –much longer than most people, so this consideration suggests an equally valid reason to avoid fixed income instruments (bonds) as early retirement vehicles.  Real estate is a famously excellent inflation hedge.  Stocks are also inflation-linked, because their prices are backed by earnings or notions about earnings.  So aggressive equity allocations might even be less risky in the very long term.

I had been thinking until recently that the lack of bonds in my portfolio would be an historical anomaly that I would correct when interest rates started to rise again.  Now I'm starting to wonder if bonds will ever make sense for me before I start getting close to a traditional retirement age, if then.

germandude

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Re: Meditations on Asset Allocation and Early Retirement
« Reply #1 on: July 06, 2013, 03:46:53 AM »
If we ever get to the point like in 1999/2000 when bond yields are higher than earning yields of companies, it is for sure better to switch a part of your portfolio to bonds.

fiveoclockshadow

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Re: Meditations on Asset Allocation and Early Retirement
« Reply #2 on: July 06, 2013, 05:16:48 AM »
I think adjusting standard financial advice to better suit FIRE, specifically accounting for FIRE folks being able to opt to re-enter the work force, is a sound thing to do.  And you outline the trade offs well.

However, I think your interpretation on bonds is a tiny bit naive.  What you are saying matches my line of thinking for a long time, but recently I've realized I'd over simplified.

Considering bonds as "fixed income" and at risk of inflation is an over simplification.  That trends the thinking towards infinite term bonds in an inefficient market.  The reality is you own a variety of different termed bonds and you are buying at the markets estimates of future inflation.  What you might lose on the upside of the inflationary cycle you regain on the downside.  Also it is important to realize that bonds are a good deflationary hedge.  Deflation wreaks havoc on equities and is a real risk.  In fact, we just went through it - though it was a bit hidden.  The government bought up bonds like mad to prevent true deflation, but the effect on bond prices was of course similar since the government was increasing demand and so of course bonds shot up.  So step one - modify or at least better refine your understanding of what bonds represent.  They are actually rather complicated financial instruments - as it has taken me some time to appreciate.

Second realize just how much risk reduction a small amount of bonds can add to a portfolio.  Mixing in bonds up to about 25% will exchange about 5% of standard deviation for 1% of return - that's a lot of volatility removed for quite low cost.  So small amounts of bonds (10% to 25%) is probably a very sound thing for even someone in the accumulation phase to allocate.

Third, realize there is a significant difference between randomly throwing bonds into a portfolio and actually re-balancing that portfolio.  This is the heart of portfolio theory and performing re-balancing is what allows you to add in bonds in moderate amounts while not impact returns nearly as much as simple algebra would indicate.

Lastly, you mention that emergency funds mitigate risk.  Keep in mind an emergency fund is just an asset allocation, but in this case allocated to cash which returns even less than bonds.  Drawing from an emergency fund during an equity slide is in fact identical to rebalancing in portfolio theory.  So what you propose is already a weaker ad hoc form of asset allocation and re-balancing.  Probably better to formalize it and use a higher yielding asset (bonds vs. cash) as your hedge.

Anyway, thanks for the thought provoking post.  I keep trying to evaluate portfolio allocation and the question of re-entering the work force is one that has to be considered.

Oh, one last thing, Bernstien has recently tossed around the idea that SS can be viewed as a bond asset when determining asset allocations but he seems to hedge about whether that is really the best way to consider it.  It of course can't be rebalanced on its own, but it might be applied as a correct to simple rules of thumb like "your age in bonds".  And of course those rules of thumb probably need to be modified for FIRE anyway.
FIRE is like playing an old Sierra game, save early and save often...

msilenus

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Re: Meditations on Asset Allocation and Early Retirement
« Reply #3 on: July 06, 2013, 07:55:13 PM »
Second realize just how much risk reduction a small amount of bonds can add to a portfolio.  Mixing in bonds up to about 25% will exchange about 5% of standard deviation for 1% of return - that's a lot of volatility removed for quite low cost.  So small amounts of bonds (10% to 25%) is probably a very sound thing for even someone in the accumulation phase to allocate.

Thanks for the thoughtful reply.

Personally, I think that 1% is a large delta when talking about returns.  If there's little value in reducing volatility, why would I pay such a dear price to reduce it?  Similarly, I don't think 5% is a large amount to reduce volatility by.  (Furthermore, I think that if you want a strategy that tries to mitigate volatility, you'd really want more than that.  And thus we creep toward a traditional strategy, which gives up 2-3% of returns and gets exposed to inflation risk.  Which perhaps motivates a strategy that seeks to embrace and tolerates volatility without mitigating it at all.)

You're absolutely correct to point out that emergency funds are an AA decision.  Clearly, they earn interest, and thus exist on the fixed-income continuum.  Viva.  Yet I think there's still a qualitative difference in that I'm groping toward a system where they are related to your inelastic spend rate and a guestimate of how bad an economic crisis can be for you.  That differs from a traditional AA, where they make up a fixed fraction of your total 'stache size, regardless of how large your 'stache grows.  To get numerate, you're talking about a 25% (or more, probably growing as you age) mix that includes long-term bonds, and I'm floating a 4% (or less, probably shrinking as you age) mix that consists of very short-term instruments.

I'm tentatively claiming that by keeping such an enormous fraction in equities, a) you aren't any worse off in the face of catastrophes if you have a small liquid backup, b) as time marches forward, your net worth will more quickly approach the point where you don't even need to worry about economic catastrophes, and c) you get a better long-term inflation hedge, which is really what you should be afraid of when you're proposing to retire on assets for more than half a century.

Not Investment Advice.

George_PA

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Re: Meditations on Asset Allocation and Early Retirement
« Reply #4 on: July 06, 2013, 08:55:55 PM »
msilenus one of the main advantages to have at least some bonds to take a bit of the wild variations out of stock equities.  If look at this blog posting: http://www.mrmoneymustache.com/2011/06/06/dude-wheres-my-7-investment-return/

MMM goes a good analysis showing that stocks have absolutely crazy and wide varying returns especially in the short term. 

1-year holding periods: Worst: -37% (and it was in 2008!) Best: +52.62%
5-year periods: Worst: -2.35% Best: +28.55%
10-year periods: Worst: -1.38% Best: +19.35%
15-year periods: Worst: +4.31% Best: +18.93%
20-year periods: Worst: +6.53% Best: 17.87%
25-year periods: Worst: +7.94% Best: +17.24%

The returns of stocks become more predictable as the time period gets longer (i.e. the start to average together a steady value).  This is why stocks work so good for traditional old age 401k style retirement.

Most people can achieve early retirement in 10-15 years.  The problem is that 10 years is still a pretty short term period for equities.  Throwing in some bonds into the mix helps get you a steady more reliable return. 

Of course any time you introduce bonds in you will get a lower return, if your goal is simply get the highest return possible ever without any consideration of when you will going into retirement, then sure 100% stocks is the way to go.  Also, I cannot lump real estate in with stocks, they are two completely different things. 

Mostly people when they plan for early retirement cuts expenses and bust their ass working hard to build up enough cash to retire.  They count down the years, the months, and the days until they get their freedom.  If they were in 100% stocks and the market crashed, for me and probably for many people, this would be a really sad and depressing event, like getting your heart and dream crushed.  I don't think you can just brush it off and say oh well, the market didn't time right, lets just go endure 5-10 more years of shit until it recovers.

Instead, me and most people would want to make damn sure that returns or passive income profits were predictable and somewhat steady when planning for early retirement.  Even if this means giving up some return, you need some predictability for planning purposes.  Real estate in my opinion makes for more steady returns than stocks and thus are good to have for funding your early retirement.
 



Khanjar

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Re: Meditations on Asset Allocation and Early Retirement
« Reply #5 on: July 07, 2013, 01:14:27 AM »
My judgement on the stocks/bond debate(specifically with regards to Treasury bonds) is that in the current market environment, there is a serious opportunity cost to going for that safety. Do I want to have bonds in my portfolio? You're damned right I do, but I can't possibly justify them at rates this low.

In particular, I was strongly agreeable to the viewpoint this article espoused.
http://seekingalpha.com/article/1310711-the-30-year-treasury-bond-makes-no-sense-compared-to-dividend-stocks

And another article along the same lines:
http://seekingalpha.com/article/1295031-why-long-term-government-bonds-are-the-dumbest-investment

The entire investing landscape is always changing, and no situation today is exactly equivalent to a situation in the past. In 2007 it was the financial meltdown. In 2000 it was the .com bust. Today's craziness is the incredibly low yield on government bonds, which has bled into all other bond yields. When that situation reverses some, I'll be more then happy to trade out some of my risk, but I will not do it because "it is safer to own bonds" because the S&P 500 yields 2% in dividends alone. I can't stand blanket investing advice like (90 minus age for bond allocation) or that bonds are always good for a portfolio to decrease risk.

fiveoclockshadow

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Re: Meditations on Asset Allocation and Early Retirement
« Reply #6 on: July 07, 2013, 05:29:20 AM »
My judgement on the stocks/bond debate(specifically with regards to Treasury bonds) is that in the current market environment, there is a serious opportunity cost to going for that safety. Do I want to have bonds in my portfolio? You're damned right I do, but I can't possibly justify them at rates this low.

In particular, I was strongly agreeable to the viewpoint this article espoused.
http://seekingalpha.com/article/1310711-the-30-year-treasury-bond-makes-no-sense-compared-to-dividend-stocks

And another article along the same lines:
http://seekingalpha.com/article/1295031-why-long-term-government-bonds-are-the-dumbest-investment

So keep in mind both articles you linked to were for long term treasuries and the asset class most recommended for diversification in a portfolio is actually short to medium term bonds (up to five years, both commercial and government). 

The second article is also poorly written, the author doesn't seem to understand QE and deflation have the same effect on bond prices.  He could quite likely be correct they are a bad investment right now, but his justifications for that claim range all over the place, some are wrong and some are even self contradictory!

The first article has two good points.  The first being that for bonds the best forecast of absolute return is what they yield right now, and they aren't yielding very much.  The second being that long term bonds can be very speculative because of long duration.

I share your concern about treasuries being over priced right now.  It seems hard to argue they aren't over priced when there is a fiscal policy backed by unlimited government funds designed specifically to increase their price!  On the other had a strict asset allocator would suggest reading and responding to such articles risks attempting market timing.

Personally I'm still undecided.  I've got only about 5% in bonds at the moment and even if I keep that allocation I need to transact them as most of that is in a LT treasury in a taxed account (wrong specific type of asset in the wrong kind of account).  I'd also like a target allocation slightly higher (10-15% probably) but it is hard to decide to do that right now for the reasons outlined.
FIRE is like playing an old Sierra game, save early and save often...

Khanjar

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Re: Meditations on Asset Allocation and Early Retirement
« Reply #7 on: July 07, 2013, 06:04:48 AM »
Well, even for short to medium term bonds, the payoff is even worse, raising the red flag even higher against -any- bonds for us not FI'd or that near to it. I mean, sure, it's technically better on a yield front compared to cash, but A: as stated before I'm locked into them(opportunity cost of flexibility), especially should interest rates rise and thus the face value fall(I've never dealt with bonds so correct me if I'm wrong on that) and B: As I'm currently not FI or near it, and I'm still fully employed, I don't need the security of it with respect to the next couple of years from that standpoint. When interest rates do start to come back up I can add into them with the money coming in from my employment.

fiveoclockshadow

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Re: Meditations on Asset Allocation and Early Retirement
« Reply #8 on: July 07, 2013, 06:52:03 AM »
Well, even for short to medium term bonds, the payoff is even worse, raising the red flag even higher against -any- bonds for us not FI'd or that near to it.

Worse than what is the question.  Three years ago I bought a house and I paid an interest rate protection premium by purchasing a 7/1 ARM rather than a 1/1 ARM because the interest rates were "insanely low" and "can't go anywhere but up".  Nonetheless two years later I was refinancing to capture an even lower rate.  And I could have waited about another year to do that.  So that was a three year window from "interest rates have nowhere to go but up" to interest rates actually continuing to go down.

You have to understand that when folks look at an interest rate on a bond and say "too low" what you are really saying is "the bond market is inefficient and overpriced".  That's a market timing call, and thus risky.  You know why 5 yr bonds returned so low three or four years ago?  Because the market expected rates to stay low and the market was correct.

Shorter term bonds reflect either immediate fiscal policy or forecasts of fiscal policy in the near future.  Long term bonds reflect the markets estimates of inflation.  So, when you say "oh my god, inflation!" but the long term bond market says "no one is concerned about inflation" you have to ask who is right.  The fact that the yield is low doesn't necessarily mean that real return is low - the market is saying it expects low inflation for a long period (and of course the market could be very wrong, or you could be).

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I mean, sure, it's technically better on a yield front compared to cash, but A: as stated before I'm locked into them(opportunity cost of flexibility), especially should interest rates rise and thus the face value fall(I've never dealt with bonds so correct me if I'm wrong on that)

If you are thinking of bonds as "locked in" then you don't have the right perspective.  You are entirely correct about their value falling when interest rates rise.  They key point though is if you compare their variation, even in an inflationary environment, to stocks it is much lower.  And of course their real return is as well.  They may fall in value, but equities are much more likely to suffer a much larger fall.  The two main points about them is they are lower risk/return than stocks and even more important often uncorrelated to stocks so they are and ideal component to a portfolio, even in small amounts.

In a cash position you are still making a bet on the shape of the yield curve, you've just chosen the short term end of it.

There is one important exception, you can find cash options in various incentive accounts (high yield checking, debit cards and so forth) that return way more than short and even medium term bonds right now.  There are limits to how much you can invest and many require some additional hassle (direct deposits or using a debit card).  But if you are going for a low asset allocation in a modest size portfolio they really are something to look at.

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and B: As I'm currently not FI or near it, and I'm still fully employed, I don't need the security of it with respect to the next couple of years from that standpoint. When interest rates do start to come back up I can add into them with the money coming in from my employment.

Well, yes, that's my dilemma and I think a good point raised by the OP.  But the issue is that even if interest rates go up will there actually be any better real return than now?  Not a forgone conclusion.  Interest rates were quite high at the end of the 70's, but then the early 80's came.  Interest rates looked just too low mid-2000s but then here we are today.

I'd say for a FIRE person it is best to completely ignore the concept of bonds returning a fixed coupon for a fixed period of time and instead simply view them as another asset class that returns something like a dividend and has a price that varies as well.  The variation is lower than equities and significantly uncorrelated from them.  The various discussions about the Fed or inflation just confuse the issue in most cases.  Those same issues affect equities as well but with looser coupling.

So the remaining question then becomes, at any given point, what risk are you willing to assume and is an asset class "overvalued". 

The first question (risk) is handled by deciding your target asset allocation.  That's a really good question and one that definitely seems like it has a different answer for FIRE than standard retirement planning.  The reality is the best and first diversification that gives one control over this is bonds.  If someone says "I don't like bonds, I want to take the most risk" then the immediate question becomes "so why not put everything in small growth stocks, or all emerging market?"  Well, that's "too much" risk and the holding periods to beat large cap equities extremely long.  OK... So why is 100% SP500 or 100% all market the right magic point of risk/return?  If you say all small cap or emerging market is too risky then you've already made a risk/return tradeoff.  Essentially, you have decided you want a throttle to chose between risk and return.  Well, the most effective throttle out there is bonds mixed with equities.  One might decide 100% equities is their desired point, but it is somewhat an arbitrary choice.

The second question (overvalued) is essentially speculative in nature and so should be considered with great caution.  This is the realm where a little bit of understanding of an asset class can be dangerous.  I still lack the confidence that I understand the bond market well enough.  Right now suddenly everyone is bearish on bonds and there has been a severe reaction to the Fed even mentioning it might ease up on QE.  Did the market over react?  Did the market under react?  I really don't know.

Anyway, at the risk of prolonging the discussion forever I'll just once again say I tend to agree FIRE seems best suited to a very heavy equity portfolio.  I previously thought 100% equities and why bother with bonds, I want the return and can tolerate the risk.  I've come to realize I never really understood bonds properly and that I had a simplistic view point.  I was accepting the single risk/reward point of a single asset class blindly as "ideal".  However, the second you start to try to decide how to asset allocate within a 100% equities portfolio (e.g. large, small and international) you just can't escape the conclusion that bonds are one of the most effective diversifying asset classes (even if in the end they may be a rather small component of your portfolio).
FIRE is like playing an old Sierra game, save early and save often...

Khanjar

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Re: Meditations on Asset Allocation and Early Retirement
« Reply #9 on: July 07, 2013, 08:07:15 AM »
Thank you for the long counter fiveoclockshadow.

For me, I do want to add bonds to my portfolio, but I'm going to keep to my current plan, throw everything into equities of different flavors and stripes, and throw money into bonds when the yield hits a higher note. As I said, I do want to add bonds to my portfolio, but it just doesn't make sense to me at these rates(and with what I think I've learned about the Fed and the entire bond market of today). Even 5% yield on 20 year treasuries would be enough for me to shift some money there, even were they to go up past that I'd be satisfied knowing that I've added that security to my portfolio whilst not adding too much of a drag. If the short to medium term bonds are what a lot of people use for balancing purposes and such, then I'm completely unknowledgeable about such things and how to deal with that.

Also, I'm not so sure that you can call market timing on bonds, especially when we are at historically low rates. If it goes lower from here, meaning this is a better value then tomorrow's, then I don't want either of those choices, and I'm satisfied with my 3%+ dividend stocks.

skinnyninja

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Re: Meditations on Asset Allocation and Early Retirement
« Reply #10 on: July 07, 2013, 09:15:44 AM »
Fantastic discussion here.  I am looking to diversify into bonds at some point but admit that i am essentially trying to time the market.

Perhaps i just "leg in" slowly over next year or two?

fiveoclockshadow

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Re: Meditations on Asset Allocation and Early Retirement
« Reply #11 on: July 07, 2013, 10:13:39 AM »
@Khanjar - Thanks for the thoughtful discussion.  I think I'm in a very similar place to you.  Been 95% or more in equities for a decade and a half.  Not had any second thoughts despite two bubbles and their rebounds in that time.  Not sure the best way to rebalance with bonds in the current market and because I'm about to move a bunch of things around in accounts for better tax advantage and lower ERs it is a natural time to decide what to do.

Very good point on market timing.  The market timing thing cuts both ways and I just don't know of any entirely self-consistent way to address it.  Clearly short term stock picking is not useful - i.e. the market is certainly inefficient but unpredictable in the short term.  Often it is asserted long term it is efficient but to say so also implies that significant deviation from fundamentals doesn't occur, but clearly that does happen sometimes (when you hear "the new normal" that might be a sign).  The concept of reversion to the mean also implies there is fundamental deviation.  And if you look at what portfolio theory says about re-balancing (namely it increases long term return for a portfolio) then clearly there are market cues as to when acquiring or selling given asset classes improves long term return...

Fortunately for me the current allocation to bonds and my desired allocation of bonds are both relatively small, so even if I get it "wrong" the impact likely isn't significant.  I'm going to concentrate on getting all the assets in order for the long term and not lose too much sleep over exactly what bond position I end up with at the end of that process.

@skinnyninja - Slowly transitioning to my desired asset allocations rather than all at once is something I'm seriously thinking about as well.  Probably the main thing to be careful of here is transaction costs, but if you are doing it in something like Vanguard index funds or by changing allocations in on going 401k salary contributions that is probably very manageable.

Anyway - I wanted to thank everyone in the thread and the OP as this discussion (both the reading and the writing actually) has been really helpful in trying to get my head settled on what to be doing on my upcoming asset shuffling.  Not that I've decided for sure yet ;)
FIRE is like playing an old Sierra game, save early and save often...

nataelj

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Re: Meditations on Asset Allocation and Early Retirement
« Reply #12 on: July 08, 2013, 06:37:17 PM »
I've found this thread fascinating, but I'm curious because it seems to me that part of the advantage of an FIRE approach is missing from this discussion. George_PA included a passionate bit on having a set retirement date and the devastation one would feel if, on reaching it, it had to be delayed.

I can certainly understand how that mentality would result in that feeling, but isn't part of the point of the FIRE approach to have more flexibility? If you're absolutely trading every part of your life to make money and get out of your day job ASAP then a delay would indeed be devastating, but I think it's possible to have a life while building to FIRE and still get there while being flexible in the FIRE approach and timing. If the market crashes right before FIRE then delay a bit, or keep a part time job until it rebounds. If you end up in retirement and have some worries take on a part time job since even a poorly paying job is a meaningful cashflow improvement from no job so a smaller effort can make a big difference. Even MMM didn't go straight to retirement on a deadline, he switched to part time first and then stopped and it took his wife even longer to retire.

My point being, part of the beauty of the FIRE approach is extra flexibility such that absolutely needing X number by Y date, which is really the typical retirement approach just re-scaled temporally, isn't necessary. In a way you can then time the market. Not time it for a high, which no one can know, but time it in that you don't retire until your current investments generate more than your expenditures with a bit of cushion added in. And given market fluctuations you might have to shift a year or three near the end, but with flexibility on exact timing that's a reasonable choice.

And to me this added flexibility allows for more risk even approaching retirement than non-FIRE people can normally handle because, as was discussed earlier, you aren't retiring for health reasons and don't have to do so completely and right away or even permanently.

Of course, that's not to say this approach is for everyone, if you really are slaving away for every last dollar and would be devastated by a delay then I agree with George_PA, the reduced volatility is probably worth some reduced returns, but if you're comfortable leaving more flexibility in such things then you can use the advantage of this flexibility in a way that non-FIRE approaches can't as easily. Thoughts?

George_PA

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Re: Meditations on Asset Allocation and Early Retirement
« Reply #13 on: July 08, 2013, 08:28:10 PM »
yeah nataelj you make some good points.

I guess with my original response I was thinking in terms of a different angle where you have a family trying to reach early retirement. 

Of course if you are single and on your own, this of course means you adjust much more easier.  If you are on your own, you have complete control and this would work great.  I would say if you are single and ok with flexibility it could definitely work in terms of getting FI faster and getting a higher return assuming the market timed well for you.

However, often went it comes to reaching early retirement, often there are other people and family members involved, so we have to taken into practical considerations as well for most people. 

For example, usually this what happens between couples who are married or live together:
One partner is a completely 100% Mustachian ready to go get this thing ASAP, full speed ahead type, and the other partner is a spender who needs convincing.  This other partner initially really could not give a crap about MMM or anything about the blog.  It could take a couple years of slow convincing just to get everyone on board with the same plan to even shoot for early retirement.  Often there could be kids involved, these choices often effect more than just you, thus you need to consider the people around you and what they will be going through as well.

The real pro-Mustancian type often has to set a retirement date in order rally the troops (e.g. get the family excited and willing to go through with it).  Definite end dates and big plans afterward are often the only motivating forces strong enough to make it happen.  You have to promise and deliver definite rewards.  In order to get a household to the really high savings rates required, i.e. 75% of money going towards savings, everyone has to be coordinated and ok with the plan.  If even one person, is not ok with it, they could spend away a lot of the savings and derail the whole thing. 

Other people may need to be involved and on broad too, if you are living at home with parents or grand-parents or other family to save more cash, they too may want and/or require a definite end date.   

I just don't see how you can motivate people with the other plan, you can't say "hey guys lets have a revolution in our thinking and way of life.  Lets do all these things and hope the market timing allows us to retirement".  Somehow I just don't see it working with a motivational speech like that.  Hope and maybes do not motivate like a definite date does. 

This is the angle or perspective I was coming from.

Lastly, I would point out that MMM switched to part time work first because he was not sure that he would even enjoy early retirement; I don't believe it was an issue of money and it was issue of acceptance and trying something new.  For example, he says "Meanwhile, I actually switched to 4-day-per-week work this year in exchange for a 20% pay cut – my first test of the waters of early retirement" (http://www.mrmoneymustache.com/2011/09/15/a-brief-history-of-the-stash-how-we-saved-from-zero-to-retirement-in-ten-years/) Also MMM did appear to have a definite end date set, the target date was to reach early retirement before their first child was born.

For example in the blog post:
http://www.mrmoneymustache.com/2011/04/25/having-the-talk-with-a-current-or-potential-mate/

He says the following:
"So one day we had the Talk. It was a talk about our future, how we both seemed so busy with work, yet we hoped to have children in a few years. I was already into the idea of living off of investments someday, so I threw out the idea of retiring early.. as in BEFORE starting a family. Was it possible? Some simple math showed that it definitely was"





« Last Edit: July 08, 2013, 08:43:55 PM by George_PA »

matchewed

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Re: Meditations on Asset Allocation and Early Retirement
« Reply #14 on: July 08, 2013, 08:50:06 PM »
I'm not sure if flexibility on when to FIRE and your family status are so intrinsically linked as that. Assume you get close to your date and the market drops 40%. What do you have to show? A still large amount of money that if you keep working for the next 2-3 years will be a very large amount of money.

nataelj

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Re: Meditations on Asset Allocation and Early Retirement
« Reply #15 on: July 08, 2013, 08:56:29 PM »
hmm, that's interesting but I agree with matchewed. And I'm a bit confused as to why a general timeframe is less sellable than a specific date. In the quot. from the MMM post you have he discusses "in a few years" which doesn't seem incredibly specific to me and is fairly open to adjustment.

I think that's not the point though, it sounds like what you're saying is that in your particular circumstance, or one you've seen, the specific date is needed to sell the FIRE approach. I'm still confused as to how such inflexibility enters though. The whole goal of FI is to be FREE. Free to spend your time how and where you want doing what you want, selling that vision to family would seem to me the main point, it doesn't expire if you don't hit it by some sell by date. And more than that, not hitting it by the date doesn't mean you've missed the bus and can't get there now, it means you're close but not there yet and if anything should be MORE motivated to get there since it's so near!

It seems that getting family on board is something you think is always a problem. In the MMM instance though his family was actually helpful, his path to financial freedom was actually helped by his wife's salary at a number of points and is now by her continued RE work (if not often). In their case they were close enough to decide to delay kids until after FI, but it could still be done otherwise, it would just be more challenging. I don't think being single is better or worse for working toward FIRE, just different, and it really depends on your situation. If you have a spouse that's on board like MMM did then they can do a LOT to help speed your approach to FIRE (far more economical to live together and pool the income-expense disparity). In some cases single might be easier, in others it would be slower, but when the goal is to suddenly open up all your time there's a lot of space for flexibility.

So I stand by my original point that flexibility should be an additional asset for retirement investment allocations in the FIRE arsenal. And I think it might be worth rethinking how a family can be assets to going toward FIRE rather than treating them as one huge mass of obstacles. I think many family members will get on board with something if it's your dream and they see you working hard for it.

And, if you really are having so much trouble with a family member spending away your efforts, you might consider splitting finances. It's not preferable to having them on board but I've heard of others in the FIRE community splitting their assets even from a spouse when their financial approaches are that different. Not ideal but better than spending your life working only to have someone else bleeding your hard work, which only creates problems in a relationship anyway. Jacob Lund Fisker actually has his finances separate from his wife and he's in ER while she works to pay off her debts (which he uses extra income to help with). Not many better ways to sell FIRE to someone with bad habits than getting there yourself!

Again though, I think the MMM approach is preferable if possible.

George_PA

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Re: Meditations on Asset Allocation and Early Retirement
« Reply #16 on: July 08, 2013, 09:47:57 PM »
I'm not sure if flexibility on when to FIRE and your family status are so intrinsically linked as that. Assume you get close to your date and the market drops 40%. What do you have to show? A still large amount of money that if you keep working for the next 2-3 years will be a very large amount of money.

It could be a lot longer than 2-3 years to recover; 

that it is whole point of volatility, the market could have average a return 0% for a decade, then make it all in the next 5 years with superstar returns;  you cannot assume a steady rate or anything even close to that; if stocks return 0% for 8 years, then returns 34% the last 2 years, you have an average return over that 10 year period of about 6%; thus, it is foolish to assume just become something averages high over a long period of time, that somehow this means you will get a decent return in the next 2-3 years or even be able to make it a few years (MMM explains this well in http://www.mrmoneymustache.com/2011/06/06/dude-wheres-my-7-investment-return/); 

you don't get predictable returns from stocks results unless you are looking at really long time frames; The nasdaq closed on March 10, 2000, the index finally peaked at an intra-day high of 5,408.60 (http://en.wikipedia.org/wiki/Nasdaq_Composite).  It still to this day has never reached that high again.  Look at it today, https://www.google.com/finance?q=INDEXNASDAQ%3A.IXIC&ei=in_bUZCAGqnj0QHigwE&hl=en it is 3484; 

This goes back to our discussion and why bonds are useful; they tame the volatility of stocks;

@nataelj, yeah MMM said a "few years" but also notice that he did not put his entire stash into the stock market?  hmm think about that one.  We have proved theoretically, it is very risky, i.e. possibly delaying retirement by 10 years or more and we showed that in real life people are not doing it that actually reached early retirement. 

Also, this is not about my family, all you have to do is read through this blog about all the people having a hard time trying to convince their spouse to get on board; Here is an example: http://www.mrmoneymustache.com/forum/ask-a-mustachian/any-recs-for-getting-my-spouse-on-board/?topicseen

Also, why is there 5 whole blog listing devoted just to this?

http://www.mrmoneymustache.com/2011/04/25/having-the-talk-with-a-current-or-potential-mate/
http://www.mrmoneymustache.com/2012/03/22/selling-the-dream-how-to-make-your-spouse-love-frugality/
http://www.mrmoneymustache.com/2012/03/27/selling-the-dream-of-financial-independence-part-2/
http://www.mrmoneymustache.com/2011/05/09/mrs-money-mustache-the-secret-life-of-frugality/
http://www.mrmoneymustache.com/2011/09/06/how-much-is-that-bitch-costin-ya/

Also, we why does MMM say that he wrote them because he was getting lots of emails from other people saying that they had trouble getting their family and spouses on board?  I am just making this up?  just because we think people will agree with something does not mean that actually happens in real life.

also nataelj if you response back please back it up with actual facts and evidence;
 


 
« Last Edit: July 08, 2013, 10:06:49 PM by George_PA »

nataelj

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Re: Meditations on Asset Allocation and Early Retirement
« Reply #17 on: July 08, 2013, 10:05:46 PM »
George_PA, I was not in the least saying that getting a spouse on board isn't ever a problem, my point was that family being on board or not doesn't have to impact a retirement date being flexible, which was your point I believe? If not, please clarify.

And no, MMM didn't have all his portfolio in stocks, but again the point I was making there was about his having a flexible date, not about his flexibility meaning he would follow exactly the investment strategy under discussion.

I seem to have struck a nerve in saying that it is possible for a spouse to be an asset, which is a point you seem to have decided to argue. I wasn't saying that's never a problem, I was saying it isn't always a problem, and sometimes can be quite the opposite (people aren't going to write MMM saying "My spouse is already on board, what do I do?" so he'll only hear from those who have issues).

I apologize if I offended you somehow in this, I was trying to suggest alternative ways of thinking about something you seem to be struggling with, if I hit a sore spot I am sorry for that.

That said, I think I've more than adequately explained myself, I'd appreciate your discussing the point I'm making rather than arguing a point I didn't make. I'm just here to talk about investment theory, insults or accusations aren't helpful to anyone.

George_PA

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Re: Meditations on Asset Allocation and Early Retirement
« Reply #18 on: July 08, 2013, 10:30:10 PM »
well of course a spouse can be an asset as long as each partner has the same game plan and both believe in the MMM way;

and yes if both spouses are ok with being flexible of course you could do it that way; there is nothing to say that can't happen;  I was talking in general what seems to happen on average

 
 

matchewed

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Re: Meditations on Asset Allocation and Early Retirement
« Reply #19 on: July 09, 2013, 04:21:39 AM »
well of course a spouse can be an asset as long as each partner has the same game plan and both believe in the MMM way;

and yes if both spouses are ok with being flexible of course you could do it that way; there is nothing to say that can't happen;  I was talking in general what seems to happen on average

And that's more the point I disagree with because it is just as easy to say it doesn't happen on average. Forget the 2-3 year recovery time or the volatility discussion. You make the claim that the time to FIRE and marital bliss are some how linked because you made a promise that work would be over. I think you may be projecting some ideas here and over generalizing individual situations with nothing to back up your claim.

*edit*

Also why would a spouse be so upset that you now a large 'stache 10 years down the road? Having all that money is still proof that this stuff works. All the "how to convince the spouse" posts are about people in the beginning stages. Those aren't posts about people 10 years down the road. So taking that and saying that the inherent flexibility in any life plan (regardless of it being FIRE or becoming an Olympic athlete) and the solidarity and stability of a family are linked is a crap statement.

All your other talk about bonds is a fair point. After 10 to 15 years of "hardship" it is no longer hardship and it is just life. You underestimate peoples ability to adapt to their circumstances.
« Last Edit: July 09, 2013, 04:31:51 AM by matchewed »

DoubleDown

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Re: Meditations on Asset Allocation and Early Retirement
« Reply #20 on: July 09, 2013, 09:43:14 AM »
In similar discussions on this topic I've stated that I intend to be more conservative in our AA so that the volatility in equities doesn't take a huge chunk out of our net worth, especially close to retirement. I'm 46, a couple of months away from retiring, and about 50% in equities (the rest in bonds, real estate, securities, etc.).

The (legitimate) counter-argument given is that inflation will be the largest threat in a long retirement, and that being anything short of 80% or even 100% equities is a path to failure unless you have a significantly lower SWR. I've weighed that risk and decided I'd rather not have volatility throw a huge, stomach-churning monkey wrench into the works. I plan to use flexibility, my COLA'd pension + SS, the potential for part-time work (particularly early in retirement when I'll theoretically be more productive), a fixed 30-year mortgage at low rates, and principal depletion in later years (if needed) as mitigation for the risk of inflation whittling away the net worth. That gives me the confidence to retire knowing a huge market drop won't set us back years or wreck the whole plan once already retired.

fiveoclockshadow

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Re: Meditations on Asset Allocation and Early Retirement
« Reply #21 on: July 09, 2013, 12:22:59 PM »
@DD - That sounds very sensible.  In a lot these thoughts one does have to be careful about irrational fear of the inflation Bogeyman while ignoring the potential for a bad equities downfall right at the start of retirement.  No one recommends 100% 30 yr treasuries as a bond investment, but when people speak in terror of inflation that seems to be what they assume the portfolio would be. 

Shorter-term ladders do fine in real returns even in inflation and they of course have way less risk than equities.  And you would mix them with at least 25% equities.  I think for FIRE you would dial up the equities share even higher - maybe 50/50 as a minimum equities mix once you are no longer contributing and are at your SWR and I'd be comfortable with even more equities than that.  It isn't at all clear that once in the SWR phase that an extreme equities position does you any good beyond gambling your estate might have a higher balance when you go.  It is also certainly clear no portfolio is served well by 100% bonds, no matter how conservative you are.

What I found sort of surprising was an analysis at the end of Intelligent Asset Allocator (by the fabled Bernstein).  He looks at SWR on $1M starting in 1966 at the beginning of a really awful and long bear market (worst case for someone drawing, just fine for someone saving) for 100/0, 25/75, 50/50, 75/25 and 0/100 allocations.  For 7% SWR all portfolios were empty within a few years at the end of the 70's.  For 6% all empty within a few years in the early 80's.  For 5% still everything fell within about three years in the late 1980s.  For 4% the all bond portfolio went empty in 1994 and all the others still had assets past 1995.  The 75% bond had half the balance of the other portfolios and the other three were very close to each other looking like they would survive indefinitely (and actually the 100% stock portfolio was not the best one).

It was quite impressive to me that for a time period that included some of the worst inflation in modern times followed by decreasing bond yields and increasing stock yields that the "success" of the portfolio was fairly insensitive to what many on this board would seem to consider a "high" bond allocation.  Portfolios up to 50% bonds were all equivalently successful and even the 75% allocation was doing surprisingly well all things considered.

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DoubleDown

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Re: Meditations on Asset Allocation and Early Retirement
« Reply #22 on: July 10, 2013, 12:54:39 PM »
fiveoclockshadow - That's great info above on how varying portfolios fared in hard times, thanks!

WageSlave

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Re: Meditations on Asset Allocation and Early Retirement
« Reply #23 on: July 10, 2013, 05:01:52 PM »
msilenus one of the main advantages to have at least some bonds to take a bit of the wild variations out of stock equities.  If look at this blog posting: http://www.mrmoneymustache.com/2011/06/06/dude-wheres-my-7-investment-return/

1-year holding periods: Worst: -37% (and it was in 2008!) Best: +52.62%
5-year periods: Worst: -2.35% Best: +28.55%
10-year periods: Worst: -1.38% Best: +19.35%
15-year periods: Worst: +4.31% Best: +18.93%
20-year periods: Worst: +6.53% Best: 17.87%
25-year periods: Worst: +7.94% Best: +17.24%

Has anyone broken data like this down into the two components of stock returns: dividends and value?

I'm just guessing here, but I would expect that the bigger contributor of volatility comes from the valuation side of the stock returns coin, and that dividends much less so.  But again, that's just a guess, hoping someone here knows the truth.

And while I'm asking for things, I'd also like to see such a table corrected for inflation across the given interval.  And for true pessimists like me, I'd like to see a hypothetical "worst worst" column, which mates the worst X-year period for stock returns with the worst X-year period for inflation (given that the periods for those two data points may not be the same).

Anyway, assuming dividends are less volatile than stock prices, it might be easier to plan your FI on an all-stock or at least heavily stock-weighted portfolio if you ignore the valuation component of equity returns and focus only on dividend returns.

fiveoclockshadow

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Re: Meditations on Asset Allocation and Early Retirement
« Reply #24 on: July 10, 2013, 08:46:04 PM »
Valuation is the more volatile component as you suspect. But dividends vary quite a bit as well. And you have to be careful about how you count dividends. When shares plummet the yield of course goes up for a fixed dividend amount. But the yield can still go up even if the dividend drops just as long as the share price drops more. So if you just look at yield you might fool yourself into thinking dividends did OK when in fact the dollar amount of dividends actually dropped a lot. I think in the 2008-9 crash dividends dropped around 20% for reference - and since price dropped more than that yields improved. But an investor still had a fair bit less in dividends after the crash.

As to ignoring the valuation variations of a stock it is interesting to note that is one of the methods of estimating long term return of a stock or market of stocks. All businesses eventually go under, so the return is solely the total of dividends for the years the company exists. An individual stock itself will eventually go to zero, but along the way you've reinvested some of its dividends in new companies that will continue on longer. 
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WageSlave

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Re: Meditations on Asset Allocation and Early Retirement
« Reply #25 on: July 11, 2013, 10:12:55 AM »
Valuation is the more volatile component as you suspect. But dividends vary quite a bit as well. And you have to be careful about how you count dividends. When shares plummet the yield of course goes up for a fixed dividend amount. But the yield can still go up even if the dividend drops just as long as the share price drops more. So if you just look at yield you might fool yourself into thinking dividends did OK when in fact the dollar amount of dividends actually dropped a lot. I think in the 2008-9 crash dividends dropped around 20% for reference - and since price dropped more than that yields improved. But an investor still had a fair bit less in dividends after the crash.

Right, it makes getting the table I want a little harder to produce.  I guess one easy way is to add another column to the table, which is "inflation-adjusted change in dividends relative to the previous year".  In other words, year one total dividend payout is X, year two is Y, and year two has Y/X*100 as the value of that additional column.  Or I suppose you could devise some kind of a "normalization constant" on which to base the dividend payout percentage.

Maybe my searching skills are weak or I'm not patient enough, but I can't find a table of S&P 500 or total US equity dividend returns, at least not absolute returns.  There's this S&P 500 dividend yield graph, but that's all relative to the share price, i.e. suffers exactly the same limitation as you pointed out.

This S&P 500 Dividend chart might be what I'm looking for, but I'm not sure...  It says, "12-month real dividend per share — May 2013 dollars".  I don't know what that number means.

My basic AA strategy for FIRE is to basically have a 25/75 (bond/equity) portfolio, and declare myself FI when my dividend returns exceed my expenses.  This is taken straight from the Your Money or Your Life recipe, although IIRC, YMOYL suggested using long UST bonds.

Either way, the emphasis is on actual income, rather than saying "I need an investment portfolio of X dollars."  I get the impression that a lot of people are using the latter metric to define FI.  In particular, the 4% rule, so if your annual expenses are X, then your portfolio needs to be X/0.04, or 25X.  But I believe the 4% rule has baked into it an implicit assumption of using total returns, which means selling principle to fund retirement.  I personally don't want to do that, since early retirement means a much longer time horizon than a traditional retirement.  It seems all the academic studies focus on a traditional retirement period (30 years or less).  And what is the impact of combining a much longer time horizon (maybe 50+ years) with worst-case sequence of returns (i.e. retiring just before a major market crash)?

I know MMM's personal philosophy is that flexibility is a big part of the equation.  And I don't want to discount that, but I'd also like to be able to have a more robust passive income stream available.  As such, defining FI solely in terms of real dividend returns means you never touch your principle, and presumably takes some of the volatility out of forecasting (if absolute dividend returns do have lower variance than valuations).  And I would hope that, over the long-term, the valuations would at least keep pace with inflation.  In other words, my grossly over-simplified view of equity returns is that the value portion simply tracks inflation, and the profit comes from dividends (and you use only the profits to fund your lifestyle).

As things are now, this basically implies a 2% SWR, or 50 times your annual expenses.  Definitely moves the FIRE goalpost farther away, but may be worth it depending on personal preference.

But then again, my simplified view/strategy of equity returns isn't too different from that of rental properties.  You invest some fixed amount in the property, and over a long enough time line, the property value should track inflation, if not do better.  But you can't sell part of a rental property to fund your retirement, so you're forced to live only on the rental income.  (OK, technically you could sell part of a property if it's a multi-unit, or you could sell part of the ownership stake to another person... but those are very high "friction" transactions relative to selling stocks... in all likelihood, not something you want to do.)
« Last Edit: July 11, 2013, 10:18:39 AM by WageSlave »

fiveoclockshadow

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Re: Meditations on Asset Allocation and Early Retirement
« Reply #26 on: July 11, 2013, 12:33:12 PM »
I think this is the data you are looking for:

http://www.econ.yale.edu/~shiller/data/ie_data.xls

... or at least a good starting point.  You'll have to do a bit of crunching on it to get exactly what you want.

As to the SWR, 2% would be extremely conservative.  If you want to leave a giant inheritance to someone that would be a good plan, but if you want to retire early that's working a lot longer than necessary.

In a properly managed portfolio you will always be "touching principle".  You need to re-balance asset allocations over time and that will mean when stocks go up a lot you will be selling them to purchase lower priced assets (often bonds, or perhaps REITs).  Similarly, if you have high yield bonds and interest rates plummet you will end up selling bonds and pick up some more of another lower priced asset (probably some form of equities). 

Artificially restricting yourself to spending just dividends or coupons isn't a good strategy.  It neglects the other "real" long term gain in equities - earnings growth.  Again, if you hold stocks until their value goes to zero the return is reflected by dividends paid out, but the total dividends paid out is not just the current dividend rate but over time that represented by earnings growth (and this is usually a few percent).  All of this still filters out all the speculative bounces and dips caused by market perceptions of P/E and what not.

The point to a SWR is not that it is based on current bond coupons or stock dividends, but that it is the rate at which you can draw at and be assured over the long term that your portfolio in real dollars (i.e. inflation adjusted) will on average not decline.  During that period there may be long periods in which dividends, earnings growth and coupons all take a nose dive and your portfolio drops - a lot - but they are followed by times in which the aforementioned will greatly out pace your spending and the portfolio balance rises. 

If a mixture of stocks and bonds is only returning a SWR of 2% over a 40 to 50 year period then we will be in some sort of horrific economic period never imagined.  You'll probably want to stock up on blunt force weapons to deal with zombies as well :)

Since FIRE considers an infinitely long SWR it is actually already extremely conservative compared to "traditional" retirement which usually assumes balances will decline over time approaching zero near death (so say thirty years) and that there is income from social security as well.  FIRE already uses a lower SWR by assuming you live forever and ignores social security.

Now - there is a really good question about whether the past assumption of 4% real returns from a balanced portfolio is sound.  Certainly things may have fundamentally changed, or might in the future.  But over a very long period of history for long holding periods 4% has been a good safe number.  And we ignore social security, which if you have low spending is actually a very significant addition to your portfolio. 

For long retirement small changes can have big effects, so 3% is already a big adjustment from 4% and significantly more conservative.  2% would be getting to be irrationally conservative I think.

P.S. As to social security, be aware of how your benefit is computed - if you are a very high wage earner who works very few years to achieve FI your SS benefit will likely be lower than a lower wage earner who works a longer period of time but earns the same total inflation adjusted wages.  Also, however, be aware the calculation of SS benefit is very progressive - that is to say the marginal increase in benefit for working more years at moderately high incomes drops.  That is to say, you get the most bang for your buck in the first amount of lifetime wages and earning more and more doesn't add much to your SS benefit.  So in that sense FIRE folks get a lot of bang for the buck out of SS.
« Last Edit: July 11, 2013, 12:40:25 PM by fiveoclockshadow »
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Riceman

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Re: Meditations on Asset Allocation and Early Retirement
« Reply #27 on: July 11, 2013, 07:31:46 PM »
The first question (risk) is handled by deciding your target asset allocation.  That's a really good question and one that definitely seems like it has a different answer for FIRE than standard retirement planning.  The reality is the best and first diversification that gives one control over this is bonds.  If someone says "I don't like bonds, I want to take the most risk" then the immediate question becomes "so why not put everything in small growth stocks, or all emerging market?"  Well, that's "too much" risk and the holding periods to beat large cap equities extremely long.  OK... So why is 100% SP500 or 100% all market the right magic point of risk/return?  If you say all small cap or emerging market is too risky then you've already made a risk/return tradeoff.  Essentially, you have decided you want a throttle to chose between risk and return.  Well, the most effective throttle out there is bonds mixed with equities.  One might decide 100% equities is their desired point, but it is somewhat an arbitrary choice.

I think this paragraph articulates my own investment strategy better than I had to this point.  I've tried to choose ETFs/funds that offer the most volatility and highest potential growth, but pick a variety of them.  My current  mix of funds and etfs by asset class is something like:

40% Emerging markets
30% Small cap
10% large cap
10% REIT
10% Health care

It's been brutal watching emerging markets stocks flounder while the the market does well, but I'm keeping faith that my portfolio is better for it in the long run.  So I guess my volatility/payoff threshold is higher than many investors, but still not full throttle.

WageSlave

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Re: Meditations on Asset Allocation and Early Retirement
« Reply #28 on: July 12, 2013, 01:43:57 PM »
I think this is the data you are looking for:

http://www.econ.yale.edu/~shiller/data/ie_data.xls

... or at least a good starting point.  You'll have to do a bit of crunching on it to get exactly what you want.

That does look to contain the info I want.  Thank's for that!  (Haven't had a chance to play with it yet.)

In a properly managed portfolio you will always be "touching principle".  You need to re-balance asset allocations over time and that will mean when stocks go up a lot you will be selling them to purchase lower priced assets (often bonds, or perhaps REITs).  Similarly, if you have high yield bonds and interest rates plummet you will end up selling bonds and pick up some more of another lower priced asset (probably some form of equities).

Good points.  I guess I didn't consider re-balancing to be "touching principle".  I look at it from the perspective of how I track my personal finances in my accounting software (GnuCash): re-balancing is just transferring values within the broad "assets" category.  Versus selling shares for the express purpose of having more spending money: that would transfer out of the asset category, into the "income" category, and ultimately be parceled out to different "expense" categories.

Let's say I owned exactly one fund: I'd obviously never need to re-balance.  And then my idea of not touching principle makes more sense, as I'm only taking out the dividend returns.  Of course my portfolio has multiple funds, and will need to be re-balanced over time; but I like to figuratively look at it as a "black box" of sorts, and kind of pretend that it's one big fund.  (And I might be able to come up with some normalized share scheme such that a re-balance would not change the number of normalized shares, whereas shelling shares for spending money would.)

I appreciate your thoughtful comments, thanks for posting them.

fiveoclockshadow

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Re: Meditations on Asset Allocation and Early Retirement
« Reply #29 on: July 13, 2013, 04:45:08 AM »
I also just found this:

http://www.bogleheads.org/forum/viewtopic.php?t=2520

For back-testing Vanguard mutual funds back to the early 1970s.  Might be easier to work with than the file I linked to earlier, though the data doesn't go back nearly as far.
FIRE is like playing an old Sierra game, save early and save often...