Author Topic: Long term investment policy  (Read 1278 times)

alwaysonit

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Long term investment policy
« on: October 03, 2016, 05:57:10 AM »
I made an investment policy 2 years ago;
http://forum.mrmoneymustache.com/investor-alley/rate-or-slate-my-investement-policy!/msg420728/#msg420728

In summary, I am a 29 year old professional gambler worth €1.075 million. I take €100,000 emergency fund from what I'm worth and use the remainder as my net worth for calculations. My AA is 60% equities (VWRL) and 40% safe deposits. Now I am updating this with the following assumptions, all which are conservative. Constructive criticism is encouraged.

A long term inflation rate of 2%, as this is a government target and also what is generally predicted.
Long term real returns of 4% on my equities (Vanguard all world). I think this is on the conservative side of realism.
Long term real returns of -1% on my safe investments. Again this is conservative, currently it’s about -0.5%.
I will live until 101 years old.

Using an annuity formula, if I retire now (which I will assume as my income is uncertain, again conservative), I can withdraw 0.94% of my safe investments and 4.25% of my equities per year and it will expire in 72 years.
This brings the following formula, where x is my equity split and W is my net worth;
W[0.0425x + 0.0094(1-x)] = 40,000, which breaks down to
W[0.0331x +0.0094] = 40,000

My original investment policy said I will never go over 60% stocks while I don’t have a fixed income and, sticking with this policy, the above formula shows that based on my assumptions I should stay at 60% stocks until I hit at least a net worth of €1,367,000.
My net worth amount where I can safely drop my stock allocation will then be:
1.45 mil – 0.55%
1.55 mil – 0.5%
1.65 mil – 0.45%
1.75 mil – 0.4%
1.9 mil – 0.35%
2.07 mil – 0.3%
2.25 mil – 0.25 %
2.5 mil – 0.2%, which I will never go lower than.

Of course all of these assumptions are open to revision, but I will never revise them during a bear market or correction in case my emotions get involved.

NoStacheOhio

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Re: Long term investment policy
« Reply #1 on: October 03, 2016, 06:10:11 AM »
This thread raises some interesting questions that may apply to you: http://forum.mrmoneymustache.com/post-fire/using-the-rising-equity-glidepath-to-reduce-sequence-of-returns-risk/

I don't think it makes sense to exclude your emergency fund from your NW. At a certain point, it's all just money.

What's your target spending?

arebelspy

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Re: Long term investment policy
« Reply #2 on: October 03, 2016, 06:42:02 AM »
Following.

Congrats on your system continuing to work the last two years, for ~200k/yr.

I don't necessarily agree with dropping the stock percentages that much--I'd rather lower your WR, to ride out drops, than risk long term growth by not having enough equities.
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with two kids.
If you want to know more about me, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
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AdrianC

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Re: Long term investment policy
« Reply #3 on: October 03, 2016, 06:52:33 AM »
Using an annuity formula, if I retire now (which I will assume as my income is uncertain, again conservative), I can withdraw 0.94% of my safe investments and 4.25% of my equities per year and it will expire in 72 years.

I'm not sure which numbers you are using.

Stash of €1.075 million - €100,000?
Withdrawing 28.5K for a WR of 2.9%?
Using Excel, and assuming your withdrawals are indexed for your 2% inflation, I get you running out of money in year 61 using 60/40.

alwaysonit

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Re: Long term investment policy
« Reply #4 on: October 04, 2016, 05:46:06 AM »
Target spending is €40,000.

AdrianC, this would leave 585k in equities and 390k in fixed income.
An annuity with present value of 585k, earning a rate of 4% per period with 72 periods gives an annuity (yearly withdrawal) of €24,877
An annuity with present value of 390k, earning a rate of -1% per period with 72 periods gives an annuity of €3,672
So total yearly withdrawal of just over 28.5k.
http://www.financeformulas.net/Annuity_Payment_Formula.html will do the calculations for you.

How did you do your calculations?

AdrianC

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Re: Long term investment policy
« Reply #5 on: October 04, 2016, 08:21:38 AM »
Target spending is €40,000.

AdrianC, this would leave 585k in equities and 390k in fixed income.
An annuity with present value of 585k, earning a rate of 4% per period with 72 periods gives an annuity (yearly withdrawal) of €24,877
An annuity with present value of 390k, earning a rate of -1% per period with 72 periods gives an annuity of €3,672
So total yearly withdrawal of just over 28.5k.
http://www.financeformulas.net/Annuity_Payment_Formula.html will do the calculations for you.

How did you do your calculations?

Simple iteration in Excel, one row per year.
2% inflation, 6% return from stocks, 1% return from bonds, rebalanced to 60/40 each year.

If I put your initial withdrawal at 40k (4.1% WR) I get you running out in year 36 with 60/40.

Your annuity calculation isn't rebalancing. Maybe that's our major difference?