Reducing risk across portfolio. . interesting option in 401k

[Lancebaby]

So I am turning 50 this year and could retire (I have posted a bit here) but enjoy what I am doing and they keep paying me so. .but, I am getting concerned about overall portfolio risk and I think I would like to reduce it.  I have an option in my 401k for a fixed/stable fund that returns 3.5% per year and is guaranteed (as much as anything is).  It was an option made avail when the company ended it's traditional pension plan to allow slow, stable growth. 

I want to get my overall portfolio down to 70/30 (stocks/bonds) or even 60/40.  Seems to me that I could get quite stable and remove risk if I put all of my "bond" money into this stable fund at 3.5% year and put the rest into my DFA 100% stock account.  I realize that I am leaving some potential money on the table but. . at that "safer" allocation I still have more money than needed.

Thoughts?

[ysette9]

My first question to you is what is this "risk" that you are defining? There are many risks out there. The risk of running out of money/inflation. The risk of panicking and doing a stupid thing like selling at a market low. The risk of sequence of returns. Please talk more about what you are afraid of and your entire situation (AA, pension? SS? other retirement income?) and that will help.

[Lancebaby]

Sorry, yes.  My risk/fear is that I will plan to retire in 3 years and sometime between now and 10 years out the market will crash, my retirement investments lose 50% of their value and I don't have enough time to recover and am forced to go back to work (not choose to, but forced).

[SeattleCPA]

So I am turning 50 this year and could retire (I have posted a bit here) but enjoy what I am doing and they keep paying me so. .but, I am getting concerned about overall portfolio risk and I think I would like to reduce it.  I have an option in my 401k for a fixed/stable fund that returns 3.5% per year and is guaranteed (as much as anything is).  It was an option made avail when the company ended it's traditional pension plan to allow slow, stable growth. 

I want to get my overall portfolio down to 70/30 (stocks/bonds) or even 60/40.  Seems to me that I could get quite stable and remove risk if I put all of my "bond" money into this stable fund at 3.5% year and put the rest into my DFA 100% stock account.  I realize that I am leaving some potential money on the table but. . at that "safer" allocation I still have more money than needed.

Thoughts?

Lancebaby, we may be in very similar situations...

I shared some risk minimization thoughts at my blog that basically share what I think everybody should do:

http://evergreensmallbusiness.com/bear-market-survival-tactics/

And then the other thing that seems tempting for people like you, like me, (but possibly also in low-grade conflict with the MMM orthodoxy) is to keep working a little bit longer since that gambit should really dial down the sequence of returns risk.

FWIW, I don't like the guaranteed investment return products. I think they're brittle and only work right until the point when you really need them to work. (BTW, I also allocate 30% to bonds but put that money into Treasuries.)

[Ursus Major]

So I am turning 50 this year and could retire (I have posted a bit here) but enjoy what I am doing and they keep paying me so. .but, I am getting concerned about overall portfolio risk and I think I would like to reduce it.  I have an option in my 401k for a fixed/stable fund that returns 3.5% per year and is guaranteed (as much as anything is).  It was an option made avail when the company ended it's traditional pension plan to allow slow, stable growth. 

I want to get my overall portfolio down to 70/30 (stocks/bonds) or even 60/40.  Seems to me that I could get quite stable and remove risk if I put all of my "bond" money into this stable fund at 3.5% year and put the rest into my DFA 100% stock account.  I realize that I am leaving some potential money on the table but. . at that "safer" allocation I still have more money than needed.

Thoughts?

Lancebaby, we may be in very similar situations...

I shared some risk minimization thoughts at my blog that basically share what I think everybody should do:

http://evergreensmallbusiness.com/bear-market-survival-tactics/

And then the other thing that seems tempting for people like you, like me, (but possibly also in low-grade conflict with the MMM orthodoxy) is to keep working a little bit longer since that gambit should really dial down the sequence of returns risk.

FWIW, I don't like the guaranteed investment return products. I think they're brittle and only work right until the point when you really need them to work. (BTW, I also allocate 30% to bonds but put that money into Treasuries.)

SeattleCPA,

I agree that it is potentially risky to to mitigate a sequence of return risk by switching to guaranteed products. However I also think it risky to overallocate on Bonds, particularly with their current valuations. Some other threads have quoted this series of articles on earlyretirementnow.com, but I not sure, it  has gotten the attention it deserves.

According to this series a withdrawal rate of less than 4% is makes a lot of sense, particularly if you plan for a retirement horizon of more than 30 years (which is very likely when you retire at 50, especially if you have a spouse). With that time horizon planning for portfolio depletion (which the Trinity study allows) is getting more and more risky (see especially the second article in the series).

So my question to Lancebaby would be: What withdrawal rate are you planning for your portfolio, when you retire?

[Lancebaby]

My modeled withdrawal rate is 3-5% with some variability (within that window).

[DavidAnnArbor]

I think in past threads posters have shown that a withdrawal rate of 3.5% will withstand any scenario that has happened in the past.
Also  you can try to do a simulation on cfiresim.com  or https://portfoliocharts.com/portfolio/withdrawal-rates/  or firecalc.com

[SeattleCPA]

I think in past threads posters have shown that a withdrawal rate of 3.5% will withstand any scenario that has happened in the past.
Also  you can try to do a simulation on cfiresim.com  or https://portfoliocharts.com/portfolio/withdrawal-rates/  or firecalc.com

First, David, I bet you're right that a fixed withdrawal rate of 3.5% would have worked in any time in past.

Second, Ursus? I looked at the blog post you referenced. And I think I understand what's going on there... Good info... And I 'm not sure we disagree.

Third, as I've noted in various posts and books, I plan to use a 4.5% drawdown rate. And that works for me. Even though I'm sitting on 30% Treasuries. And what's probably the two big differences are (a) I am 57 and want to work longer because I love the people I work with (both co-workers and then many of our clients)... so those extra years really make a difference.... and then (b) I'm happy to work with a variable withdrawal rate...

BTW, the cfiresim tool does a great job at modeling variable withdrawal rates. And I understand it's a MMM moderator that developed the tool?

[AlmstRtrd]

If you fear that a stock market crash could mess up your retirement plans (a reasonable concern), why not diversify beyond stocks and bonds and add, say, 10% in gold and maybe 10% cash? portfoliocharts.com makes it really easy to test out various passive allocations. Holding some cash, bonds and gold means that you are no longer completely at the mercy of "the market" because you are essentially in ALL markets. Gold has tended to smooth out overall returns. The highs are likely to be lower and the lows are likely to be higher. You don't have to go 100% Permanent Portfolio to get many of the advantages of Harry Browne's thinking. Now let the bashing begin! Gold and cash are not terribly popular on this forum.

[SeattleCPA]

If you fear that a stock market crash could mess up your retirement plans (a reasonable concern), why not diversify beyond stocks and bonds and add, say, 10% in gold and maybe 10% cash? portfoliocharts.com makes it really easy to test out various passive allocations. Holding some cash, bonds and gold means that you are no longer completely at the mercy of "the market" because you are essentially in ALL markets. Gold has tended to smooth out overall returns. The highs are likely to be lower and the lows are likely to be higher. You don't have to go 100% Permanent Portfolio to get many of the advantages of Harry Browne's thinking. Now let the bashing begin! Gold and cash are not terribly popular on this forum.

I have only superficially looked at Harry Browne's portfolio construction. And let me say that personally I would never use it. I don't have the personality to be comfortable with some of the stuff you need to do to make it work.... however, that all said, I would bet that what Bill Bernstein says in this blog post is correct. Dr. Bernstein is a smart guy and very thoughtful about finance.:

http://www.efficientfrontier.com/ef/0adhoc/harry.htm

[AlmstRtrd]

I have only superficially looked at Harry Browne's portfolio construction. And let me say that personally I would never use it. I don't have the personality to be comfortable with some of the stuff you need to do to make it work.... however, that all said, I would bet that what Bill Bernstein says in this blog post is correct. Dr. Bernstein is a smart guy and very thoughtful about finance.:

http://www.efficientfrontier.com/ef/0adhoc/harry.htm

I'm certainly familiar with the Bernstein piece. The most often quoted bit seems to be:

"There's nothing wrong with Harry's portfolio, nothing at all, but there's everything wrong with his followers, who seem, on average, to chase performance the way dogs chase cars."

I would just say that one doesn't need to run a strict 4X25 PP to get some of the gold and cash benefits. One could have say 50/30/10/10 in Stocks/ITT/Gold/Cash. That portfolio would still do well when the good times are rolling but not get destroyed if the stock market gets hammered for a few years. And, to be clear, I am not looking for converts... I just think there are ways to mitigate portfolio drawdowns that don't just involve adding a total bond market fund.

One thing that I would add is that I am 58 years old. Being all in stocks at this point would scare the crap out of me. I'd rather have a portfolio that doesn't suffer from large drawdowns and the sequence of returns risk that goes along with those drawdowns. I'll accept potentially overall lower returns in exchange.