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Re: Are Higher Stock Allocations the Only Option for Retirees?


@Mortmain wrote:

The chase for yield has been going on for a long time. Retirees have been crushed by low rates and have been forced into higher-risk securities. Retirees are the silent sacrificial lamb here. A suggestion that some have made is using gains as income. It was the norm at one time when CGT was more favorable than income tax as governments tried to get companies to reinvest. However, this only helps fill an income gap over the short term. The question is whether rates can ever return to normal where they reward investors for inflation and credit risk over and above the risk-free rate.

When rates rise it has an adverse effect on valuations. Note this isn't just relevant to bonds. Share prices, which are currently trading at very high valuations are also interest-rate sensitive. So, if you were to invest in shares, you are likely to lose principal, when, and if, rates start to crawl back up, or even before. To reduce capital risk you would need to select dividend stocks that are undervalued. If you bought into an ETF that would be harder to achieve.

The bottom line is avoid adding risk when so much uncertainty surrounds markets. This is especially relevant to retirees. If your income has been significantly impacted, tap into gains. Otherwise, batten down the hatches, only spend on essentials and wait it out. Since there is no opportunity cost from doing this, if things don't improve, you haven't lost anything.


1) I have been hearing for years that rates can only go up, and they keep going down.  Unless rates are going up rapidly bond fund will adjust.

2) Not all bonds are treasuries.  Usually, Munis are doing better than treasuries in rising rates.  High Yield and especially bank loans are doing better too. A Multi sector fund where managers can adjust to market conditions is a good place to be.

3) Some bonds for ballast is another way for lowering volatility.

4) There are bond funds with higher dist than your typical treasuries such as OPTAX+PTIAX pay over 3.5% PIMIX pays over 5%.

5) I never invested for income as a younger investor or as a retiree.  I look for great risk/reward bond funds and if they happen to have higher income it's the icing on the cake.  I have been invested mostly in bond OEFs for several years already.

Lastly, I haven't lowered my expenses, I made much more than my goals and I haven't raised my equities because I only trade them when I know I can make money within days.

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Re: Are Higher Stock Allocations the Only Option for Retirees?

"If an investor owns enough dividend paying equities, retirement benefits and SS which exceed expenses and taxes there will be no need to sell stocks when there is a 20%-30% drop."

Exactly.

I did not do anything recently except to move and rearrange the portfolio with the same number of shares of the same kind in ROTH and taxable accounts to minimize my taxes. I took advantage of the price fall in the CEFs but otherwise, my income base now is the same as it was in March or April except that my overall taxes for the year will be lower now than it was in April or May. The actual portfolio went down by 35%, and that did not bother me at all. The reason: Anything that goes down will bounce back. But, while the interest rates and the duration are decided by the FED artificially, the dividends and dividend growth are decided by the consumers. Consumers have to eat, drive, watch movies, zoom to see grand children, etc. What is going to bring more money in your pocket? Bonds or stocks?

FED lowers the interst rate to keep the government solvent or at least to lower the interst payments of US bonds. When you depend on the US bonds, your income also goes down and the bond price also goes up. It is a double whammy if you invest in government bonds. Stop giving free money to the US government.

When I retired, my dividend was $X. In about a decade, the dividend grew to $5X and went over my retirement income as well as my SS which have been growing slowly. It is the growth rate that counts.

You should have thought about these things long time ago. At this point, you can move the bond invesments slowly into other areas and try to improve the income. Just my two cents.

 

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Re: Are Higher Stock Allocations the Only Option for Retirees?

 wrote:

Nice summary, Mortmain:

"The bottom line is avoid adding risk when so much uncertainty surrounds markets. This is especially relevant to retirees. If your income has been significantly impacted, tap into gains. Otherwise, batten down the hatches, only spend on essentials and wait it out. Since there is no opportunity cost from doing this, if things don't improve, you haven't lost anything."

I cited the Bill Bernstein quote to supply the OP with one way of conceptualizing his/her concerns.

My focus was/is on the OP's query, not on predictable ad hominem attacks.

If it helps to satisfy FD's curiosity, the answer is no I don't have a pension per se but I sure as heck have a near equivalent--20 years of annuity income and counting. But this thread is not about me or thee but the OP. 

Nothing further from me other than my compliments to Mortmain.

Bob 

 

FD: Why do you think that every time I respond to your post it's an attack?  Several posters are looking at their own situation and think it's the norm.

I have no idea what's the right % in stocks/bonds unless I know a lot more.

Some have pensions, some have low expenses, some want low volatility/risk, some insist on portfolio distributions to cover their expenses, some think only high income is important, some only invest in indexes.  Generics hardly work for everybody.

I was never impressed by generic articles/work such as Bill Bernstein. How can Bernstein solve the problem of a retiree who has just 10-15 times annual expense which is very good compare to most retirees + can't work anymore?  Sure, it's easy to say, save 25 times and if you can't keep working.  That's not a solution, it's a utopia.  

Example: I have been told by many that you can't retire and invest mostly in bonds...and I'm doing it.

===========================

ECEPROF

Re: Are Higher Stock Allocations the Only Option for Retirees?

"If an investor owns enough dividend paying equities, retirement benefits and SS which exceed expenses and taxes there will be no need to sell stocks when there is a 20%-30% drop."

Exactly.

I did not do anything recently except to move and rearrange the portfolio with the same number of shares of the same kind in ROTH and taxable accounts to minimize my taxes. I took advantage of the price fall in the CEFs but otherwise, my income base now is the same as it was in March or April except that my overall taxes for the year will be lower now than it was in April or May. The actual portfolio went down by 35%, and that did not bother me at all. 

 

FD: That's great but most retirees I know don't want to lose more than 10%.  Do you have a pension or a big portfolio that covers at least 20 times your expenses? What about millions of retirees without it? Do you have a solution for them?

 

 

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Re: Are Higher Stock Allocations the Only Option for Retirees?

I'm always surprised at how many retirees don't seem to understand that the point of their portfolio is to serve them until they die.  Those that want to have their portfolios grow over and above their expenses and inflation will surely have to take more risk, and even that may not help.  

Most of us are spoiled because we have lived through a couple of generations of the best investment results in history.  We may not see that down the road.  If you want your portfolio to last with lower risk, then you have to be willing to spend it down.  That's what it is there for.  If you start with 1M in retirement and die with 500K, so what?  Your kids will get over it.  And if you die with that 500K, but haven't done the things you wanted to, and spent the way you wanted to, then shame on you.

Once you accept that you may well spend your portfolio down, then you can learn to live with your real risk tolerance and not pretend you can change it just because interest rates are low on bonds or the PE is high on stocks.  Enjoy your life.  Be safe.

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Re: Are Higher Stock Allocations the Only Option for Retirees?


@FD1001 wrote:

 

ECEPROF

Re: Are Higher Stock Allocations the Only Option for Retirees?

"If an investor owns enough dividend paying equities, retirement benefits and SS which exceed expenses and taxes there will be no need to sell stocks when there is a 20%-30% drop."

Exactly.

I did not do anything recently except to move and rearrange the portfolio with the same number of shares of the same kind in ROTH and taxable accounts to minimize my taxes. I took advantage of the price fall in the CEFs but otherwise, my income base now is the same as it was in March or April except that my overall taxes for the year will be lower now than it was in April or May. The actual portfolio went down by 35%, and that did not bother me at all. 

FD: That's great but most retirees I know don't want to lose more than 10%.  Do you have a pension or a big portfolio that covers at least 20 times your expenses? What about millions of retirees without it? Do you have a solution for them?


True. I agree. They should have arranged their portfolios long ago so that they should not be in this position. That is because their growth rate was very low by lending money at cheap rates to the US government for a long time. That was the mistake and it is too late to regret but move slowly away from lending money to the US government at zero rate. You cannot live on the FED rates for a long time and certainly not at zero rate. That was my point.

Indeed, they have to adjust their life style to accomodate the new income level. They have no choice unless they can borrow money at zero rate from someone and pay it back at some point in the future. But, they should have the means to be able to pay it. Otherwise, do not borrow at any rate. My wife warned me just last month "Forget the zero percent balance transfer." We do the have means but my wife does not like that.

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Re: Are Higher Stock Allocations the Only Option for Retirees?


@bilperk wrote:

I'm always surprised at how many retirees don't seem to understand that the point of their portfolio is to serve them until they die.  Those that want to have their portfolios grow over and above their expenses and inflation will surely have to take more risk, and even that may not help.  

Most of us are spoiled because we have lived through a couple of generations of the best investment results in history.  We may not see that down the road.  If you want your portfolio to last with lower risk, then you have to be willing to spend it down.  That's what it is there for.  If you start with 1M in retirement and die with 500K, so what?  Your kids will get over it.  And if you die with that 500K, but haven't done the things you wanted to, and spent the way you wanted to, then shame on you.

Once you accept that you may well spend your portfolio down, then you can learn to live with your real risk tolerance and not pretend you can change it just because interest rates are low on bonds or the PE is high on stocks.  Enjoy your life.  Be safe.


I'm sure not all will agree with you, Bill, but I sure do.

I haven't reinvested new money in my IRA(my pension so to speak), but I hold three balanced funds(Wellesley, Pimco RealPath Income Fund and Value Line Asset Allocation Fund as my cores), along with Pimco Income Fund. I still hold several stocks, but I've reduced the number of those positions to about 6-7. I have several CDs coming due and I'm planning to use some of the money to purchase Pimco Preferred & Capital Securities Fund. I have a few other smaller holdings that will likely be eliminated over time. My money market fund is growing and I'm fine with that until things quiet down in this country.

 

 

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Re: Are Higher Stock Allocations the Only Option for Retirees?


@retiredat48 wrote:

 

I am familiar with what GL12019 posted re Bernstein, etc.

There is a resolution here...perhaps a middle point...an alternative to bonds.

That is, money market funds and very short term bond funds.  Yes, we need a definition that what the OP is referring to is traditional vanilla bond funds of some meaningful duration.

Thus, mm funds and short term bond funds fit the bill.  You will get an interest rate not much less than current long term bonds...yet you really freeze principal.  You eliminate the convexity problem...and the problem with rising rates.  You have greatly reduced your chance of solid NEGATIVE REAL RETURNS in bond funds.

BTW This is me.  I have the most I have ever had in mm funds and short term bond funds.  I have patience.  I sleep at night knowing this money will not be impacted by changing rates.

And it meets Bernsteins "Why play the game" when you have made it.  To me, longer duration bonds are a much riskier game now, than stocks.  Especially with the fed reserve propping up these bonds with billions and billions of QE purchases.  What happens when the kool aid is removed?  

It's simple.  A decade ago the fed bailed out banks on the backs of senior citizens...think zero rate CDs.  Now, the gvt/fed is bailing out covid on the backs of senior citizens and bondholders...protecting the wealthy and hedge funds.  What a country.

R48

 


According to the WSJ the annual yield on a MM fund is 0.26% which will not bring In a lot of income for retirees who are 60% Or more invested in bonds while they wait for rates to rise to the 1.3% level of inflation.

Fed is buying longer term bonds to provide liquidity to businesses that need cash to stay open. Low Interest rates will be with us forever because there is too much cash circling the globe looking for a Place to be invested. Stocks in essential market sectors will continue to grow as the economy recovers.

As the covid crisis clearly demonstrates there is no such thing as winning the game in investing as doofus Bernstein led investors to believe. Investors can check out any time they want but they can never leave. I will remain vigilant in investing looking for the best returns with the least Long term risk as long as I am able.

I don’t worry about my investments being impacted by changing Interest rates because the central banks of the world will keep rates at 0 or below to increase spending in their country’s economies which in countries with high tax rates, e.g., France, will not happen because almost half of the French GDP is siphoned off for taxes. Low Interest rates are good for stocks.

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Re: Are Higher Stock Allocations the Only Option for Retirees?


@Intruder wrote:

@retiredat48 wrote:

 

I am familiar with what GL12019 posted re Bernstein, etc.

There is a resolution here...perhaps a middle point...an alternative to bonds.

That is, money market funds and very short term bond funds.  Yes, we need a definition that what the OP is referring to is traditional vanilla bond funds of some meaningful duration.

Thus, mm funds and short term bond funds fit the bill.  You will get an interest rate not much less than current long term bonds...yet you really freeze principal.  You eliminate the convexity problem...and the problem with rising rates.  You have greatly reduced your chance of solid NEGATIVE REAL RETURNS in bond funds.

BTW This is me.  I have the most I have ever had in mm funds and short term bond funds.  I have patience.  I sleep at night knowing this money will not be impacted by changing rates.

And it meets Bernsteins "Why play the game" when you have made it.  To me, longer duration bonds are a much riskier game now, than stocks.  Especially with the fed reserve propping up these bonds with billions and billions of QE purchases.  What happens when the kool aid is removed?  

It's simple.  A decade ago the fed bailed out banks on the backs of senior citizens...think zero rate CDs.  Now, the gvt/fed is bailing out covid on the backs of senior citizens and bondholders...protecting the wealthy and hedge funds.  What a country.

R48

 


According to the WSJ the annual yield on a MM fund is 0.26% which will not bring In a lot of income for retirees who are 60% Or more invested in bonds while they wait for rates to rise to the 1.3% level of inflation.

Fed is buying longer term bonds to provide liquidity to businesses that need cash to stay open. Low Interest rates will be with us forever because there is too much cash circling the globe looking for a Place to be invested. Stocks in essential market sectors will continue to grow as the economy recovers.

As the covid crisis clearly demonstrates there is no such thing as winning the game in investing as doofus Bernstein led investors to believe. Investors can check out any time they want but they can never leave. I will remain vigilant in investing looking for the best returns with the least Long term risk as long as I am able.

I don’t worry about my investments being impacted by changing Interest rates because the central banks of the world will keep rates at 0 or below to increase spending in their country’s economies which in countries with high tax rates, e.g., France, will not happen because almost half of the French GDP is siphoned off for taxes. Low Interest rates are good for stocks.


If your post is aimed at me, no need to.

No one has been promoting more, an increasing stock allocation for the last five years, than you and me!

I simply gave the OP what he asked...alternatives to stocks, that aren't bonds.

R48

 

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Re: Are Higher Stock Allocations the Only Option for Retirees?

I fully agree with you. Bonds, meaning Intermediate term bonds are a sure way to lose money.
What do surprise me is that the Vanguard Retirement Target funds continue to use the highly popular Total US Bond Market with a duration of over 5 years,. What is it that they know that I am missing?

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Re: Are Higher Stock Allocations the Only Option for Retirees?

Bonds, meaning Intermediate term bonds are a sure way to lose money.”

You’re sure you’re sure? Inflation is zero right now. People have been saying “bonds are a sure way to lose money“ for ... how many years now?

The only sure thing is that “sure things” aren’t.

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Re: Are Higher Stock Allocations the Only Option for Retirees?

Real CAGR (in USD) since 1900

USD / USA bonds = 1.80%

International Bonds = 1 20%

Global Bonds (40% USD) = 1.60%

Source: https://www.bogleheads.org/wiki/Developed_market_bonds

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Re: Are Higher Stock Allocations the Only Option for Retirees?


@galeno wrote:

Source: https://www.bogleheads.org/wiki/Developed_market_bonds


Nice link. How do I invest in Denmark bonds?

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Re: Are Higher Stock Allocations the Only Option for Retirees?

@AlwaysPassive 

How much do you need from your portfolio?  That is the important question.  If pensions and social security are paying most of your living expenses then a 1-2% return might be OK.  If they don't and you cannot cut out discretionary expenses then you have no choice but to add a little risk for better returns. (I look at returns not yield.  I reinvest everything and then sell shares when I need money.)

Speaking of pensions and social security, there is a line of thought that says the present value of the income stream should be included on the bond side of the equation.  I personally think this is a psychological thing.  I prefer subtracting pensions and social security from living expenses and setting up the portfolio to cover the shortfall.

I like Bengen's 4% Rule for withdrawals but experts are now writing that the 4% rule may not work.  It gets its name because a 4% initial withdrawal adjusted for inflation was historically proven safe for a 30-year retirement.  Higher initial withdrawal rates could be used for shorter retirement periods.  But, the method has never been tested under such prolonged periods of low interest rates.  Bengen's (and others) set the target allocation at 50-75% stock for the 4% rule.  If that high of a stock allocation will no longer support inflation adjusted withdrawals then it is certain that a 25-30% allocation won't.

There is risk involved in all investing. Period.  The question is how to mitigate those risks.  In the past, some investors would go heavy into bonds  to mitigate risks.  Unless you need very little from your investments that doesn't look like its going to work any more so investors need to find other methods.

Those same experts who are questioning  the "4% Rule" are writing that bonds are still a very important part of an individual's portfolio.  The investor just needs to think a little differently about them. Even though they don't provide sufficient income they can provide a temporary cash inflow.  They are something that can be sold during market declines giving stocks a chance to recover. 

Those experts are also writing about "Other Assets."  Assets that can provide cash during market declines so that the investor doesn't have to sell shares of stock at the wrong time.  Other assets are things like cash, whole life insurance that allows withdrawals, and reverse mortgages. 

This is also where re-balancing is important.  Investors who are afraid to buy stocks after a market decline usually miss the most important part of the recovery.  If an investor wants a 50/50 allocation and the market decline changed it to 30/70 then periodic, scheduled re-balancing forces the investor to buy stocks into a down market.  He doesn't completely miss the recovery by waiting to be sure its OK to buy.

Not being forced to sell in down markets and re-balancing are strong risk mitigation tools for those who are afraid of a heavier stock allocation.  Another is a variable withdrawal strategy.  There are tons of those out there.  In another thread we tested several.  Each of us seemed to have a different favorite.  Instead of fixed dollar inflation adjusted withdrawals (4% Rule) they are usually a fixed percentage withdrawal with floors and ceilings.

I'm 70 years old.  My pension and social security pay most of our bills.  I am a passive investor.  I don't want to actively manage my portfolio.  That is why I invest in balanced funds.  The fund managers actively manage the asset allocation, re-balance, and more.  I am currently in moderate-allocation funds (60-65% stock) and was planning on adding conservative-allocation funds (35-40% stock) to reach a 50/50 balance.  Now I'm not so sure. My investment goals are to take care of my wife and leave something for the kids.

As of today those moderate-allocation fund have a 12-month return of 7.4%, a 5-year return of 8.4%, and a 15-year return of 7.5%.  Yes, there are bumps and grinds along the way.  The YTD return is 1.5%.  2019 return was 20.1%. And, 2018 loss was 2.8%.  That is why we need risk mitigation tools.  Mine are cash (probably too much not invested), a variable annuity that allows partial cash withdrawals, and a reverse mortgage if ever needed.

I really don't think a heavy bond allocation is going to work for us and if you need more than 1-2% it might not work for you.  But, there are a lot of other tools to use to mitigate risk other than a heavy bond allocation.

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Re: Are Higher Stock Allocations the Only Option for Retirees?

These are real returns. Where can you find these returns today? Off course nowhere. Real returns are negative, and that is the issue

—————————-
“It ain’t what we don’t know that gets us in trouble. It’s what we know for sure that just ain’t so.”
Mark Twain
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Re: Are Higher Stock Allocations the Only Option for Retirees?


@AlwaysPassive wrote:
These are real returns. Where can you find these returns today? Off course nowhere. Real returns are negative, and that is the issue

—————————-
“It ain’t what we don’t know that gets us in trouble. It’s what we know for sure that just ain’t so.”
Mark Twain

If that question is directed at me, the returns I posted for my portfolio is from Morningstar's portfolio manager.  If you wish to check the individual funds my portfolio is:  66.8%  American Funds Balanced Fund (moderate-allocation), 23.5% Vanguard Wellington (moderate-allocation), 6.6% American Funds Mutual Fund (stock fund), and 4.1% Vanguard Wellesley. (conservative-allocation).

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Re: Are Higher Stock Allocations the Only Option for Retirees?


@AlwaysPassive wrote:
I fully agree with you. Bonds, meaning Intermediate term bonds are a sure way to lose money.

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What..what??  ??  Totally disagree....  According to Quicken my VBILX returned 12.25% over the last 12 months.    YTD return is 14.71% -- (I think quicken looks out a year and if it continues to earn what it earned so far it projects 14.71%)  If I do a "yearly look" on Quicken it's currently at 6.6%.    Not quite sure how quicken figures out returns so I looked at  Vanguard which reports 10.40% 1 yr return and 8.93% YTD... not too shabby and definitely not losing money.

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Re: Are Higher Stock Allocations the Only Option for Retirees?

Mustang,

I think the OP is stuck on the idea you can't get a "real return" from fixed income. He is plainly wrong.

I get a "real" return from my TIAA stable value fund, from the bond sleeve of my balanced funds, and from my muni fund (the latter two are Vanguard funds).

It's become a pointless exercise.

Bob

P.S. With respect to the Twain quote, here's a perhaps inconvenient certainty: Vanguard has been unusually successful in attracting money into its actively managed bond funds--over 1/2 trillion in assets. See feature article on page A1 of today's Wall Street Journal. 

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Re: Are Higher Stock Allocations the Only Option for Retirees?

I have heard a lot about Stable Value fund, balanced fund, Vanguard, Wellington, Wellesly, etc., etc for many decades. Forget about one year or two years. 

Check the chart for 10 years using VBILX as the reference - the chart from Stock Chart.

Screenshot_2020-07-28 VBILX,QQQ,VGT,VTI - SharpCharts com Performance Workbench.png

Forget about one year or two years. Do you realize that you could have made a lot more money using VTI, VGT, and QQQ. If you have enough money accumulated, dividend income will be enough for making a living without selling anything. It is also tax efficient. The OP is about income and not about return this year, last year etc.

 

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@ECEPROF wrote:

I have heard a lot about Stable Value fund, balanced fund, Vanguard, Wellington, Wellesly, etc., etc for many decades. Forget about one year or two years. 

Check the chart for 10 years using VBILX as the reference - the chart from Stock Chart.

Screenshot_2020-07-28 VBILX,QQQ,VGT,VTI - SharpCharts com Performance Workbench.png

Forget about one year or two years. Do you realize that you could have made a lot more money using VTI, VGT, and QQQ. If you have enough money accumulated, dividend income will be enough for making a living without selling anything. It is also tax efficient. The OP is about income and not about return this year, last year etc.

 


Wow... talk about comparing apples and oranges.

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Re: Are Higher Stock Allocations the Only Option for Retirees?


@bilperk wrote:

I'm always surprised at how many retirees don't seem to understand that the point of their portfolio is to serve them until they die.  Those that want to have their portfolios grow over and above their expenses and inflation will surely have to take more risk, and even that may not help.  

Most of us are spoiled because we have lived through a couple of generations of the best investment results in history.  We may not see that down the road.  If you want your portfolio to last with lower risk, then you have to be willing to spend it down.  That's what it is there for.  If you start with 1M in retirement and die with 500K, so what?  Your kids will get over it.  And if you die with that 500K, but haven't done the things you wanted to, and spent the way you wanted to, then shame on you.

Once you accept that you may well spend your portfolio down, then you can learn to live with your real risk tolerance and not pretend you can change it just because interest rates are low on bonds or the PE is high on stocks.  Enjoy your life.  Be safe.


I read this post without seeing who the author was.

Then I noticed it was bilperk...wow.

He's talking about me, in the bold above.

I surely could not have retired at age 48 without accepting the likelihood of portfolio drawdown; I have done many of the things I wanted to do(67 done on top 100 buckets list, made at age 48); and I've learned to live with real risk tolerance.

R48

 

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