Stock market 2021

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Dynamic Spending Rules To Account For The Dispersion Of Return Sequences?​

While sequence of returns risk can cut both ways – to the downside, and the upside – the irony is that due to the compounding nature of wealth, the reality is that when the sequence is good, it can actually produce exponentially more wealth to the upside than the bad scenarios produce to the downside! Thus why, for a $1M portfolio, there’s an equally likely probability to finish with the same $1M in principal remaining, or $6M left over instead! And even at a 5% initial withdrawal rate, the 25% chance of depleting the portfolio that advisors might caution clients about is the same as the 25% chance of finishing with nearly triple the original principal instead (on top of that 5% initial withdrawal rate with a lifetime of inflation adjustments)!


www.kitces.com

Extraordinary Upside Potential Of Sequence Of Return Risk

A bad sequence of returns can deplete a portfolio in retirement, but in fact, it's far more common for favorable sequences to create an excess of wealth.
www.kitces.com www.kitces.com
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BLADEMDA said:
I am well aware that it is highly probable I lose 30% of my portfolio's value at some point in the future. This has happened to me 3 times already and I weathered all 3 storms. So, I expect that 30% drop in value and I can honestly say my portfolio is strong enough and big enough to weather it. So, why should I choose to give up the expected gains on equities over the next 20+ years just because of a storm or two? The logical choice is if you have enough Cash on hand and enough equities to handle the 30% drop then my kids and grandkids can benefit greatly by my staying invested. At this point the money is about THEM not me.
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Agree. If you have account for the possibilities that you are likely less able and/or willing to earn income going forward to make up for a portfolio hit AND your portfolio drop may be more than 30% in real terms.
 
But even back when I was devising my plan I knew it was potentially inconsistent with some research by Javier Estrada of the IESE Business School in Barcelona, Spain. Estrada used 110 years of returns data from 19 countries and showed that a 100% stock portfolio has often performed as good or better than bucket-type approaches. While that sounds promising for an all-stock retirement portfolio, I still thought it was prudent to guard against sequence risk in my own retirement.

So, I was intrigued when I saw a new research paper by Estrada that casts more light on sequence risk. If you choose only one investing research article to read this year, Estrada’s paper on sequence risk is my top pick, particularly if you’re an investor nearing or in retirement. Estrada explains his research in a way that is refreshingly understandable for the layperson. But even so, I thought it would be worth summarizing some key points from his new paper and presenting a few of my related observations as a mindful investor.

f Estrada’s new study had been available a few years ago when I was crafting my own retirement plan, I likely would have just selected a 100% stock portfolio and a reasonably cautious withdrawal rate. I would have dispensed with the bucket approach entirely.

www.etftrends.com

A Better Way to Think about Sequence-of-Return Risk

Sequence risk is when several years of bad returns early in retirement cause a portfolio to run out of money too soon.
www.etftrends.com www.etftrends.com
 
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Success breeds complacency. Complacency breeds failure. Only the paranoid survive.
-Andy Grove
 
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dr doze said:
Agree. If you have account for the possibilities that you are likely less able and/or willing to earn income going forward to make up for a portfolio hit AND your portfolio drop may be more than 30% in real terms.
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Please remember that I am not advocating a 100% equity portfolio. Rather, I believe with the low returns and high risks of fixed income that stocks are a better investment going forward. Are equities over-valued? Yes. But, based on interest rates and massive stimulus spending the better investment is equity. That said, I will pare back to 75% exposure at the end of this year. The bull market in bonds is dead and interest rates are rising so even equities may deliver very muted returns.

One other thing is that markets move really fast these days so the next downturn is unlikely to last more than 2 years unless a real disaster strikes (nuclear war head?). But, there is definitely risk in holding devalued US dollars as well.
 
dr doze said:
40/60.
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You are situated quite well if we get a massive correction. You would be able to rebalance 60/40 into equities and make a huge profit. But, timing the next correction requires a lot of luck.

I have to give you credit where credit is due. When the herd is going right you are moving left. 40/60 in this market is truly a call on over valuation.
 
BLADEMDA said:
You are situated quite well if we get a massive correction. You would be able to rebalance 60/40 into equities and make a huge profit. But, timing the next correction requires a lot of luck.
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I don't need to time it. If/When it occurs I will be deploying cash robotically as my allocation deviates from target.
 
BLADEMDA said:
100% stocks? Does that mean you have a FU account with 6 months in it? What about some cash on the side just in case? As long as 100% stocks means you have other "buckets" with money/assets in them then your strategy makes sense.
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Have 6 months worth of cash but we don't spend much.
 
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anonperson said:
100% equities (mainly VTI, VXUS)

6 months of cash on hand otherwise

I have a ~25 year horizon before retirement
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Likely to work out for you...If you have the stomach for the downturns, bearing in mind that your income stream will be less secure during prolonged downturns.
How did you feel 12-15 months ago? Watching your portfolio drop rapidly? Wondering how the pandemic might affect your income long term? Did you wish that you had some cash/bonds to deploy into stocks or at least as a cushion in case the world changed more than it did? Or were you thinking about selling? The world of low/falling stock prices is the world of uncertain and falling incomes.
 
FWIW the market is usually at all time highs. It almost always looks overvalued with previously unseen valuations.

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100% equity on the IRA/401k in market.

Have a healthy real estate portfolio at the moment, these rates are incredible and got great deals last year with market downturn.
 
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dr doze said:
Likely to work out for you...If you have the stomach for the downturns, bearing in mind that your income stream will be less secure during prolonged downturns.
How did you feel 12-15 months ago? Watching your portfolio drop rapidly? Wondering how the pandemic might affect your income long term? Did you wish that you had some cash/bonds to deploy into stocks or at least as a cushion in case the world changed more than it did? Or were you thinking about selling? The world of low/falling stock prices is the world of uncertain and falling incomes.
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The mini bear market from a year ago didn't phase me much but that is because my net worth isn't that high currently.

If I was seeing my portfolio drop by seven figures, maybe I would panic more.

But overall I feel comfortable with my decision. The money in my retirement and taxable accounts are "out of sight, out of mind" so the volatility doesn't bother me.

Regarding income, my specialty is fairly steady (OBGYN/urogynecology) so no major fluctuations during the pandemic. I'm not pulling in ortho money but I'm happy with my compensation and can live comfortably on it.
 
anonperson said:
The mini bear market from a year ago didn't phase me much but that is because my net worth isn't that high currently.

If I was seeing my portfolio drop by seven figures, maybe I would panic more.

But overall I feel comfortable with my decision. The money in my retirement and taxable accounts are "out of sight, out of mind" so the volatility doesn't bother me.

Regarding income, my specialty is fairly steady (OBGYN/urogynecology) so no major fluctuations during the pandemic. I'm not pulling in ortho money but I'm happy with my compensation and can live comfortably on it.
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I lost 7 figures last year during the pandemic. My response? I bought stocks at a generational low using my cash on hand. That $500k in stocks purchased just 14 months ago made me a lot of money.

when the market crashes again I’ll be back buying another $400k in stocks. But, due to my age and risk tolerance I’ll be selling those additional equities once the market recovers.
 
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100% stocks until I pay off my student loans, then I'll go to ~10-20% bonds. Real estate is yet to be determined. I'm always intrigued but find myself coming back to the bogle heads 3 fund idea all the time. I've got a LONG investment horizon so i will stay heavy in equities for a very long time i suspect.

Last year during the market downturn, i immediately maxed out my and my wife's Roth IRAs with money we had saved up.
 
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www.cnbc.com

S&P 500 hits sixth-straight record, Dow adds 100 points as Wall Street kicks off the second half

The benchmark index rose 0.5% and notched its sixth-straight record close, settling above 4,300 for the first time at 4,319.94.
www.cnbc.com www.cnbc.com

Doze is correct that I likely have too much exposure to equities. I started out wanting a 60/40 allocation but the "40" wasn't making me any money. Then, the pandemic hit and I saw the opportunity to cash in (literally) on very cheap equities. That purchase along with the market recovery has put me at 79% as of today.

The irony is I have a hard time selling at market highs but a much easier time buying at the lows. Doze has me thinking about de-risking some later this year.
 
BLADEMDA said:
www.cnbc.com

S&P 500 hits sixth-straight record, Dow adds 100 points as Wall Street kicks off the second half

The benchmark index rose 0.5% and notched its sixth-straight record close, settling above 4,300 for the first time at 4,319.94.
www.cnbc.com www.cnbc.com

Doze is correct that I likely have too much exposure to equities. I started out wanting a 60/40 allocation but the "40" wasn't making me any money. Then, the pandemic hit and I saw the opportunity to cash in (literally) on very cheap equities. That purchase along with the market recovery has put me at 79% as of today.

The irony is I have a hard time selling at market highs but a much easier time buying at the lows. Doze has me thinking about de-risking some later this year.
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Please reread post #99.
 
dr doze said:
Please reread post #99.
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We keep talking like a pullback is inevitable, but in theory shouldn't that be priced in? Do we know something the market doesn't? Sure market is at all time highs, but the dollar is also at all time lows. Do we expect a liquidity crunch sometime soon, and what would be the catalyst? If a young person comes upon 500K today, why not put it all in VTI in one lump sum? Who's to say if (and when) this pullback will happen?
 
gasdoc77 said:
We keep talking like a pullback is inevitable, but in theory shouldn't that be priced in? Do we know something the market doesn't? Sure market is at all time highs, but the dollar is also at all time lows. Do we expect a liquidity crunch sometime soon, and what would be the catalyst? If a young person comes upon 500K today, why not put it all in VTI in one lump sum? Who's to say if (and when) this pullback will happen?
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People tend to overestimate their risk tolerance.
 
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I believe USA's national policy is to inflate out all the debt and keeps the interest as low as possible.

Under this scenario, bond, cash all trash.

Stocks, real estate, business, and children are all better assets.
 
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narcotics999 said:
I believe USA's national policy is to inflate out all the debt and keeps the interest as low as possible.

Under this scenario, bond, cash all trash.

Stocks, real estate, business, and children are all better assets.
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Children? Besides my wife they are the most expensive thing I have ever owned/been responsible for. We are talking about at least $600K per kid if not more. I love my kids but they are definitely not money makers.
 
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www.cnbc.com

S&P 500 hits sixth-straight record, Dow adds 100 points as Wall Street kicks off the second half

The benchmark index rose 0.5% and notched its sixth-straight record close, settling above 4,300 for the first time at 4,319.94.
www.cnbc.com www.cnbc.com

Sorry Doze but I am not rebalancing until December at the earliest. I'm going to let it ride.


When the S&P 500 is up more than 12.5% to start the year, the second half has a median gain of 9.7%, according to LPL Financial data going back to the 1950s
 
SaltyDog said:
Disagree. Net loss for sure.
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Assets != money

600K cash in bank is probably worth 200K in purchase power 25 years later. Kids provide emotional satisfaction, motivation to make more money, and hopefully some help when you are old.
 
narcotics999 said:
Assets != money

600K cash in bank is probably worth 200K in purchase power 25 years later. Kids provide emotional satisfaction, motivation to make more money, and hopefully some help when you are old.
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I expect to spend about 20 million per child. 24 hour nanny during the early years (110k per year x3 years) until they can go to private preschool (55k/yr x2 years), then we have private school of course (another 55k/yr x 12 years), polo, lacrosse sailing and tennis lessons, after hours tutoring, new cars when they turn 15, trips to Europe so they can learn French, Ivy League school and a house down payment plus a wedding etc etc the expenses just add up it’s a shame how expensive it is to have them!l but that is the hardship I must endure.
 
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chessknt said:
I expect to spend about 20 million per child. 24 hour nanny during the early years (110k per year x3 years) until they can go to private preschool (55k/yr x2 years), then we have private school of course (another 55k/yr x 12 years), polo, lacrosse sailing and tennis lessons, after hours tutoring, new cars when they turn 15, trips to Europe so they can learn French, Ivy League school and a house down payment plus a wedding etc etc the expenses just add up it’s a shame how expensive it is to have them!l but that is the hardship I must endure.
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Can't tell if joking or serious....
 
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abolt18 said:
Can't tell if joking or serious....
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I know a few colleagues who have spent in excess of $1 million per child. I think one kid in particular set him back 1.5 million. Private Schools. Tutors. Private College. More tutors. One year overseas. Med School. Cars. etc.
 
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pgg said:
If you have cash on the side that's not 100% stocks, no?
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Yes, but if you follow various boards such as White Coat Investor, bogleheads, etc, it's pretty much assumed that that refers to what you have invested. Obviously the vast majority of high income professionals will have cash set aside for withdrawal needs regardless of what their asset allocation is.
 
abolt18 said:
Can't tell if joking or serious....
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Obviously it is bull****. The idea that kids cost 7+ figures is completely absurd. A portion of educational costs + 18 years of food and health insurance is not going to approach seven figures otherwise nobody besides the upper class could have kids.
 
chessknt said:
Obviously it is bull****. The idea that kids cost 7+ figures is completely absurd. A portion of educational costs + 18 years of food and health insurance is not going to approach seven figures otherwise nobody besides the upper class could have kids.
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You can when the government pays for everything. If I got a dollar for every medicaid/uninsured homeless g7pwhatever that I've ever had I'd be retired.
 
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Kids can be expensive and I put all 3 i. private preschool… easily 10k per kid per year times 3 years each. They now go to public school where my property taxes are 25k and climbing but way cheaper than private. Besides activities , kids are happy when they spend time with their friends family , beach and popsicles. Everything else is what you put on them not what they expect .
 
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www.washingtontimes.com

CBO sees supercharged recovery as pandemic dissipates, predicts severe inflation in coming months

The U.S. economy will roar to life over the rest of this year and remain supercharged for a year or two beyond, the Congressional Budget Office said Thursday, though the analysts also warned Americans to expect inflation to rise “sharply” for several months.
www.washingtontimes.com www.washingtontimes.com

CBO said Democrats’ coronavirus relief package, which President Biden signed in March, will pump hundreds of billions of dollars into the economy.

The result will be a fantastic year for the economy, with gross domestic product rising 7.4% in real terms year-to-year in 2021 and still running strong at 3.1% growth in 2022.

The economy will cool quickly in 2023, with GDP growth falling to 1.1% and rising only to 1.2% in 2024 and 2025, the CBO projected.

_________________________


I will need to be in equities just to keep up with that Inflation. My retirement number just got bigger by 25% to account for inflation.
 

BLADEMDA said:
View attachment 339926
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Doze, Those are returns of 9.7% if inflation runs at 3%. Financial advisers actually think we will get 9.7% returns going forward? I am bullish about 2021 but the good times won't last forever. We could easily see a massive correction in 2022 or 2023. Investors are expecting 20% annual returns when accounting for inflation? Has all that legal marijuana gone to their head?
 
BLADEMDA said:
Doze, Those are returns of 9.7% if inflation runs at 3%. Financial advisers actually think we will get 9.7% returns going forward? I am bullish about 2021 but the good times won't last forever. We could easily see a massive correction in 2022 or 2023. Investors are expecting 20% annual returns when accounting for inflation? Has all that legal marijuana gone to their head?
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printing money feels good and helps everybody in the beginning. Not so much later on.
 
chessknt said:
Obviously it is bull****. The idea that kids cost 7+ figures is completely absurd. A portion of educational costs + 18 years of food and health insurance is not going to approach seven figures otherwise nobody besides the upper class could have kids.
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20m is obviously a joke unless you are Uber-wealthy.

1m+ not so much a joke for many with physician-level incomes. I know I will end up north of 1m per kid (obviously not “necessary” but NOT hard or particularly unusual).
 
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chessknt said:
Obviously it is bull****. The idea that kids cost 7+ figures is completely absurd. A portion of educational costs + 18 years of food and health insurance is not going to approach seven figures otherwise nobody besides the upper class could have kids.
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I am a conservative, Republican voter. I believe in equality of opportunity not equality of outcome. But, there is no way a poor kid has the same "opportunities" as a rich one. No way. I have witnessed slightly above average kids rise to the top because their parents spent a small fortune (in excess of $1 mil each) to increase the likelihood of such an outcome.

Sure, you can spend $200K on a kid age 0-22 but I seriously doubt the odds favor that child over the one who gets $1.4 million over his/her lifetime.
Again, there are no guarantees but to think that the those spending small fortunes of their kids don't have a leg-up on the rest is foolish.
 
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