Retirement

[SuppaTime]

As for "diversification" it usually works at the top when you don't really need it,
but it fails at the deep bottoms when you do - like in early 2009 when stocks,
bonds, commodities and real estate all went down together.  The only thing
going up was the U.S. Dollar (if you'd had U.S. Dollars in the banks that had failed,
and they weren't bailed out, you'd have lost there also).

The point of diversification within an asset class is to eliminate non-systematic volatility. That is ups/downs due to a quirk in either a company (e.g., the CEO is a crook), or idiosyncrasies within a market sector. Oil is a good example of the latter (oil companies have tanked recently). Once you are diversified to that level, the only thing left is systematic risk (volatility), which is due to random behavior and events that affect all assets within the class. In the view of theorists, it is the baseline, least amount of risk to a portfolio and all other assets are measured against that.

Diversification across asset classes seeks to find uncorrelated systematic risks. The classic example is bonds and equities. For the most part, the systematic behavior of bonds has almost zero correlation with that of equities. Bonds have other risks, but as far as seeking something that doesn't crash when stocks do, bonds (at least high quality bonds) are it. Some people go to gold rather than bonds, but it is the same thing - the price of gold is largely independent of how equities are behaving.

As far as ownership of securities such as stocks, bonds, ETF's, etc. Regardless of who the custodian is (Vanguard, Schwab, Ameritrade, Merrill Lynch, etc.), you are the owner. Those institutions are the custodian only. Your ownership of the security is communicated to the issuer of the security when you purchase it through the custodian. Things get a little weird with a retirement account like a 401k, since the company that founded the 401k has some legal responsibilities, but you are still the owner of any securities with the account.

[Subber]

As for "diversification" it usually works at the top when you don't really need it,
but it fails at the deep bottoms when you do - like in early 2009 when stocks,
bonds, commodities and real estate all went down together.  The only thing
going up was the U.S. Dollar (if you'd had U.S. Dollars in the banks that had failed,
and they weren't bailed out, you'd have lost there also).

The point of diversification within an asset class is to eliminate non-systematic volatility. That is ups/downs due to a quirk in either a company (e.g., the CEO is a crook), or idiosyncrasies within a market sector. Oil is a good example of the latter (oil companies have tanked recently). Once you are diversified to that level, the only thing left is systematic risk (volatility), which is due to random behavior and events that affect all assets within the class. In the view of theorists, it is the baseline, least amount of risk to a portfolio and all other assets are measured against that.

Diversification across asset classes seeks to find uncorrelated systematic risks. The classic example is bonds and equities. For the most part, the systematic behavior of bonds has almost zero correlation with that of equities. Bonds have other risks, but as far as seeking something that doesn't crash when stocks do, bonds (at least high quality bonds) are it. Some people go to gold rather than bonds, but it is the same thing - the price of gold is largely independent of how equities are behaving.

Hmmm....yes that is the theory but, I find that
while the correlation of stocks and bonds over the short term and even intermediate term can be nil,
if you look at the long term charts the correlation between them is very strong.  Both had huge
bull markets from around 1992 till 2000 and have continued to go up and down together
in the large swings since then.  Right now interest rates are exceptionally low (interest rates down, bond prices up
(for those who don't know, not you Suppa Time I'm sure you know)) so bond prices are very high, correlating with
similarly very high stock prices. 

I guess you could say the commodities haven't been correlating much with stocks and bonds
since they've been hammered by 40% and more (depending upon the specific commodity)
over the past couple of years; however, I think it may turn out that they are leading the cycle....we will see.

If or when interest rates go up, assets heavily financed with debt such as stocks, and commodities,
and even bonds, & of course real estate, all will go down - ugh.  Maybe it is that diversification
doesn't work well in super-leveraged economic times.

Well, theory-wise I guess you could say that in worst case conditions eliminating non-systematic risk
(with diversification) doesn't really help at the bottom....a la the financial crash (2007-2009).

[eastbound]

respectfully disagree--if one's custodied securities are rehypothcated by the custodial bank, and that bank fails, your securities are tied up in bankruptcy liqudation--your securities will not simply be returned to you in a reasonable time--you agree to that status in the fine print of the brokerage acct agrmt you sign--vanguard does not rehypothecate--it dampens their profits hugely, but bogle insisted it be that way--part of shunting him out may be so as to change that over time.

google rehypothcate hedge fund mortgage crisis--there is plenty to read re this

[Tom]

My thoughts on diversified investing. Here is a link to the chart that most investment advisors use: https://www.hartfordfunds.com/dam/en/docs/pub/funddocuments/flyers/MF5666.pdf

Diversified investing is designed to lessen the risks of losses but it also lessens the ability for gains. The whole priciple behind it is to start out with a balanced investment in 10 to 15 different investment areas. After a period of time, investments in some of the areas will increase while others will decrease, this will cause the portfolio to become unbalanced. A computer program will then run to re-balance the portfolio.

The two biggest problems I have with this is 1) to re-balance you need to sell your winners and buy into the losers and 2) when the stock market takes a big hit, all areas go down. Yes some more than others, but if you remember 2008, there were no safe havens and all areas lost dramatically. Another problems is, there is no or very little thought in taking advantage of future trends.

What I have done is put the majority of my investment into a balance fund or etf but keep around 20% to personally manage. The 20% will stay in an index fund, such as an S&P 500 etf until I see an area or a specific stock that I think will grow in the future. I have invested in areas such as alternate energy, South American emerging nations, technology, whatever. This gives me the ability to jump on the bandwagon for increased growth, but I can do it conservatively and not put too much at risk.

[SuppaTime]

respectfully disagree--if one's custodied securities are rehypothcated by the custodial bank, and that bank fails, your securities are tied up in bankruptcy liqudation--your securities will not simply be returned to you in a reasonable time--you agree to that status in the fine print of the brokerage acct agrmt you sign--vanguard does not rehypothecate--it dampens their profits hugely, but bogle insisted it be that way--part of shunting him out may be so as to change that over time.

google rehypothcate hedge fund mortgage crisis--there is plenty to read re this

Rehypothecation is the re-use of a pledged security. So the security has to first have been put up as collateral for a loan. This could happen with a brokerage house if you pledge your holdings for a margin trading account. But you would have to sign up for that and authorize a lien on your securities. I have not done that, and such a lien or pledge does not show up in my account agreement.

[SuppaTime]

The two biggest problems I have with this is 1) to re-balance you need to sell your winners and buy into the losers and 2) when the stock market takes a big hit, all areas go down. Yes some more than others, but if you remember 2008, there were no safe havens and all areas lost dramatically. Another problems is, there is no or very little thought in taking advantage of future trends.

Rebalancing is controversial. Some people (and advisers) swear by it, others cite studies that show it does not do anything for you. I personally do not actively rebalance. I passively rebalance when I make a withdrawal by figuring out what to sell. But I never sell something to buy something else. I am the ultimate "buy and hold" investor.

The gold standard for Bogleheads bond investing is BND (total US bond index fund). Its price had a very brief dip in 2008, falling 10% and recovered within a month. A $10k investment in BND in 2007 would be worth $14.6k now. It has minimal interest rate sensitivity, little volatility, good credit quality, an OK return (better than US Treasuries), and it is uncorrelated with the stock market.

[PonoBill]

I'll cover rebalancing in another article, but MPT theory holds that rebalancing tends to enforce a necessary discipline on asset holding--to avoid the emotional timing (the market's going down, I have to sell!  The market's going up, I have to buy!)) and replace it with buying assets when they are cheaper and selling when they are not. Whether or not that works is determined in part by how well and how often you rebalance, and how the markets ultimately behave. The plan is certainly not perfect, but it has a lot of data and work behind it.

I suspect the end result of my research is that I will hold the major part of my investments in MPT-style investments, either in robo accounts or Vanguard, and probably both--and some directly managed accounts using a set of strategies to be named later, as soon as I figure them out.

One interesting and somewhat terrifying book I'm reading is Jackass Investments. Some interesting information, but as always, my quest is to find who the fool is, and make sure it's no longer me.

[SuppaTime]

I'll cover rebalancing in another article, but MPT theory holds that rebalancing tends to enforce a necessary discipline on asset holding--to avoid the emotional timing (the market's going down, I have to sell!  The market's going up, I have to buy!)) and replace it with buying assets when they are cheaper and selling when they are not. Whether or not that works is determined in part by how well and how often you rebalance, and how the markets ultimately behave. The plan is certainly not perfect, but it has a lot of data and work behind it.

The rationale against rebalancing is that it is a form of market timing, and timing the market is pretty widely accepted as a bad strategy.  People do a poor job of determining when the market is at the top and when it is at the bottom (except in hind-site). There is an interesting metric that tracks how investors under-perform by trying to time the market. It is called the "investor return". Morningstar tracks several funds' investor returns. The gain you get from trying to "buy low, sell high" will have to offset the loss you get from mis-timing the market.

There is another rub against rebalancing. It is the black-hole scenario. Equities drop, so you sell bonds to buy more equities, which drop even more, and you keep chasing equities down a black hole. Historically this has never occurred, but the bad thing is if you don't have major testicular fortitude to go all the way down to the bottom of the hole, you will lose a lot of money - if you panic and sell under-water equities, those unrealized losses are converted to actual losses. That scares a lot of people.

At any rate, when experts disagree on things like rebalancing, I figure it is a hit/miss sort of a thing and just do what makes the most sense to me.

[PonoBill]

I've decided to write a book on retirement as a general topic. I plan to cover a lot of ground and make it non-technical, but useful. We'll see how that works. But I'm also opening the review process to anyone interested in following along with me. I'm writing the book in Pressbooks, which is how I rewrote the sequel (Riding Anouk) to my first book, Riding Sophia.

Here's the link for the retirement book:  http://retirement.pressbooks.com/   If you want to make comments please register as a user by sending me a PM with your email address. I'll get you set up.

Here's a link to the unedited version of Riding Anouk:http://ridinganouk.pressbooks.com/

I'm not happy with the first few chapters and it hasn't been proofread yet, but it's somewhat ready for public consumption.

[eastbound]

suggested title:

"engaged, active retirement--no sleep allowed"

[SuppaTime]

Here's the link for the retirement book:  http://retirement.pressbooks.com/   If you want to make comments please register as a user by sending me a PM with your email address. I'll get you set up.

Too funny - you mentioned Babcock Jenkins in the book, which I immediately recognized. My company (before I retired) used to use you guys back when. And sure enough, our logo is still on the web site.

[PonoBill]

Pretty much any and all high tech companies used B&J at some point in its 22 years in business. One compelling reason is that we invented a little piece of tech that coupled direct mail to the web. So even as a dinky company we were able to attract all the big tech players. After we transitioned to more of a pure internet play, our portfolio was enough to get us in the door, and we've always had great people.

[SUPcheat]

Just started reading the book.  Pretty good, especially the caution about the pros.  Many pros are insurance sales people, or were, and became certified financial planners after fact.  They will stuff you to the gills with whole life insurance and annuities that produce very high commissions for THEM.

I got to know one guy pretty well but not as his client. He actually did a lot of good, because he was in tax planning and was a CPA, and the people he served were generally irresponsible spendthrifts.  Setting up trusts, managing inherited estates, doling out allowances and doing tax planning for those types actually served them well, even if it was a high commission service, because the people were shallow, live for today morons, or families fighting over inheritances. An annuity is actually a good thing for a spendthrift, even if sold at high commission, because it forces them to budget.

However, in his own life, he was always on knife's edge.  He kept taking out second mortgages to live, tapped retirement plans with paid penalties, and generally had not much in the way of personal savings and spent more than he had.  He just wanted to get a certain number of million dollar plus portfolios to manage at one percent a year to guarantee his income stream, which once acquired, would allow him to go on indefinitely with income even if not retired.  Professions based purely on knowledge can go on forever without necessarily retiring, just dialing back a bit, and I think that was his plan.

A lot of it comes down to the "myth of expertise" that many people wish to rely on and trust. When it comes to finance, there is nobody who can predict the future and basically NOBODY is an expert. If you don't realize that commissions, expenses and services will eat you alive over time, then you are basically doomed to share your nest egg and not use it for yourself.

Also, a lot of people have the idea that they want to leave something for their children. I don't have children, but it amazes me how many people spend their money bribing their children and grandchildren back into their lives and follow them around so much.  I think if you have raised your kids and provided them with at least a bachelor's level college education, you need to look after yourself.  If you have the abundance to give to them without compromising yourself, fine, but living a half ass life in old age to give your kids a windfall is not clear thinking to me.

[Tom]

This retirement tread seems to be more about investing than retirement, which of course is a very important part of retiring successfully. Here are some of my thoughts on retirement.  I was forced to retire just before my 62nd birthday when the economy tanked in 2008 and my job as a mainframe computer programmer at a mortgage banker no longer existed. All in all, things have worked out quite well and I now have a better understanding of what retirement is all about than I did before I retired.

My goal in retirement is for my wife and I to enjoy the best life we can, and I have no desire to die rich. If I knew how long my wife and I are going to live, retirement planning would be simpler, but since that's unknown, we have to make some assumptions and plan accordingly. During wage earning years, the goal is to accumulate wealth that can be used during retirement, this of course includes savings but also includes paid for ownership of capital goods and equity. After retirement, it is all about income being generated from that wealth. More specifically it is really all about cash flow, that is having more money coming in than money going out. Income can come from pensions, social security, income producing investment, and drawing down your investments, and many other ways. You can increase your positive cash-flow through spending money more wisely. The best thing I did to increase my cash-flow was to refinance my house to a 30 year loan and use the money to payoff the loans on two of my rental properties. Being 67 I am not going to payoff my 30 year loan with my monthly payments, but my rental income makes my house payments and gives me a good steady positive cash-flow. I still have the same amount of equity, I just reduced my payments by stretching them out over a longer period of time which gives me more money that I can spend on enjoying my retirement.

[PonoBill]

That's a great insight, tom. You really have to think differently when you are retired.

The book is steadily expanding, and I plan to make it about 1/3 about financial and saving practices and 2/3 on everything else that makes retirement successful. If you look at the table of contents of the current version you'll find the topics I plan to cover so far. Some of them are empty placeholders, some are partly populated. I'm trying to write first about the parts I hate--finance, savings and taxes. I know I'll get lost in the fitness and fun categories and won't finish the grim crap. I need to rewrite the tax section since I left out a lot of detail, but sheesh. No fun.

On the plus side I'm learning a lot. And that's what this is really about. It's like writing on the Zone. I use questions on the zone as ways to spark my deeper research into things I care about. I'm sure I've learned more about glassing by answering people's questions than any of the people who read my comments.

http://retirement.pressbooks.com/