Principle Preservation Is WRONG When You Retire

[Singuy]

I am going to bring this topic out as a main topic because based on conventional wisdom, capital preservation(or going low risk like CDs or low yield Bonds) is entirely wrong for when you retire. Always put your money in the s&p 500 at 100% allocation forever until forever UNLESS you can get some kind of return beyond 6% (which doesn't exist today). The math doesn't lie.

Lets assume you retired with 2 million RIGHT BEFORE the financial crisis of 2007/2008 with a withdrawal rate of 4% per year, or $6666/month. If you held 100% of this money in the S&P 500, today you will have 3.6 MILLION dollars! That's right, you have gained 1.6 million AND lived off this money the past 12 years.

Compared this to a 4% CD(which doesn't exist), you will have exactly 2 million dollars after 12 years. So all this reduction in risk mentality because you're afraid your portfolio will drop 50% overnight before retirement is nonsense. Dollar cost average out and you will always win unless you can find 6-8% CDs.

Use the back test calculator and see for yourself

https://www.portfoliovisualizer.com/...&symbol9=VTMGX

Edit: I just backtest two market crashes with a retirement right before dot com bust. You will have 3.2 million dollars today after living off your 2 million since 1999, or 21 years. You can make a case back in the 90s that you should preserve capital when CD rates were reasonable.

This is why interest rates are inversely correlated to market rallies. No one puts their capital in CDs/Bonds when there are no returns. Even Covid and the looming recession of 2021 and beyond is not bringing down the equities market as predicted when all the people on the forum said market crash incoming..even before Covid.

[bjl584]

So basically, stay invested even in retirement years?
I never thought too deeply about it, as retirement is still a ways off, but I guess I never really say myself cashing everything out and sitting on a cash hoard in my retirement years.

[Singuy]

So basically, stay invested even in retirement years?
I never thought too deeply about it, as retirement is still a ways off, but I guess I never really say myself cashing everything out and sitting on a cash hoard in my retirement years.

Yes because people for some reason thinks retirement is an end point in time, when in fact there are still 20-30 years ahead, plenty of time for market to recover.

[corn18]

If it were only that simple. Emotions play as much of a role in investing as facts and data. A lot of people could not handle losing 58% of their retirement savings without bailing. You had $2M in 2008 and then you had $1M in 2009. It’s easy to look back and see how simple it was to weather the storm, but not when you are in the middle of it.

[Singuy]

If it were only that simple. Emotions play as much of a role in investing as facts and data. A lot of people could not handle losing 58% of their retirement savings without bailing. You had $2M in 2008 and then you had $1M in 2009. It’s easy to look back and see how simple it was to weather the storm, but not when you are in the middle of it.

You can't have it both ways. If you trust that the S&P will grow on average of 9%/ year over 30 years then you stick to it. The equity market always recover and has never failed once. So its the same risk putting in your savings when you were 20 or 60. You can't make a point that when you are twenty you still have a job..well you also don't have 2 mil in the market either when. You were 20.

[corn18]

You can't have it both ways. If you trust that the S&P will grow on average of 9%/ year over 30 years then you stick to it. The equity market always recover and has never failed once. So its the same risk putting in your savings when you were 20 or 60. You can't make a point that when you are twenty you still have a job..well you also don't have 2 mil in the market either when. You were 20.

No it’s not the same risk. It’s convenient to use average returns vs. sequence of returns. I’d post a link but I’m on my phone. Losing 50% in year one of retirement can mean failure even if you average 9% over 30 years. Just a fact. That’s why I am building a bond tent going into retirement and letting my AA drift to 50/50 this year. Once I retire, I will let that drift up to 80% over the next 15 years as I approach SS age. Once SS kicks in, I don’t need my nest egg anymore so I will be investing for charities and my kids.

[Singuy]

No it’s not the same risk. It’s convenient to use average returns vs. sequence of returns. I’d post a link but I’m on my phone. Losing 50% in year one of retirement can mean failure even if you average 9% over 30 years. Just a fact. That’s why I am building a bond tent going into retirement and letting my AA drift to 50/50 this year. Once I retire, I will let that drift up to 80% over the next 15 years as I approach SS age. Once SS kicks in, I don’t need my nest egg anymore so I will be investing for charities and my kids.

Only a failure in your head under the assumption that the million lost is lost forever when in fact 100% of the time it comes back in a future date, and then grow beyond the loss by 200-300%. Only if say a market crash for 7 year straight which is impossible except during a world war. Then I argue everything is F ed during a world war.

I back tested every which way.

[corn18]

Only a failure in your head under the assumption that the million lost is lost forever when in fact 100% of the time it comes back in a future date, and then grow beyond the loss by 200-300%. Only if say a market crash for 7 year straight which is impossible except during a world war. Then I argue everything is F ed during a world war.

I back tested every which way.

Back testing proves nothing. Many millionaires have gone broke at the altar of back testing and any other kind of tool that uses the past to predict the future. If it worked, there would be no efficient market and all the analysts with their fancy algorithms would be rich and floating on their yacht.

Try the Monte Carlo simulations. They aren't predicting anything other than something different than what has happened in the past by using the past. Not perfect, but more robust than back testing.

Here's a link to a Kitces article that does a great job explaining SORR:

[disneysteve]

Great thread. Thanks for starting it.

I am definitely of the opinion that everyone at every age should have at least a portion of their portfolio in stocks. My 90-year-old mother has a chunk in an S&P 500 fund as well as holding several individual stocks.

The piece you haven't mentioned is income. Yes, there are some dividends and capital gains thrown off by individual shares and mutual funds or exchange traded funds, but if those aren't sufficient to cover your spending, then you will need to sell shares each time you need money. That isn't something that everyone really feels comfortable doing, especially as they get older.

And you can't deny that stocks are higher risk than fixed-income investments. If you have sufficient money to last a lifetime, why take more risk than necessary?

Let's say we retire with $2.2 million and our annual spending is $84,000. Without earning a penny in interest, that would last us 26 years. Obviously, you need to factor in inflation so it isn't quite that simple, but we clearly don't need a 12% return to be just fine, so why take that risk? I don't need to die with twice as much money as I started with. I just don't want to run out of money before I die.

My plan? We're around 65% stock and I plan to stay somewhere around there because I do lean more toward your line of thinking and I'm comfortable managing that portfolio and drawing from it if needed to access money. But I also want a stash of cash so that I never have to sell emergently and if there is a crash, I have a cushion that lets me keep up normal spending while giving the stock allocation time to recover untouched.

Hope that all makes sense.

[Fishindude77]

For sure, you can't let off the gas at retirement. I retired at 57 and my dad is still in good health at 90, so I need to keep much of my money working and earning as retirement could potentially be 30-40 years.
It could also get real expensive those last couple years if you wind up in a nursing home.

I do not agree with the idea that all of your investments should be tied up in the stock market, there are other ways to make money and it is never unwise to diversify. We've got money in; the market, some business ownership, lots of real estate, CD's and cash.

[Singuy]

Back testing proves nothing. Many millionaires have gone broke at the altar of back testing and any other kind of tool that uses the past to predict the future. If it worked, there would be no efficient market and all the analysts with their fancy algorithms would be rich and floating on their yacht.

Try the Monte Carlo simulations. They aren't predicting anything other than something different than what has happened in the past by using the past. Not perfect, but more robust than back testing.

Here's a link to a Kitces article that does a great job explaining SORR:

Like I said, when there are no other investment vehicles, everyone goes equity because you have a 100% chance of losing your money to inflation if the returns are 0.8%

I absolutely encourage capital preservation when CDs are giving out 6-8% because no only high interest rates induce market corrections without a strong rebound, but also wanting an extra 1-2% return beyond what CDs can provide is terrible for the risk you are taking.

But as if today when interest rates are guaranteed to be zero for the next few years, you are risking a 8% average return which is senseless especially knowing the market will continue to be inflated when there are no other alternative.

This is the beauty of auction based equity market based on supply and demand. When interest rates are low, demand becomes infinite.

[corn18]

Like I said, when there are no other investment vehicles, everyone goes equity because you have a 100% chance of losing your money to inflation if the returns are 0.8%

I absolutely encourage capital preservation when CDs are giving out 6-8% because no only high interest rates induce market corrections without a strong rebound, but also wanting an extra 1-2% return beyond what CDs can provide is terrible for the risk you are taking.

CD's never keep up with inflation, even when they are returning 6%. This is a strawman argument.

But as if today when interest rates are guaranteed to be zero for the next few years, you are risking a 8% average return which is senseless especially knowing the market will continue to be inflated when there are no other alternative.

Again, using average returns is a mistake. The market does things that are not average.

This is the beauty of auction based equity market based on supply and demand. When interest rates are low, demand becomes infinite.

I don't understand this.

asdfasdf

[Singuy]

asdfasdf

You use average returns because you dollar cost average out over 25-30 years, not trying to time the market. Don't know why this concept is so hard to understand.

The math is better than dollar cost averaging in since any potential future gains is off whatever is left from 2 million and not 20k.

The market always go up. Are you trying to argue that it doesn't? Or are you not sure what the rebound time frame is? The only risk is in the length of time of the market crash which is correlated with interest rates. The lower the rates, the shorter the crash.

[corn18]

You use average returns because you dollar cost average out over 25-30 years, not trying to time the market. Don't know why this concept is so hard to understand.

The math is better than dollar cost averaging in since any potential future gains is off whatever is left from 2 million and not 20k.

The market always go up. Are you trying to argue that it doesn't? Or are you not sure what the rebound time frame is? The only risk is in the length of time of the market crash which is correlated with interest rates. The lower the rates, the shorter the crash.

You obviously are unable or unwilling to accept the premise of Sequence of Returns Risk (SORR). Read the Kitces article. If you don't believe SORR is real, then we will agree to disagree.

[disneysteve]

The lower the rates, the shorter the crash.

Interesting point. Is that historically accurate? It makes sense.

I've seen numerous articles about the demand for stocks being sky high now because it's really the only alternative. And that demand is part of what is driving higher prices.