FI ratio

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TomB19
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FI ratio

Post by TomB19 »

I don't understand the desirability of using a ratio for a fixed income allocation.

Wouldn't it make more sense to keep 2~3 years of retirement income in FI and put the rest into other ventures, regardless the ratios?

The point being, it seems like FI exists to enable the investor to ride out a crash or correction. Assuming this is the case, the problem is time based, not ratio based, so it seems to make sense to keep aside enough to live off for a few years.
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Re: FI ratio

Post by longinvest »

But, time elapses. One has to spend, during retirement. So, the 2-3 year reserve gets depleted and must be refilled. How do you propose to do that?
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AltaRed
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Re: FI ratio

Post by AltaRed »

I consider FI primarily as a shock absorber that can be disproportionately used when equities are in the tank, but that must then be disproportionately replenished, even if equities have not fully recovered, to enable rinse and repeat.
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cannew
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Re: FI ratio

Post by cannew »

Everyones situation will be different and a lot depends upon ones income and how secure it is. The FI or cash on hand will be determined by an estimate of future expenses, like taxes, trips, major expenditures (saving for a car) or just a comfort level (like knowing one has so much cash available). It does not have to be a fixed amount or percentage, but flexible to suit your own situation.
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Re: FI ratio

Post by longinvest »

AltaRed wrote: 14 May 2017 14:19 I consider FI primarily as a shock absorber that can be disproportionately used when equities are in the tank, but that must then be disproportionately replenished, even if equities have not fully recovered, to enable rinse and repeat.
Doesn't a fixed FI ratio do exactly that? For example (50/50 AA):

Initial portfolio: $500,000 stocks, $500,000 bonds
Stocks return -50%, bonds return +5%
Before withdrawal and rebalancing: $250,000 stocks, $525,000 bonds
Desired withdrawal: $40,000

This implies:
  • Withdrawal: $40,000 from bonds, leaving $485,000 in bonds
  • Sell $117,500 in expensive bonds to buy $117,500 in cheap stocks*
  • We're back to a balanced portfolio: $367,500 stocks, $367,500 bonds
* Really! One was willing to buy (or hold) stocks at double their current value just last year. Why not buy them now that they're at half the price? Don't people buy things at a rebate when there's a special?

A fixed ratio of stocks and bonds is the ultimate bucket system, when you think about it!
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AltaRed
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Re: FI ratio

Post by AltaRed »

What I didn't say in my earlier post (and where my head was) is at my current level of spending and net worth and risk tolerance, I believe in needing only about 15% in FI. So yes...call it re-balancing an 85/15 portfolio at this time, but I came at it from the perspective of how much FI I want in absolute dollars as a shock absorber rather than 15% being the correct allocation percentage 'for all time'. IOW, I re-balance to a FI amount (not percentage).
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longinvest
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Re: FI ratio

Post by longinvest »

It's still fun to look at what happens with the 85/15 scenario:

Initial portfolio: $850,000 stocks, $150,000 bonds
Stocks return -50%, bonds return +5%
Before withdrawal and rebalancing: $425,000 stocks, $157,500 bonds
Desired withdrawal: $40,000

This implies:
  • Withdrawal: $40,000 from bonds, leaving $117,500 in bonds
  • Sell $36,125 in expensive bonds to buy $36,125 in cheap stocks
  • We're back to a 85/15 portfolio: $461,125 stocks, $81,375 bonds
Again in this case, the withdrawal is automatically taken from bonds, when stocks dive.
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ghariton
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Re: FI ratio

Post by ghariton »

AltaRed wrote: 14 May 2017 14:49the perspective of how much FI I want in absolute dollars as a shock absorber .... IOW, I re-balance to a FI amount (not percentage).
That's what I do. Note two consequences, though.

First, as my portfolio size has grown in the last decade, and my FI component has stayed the same, the amount allocated to FI has dropped, from some two thirds to some one third. Again, there's nothing magic about these ratios -- they just fall out of the strategy.

Second, if there is a severe financial downturn and both bonds and equities fall, there may be a case for selling equities and restoring the absolute value of the FI component.* That may not be the wisest thing to do, but it should certainly be contemplated. But that also shows that none of these rules should be followed automatically. Even my very simple strategy can't be completely on auto-pilot. :wink:



*Indirectly, that's what I did in 3008-2009. My bonds fell in value, and I directed all my "new" money to increasing my bond holding. Then in April 2009, when my brother-in-law needed $30,000 to save his business, I sold some equities. Later, when my bonds recovered, I sold some, so as to get down to my target FI, and switched the money to equities.

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DenisD
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Re: FI ratio

Post by DenisD »

AltaRed wrote: 14 May 2017 14:49IOW, I re-balance to a FI amount (not percentage).
I rebalance to equity and bond amounts and let the cash vary. :wink:
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Re: FI ratio

Post by kcowan »

I include convertible debentures in my FI bucket. Two are coming due June 30th:
1. NFI which is currently trading for US$4.05 on a cost of $1.04 while giving a 6.25% return plus FX, and
2. Enercare trading at $3.0 on $1.0 with 6.25% return.

These are examples of having your cake while eating it. Granted these were lucky exceptions, but I am having trouble counting them as FI. And when they settle, I will have trouble replicating them.

Convertible debentures seem to be a vanishing breed, and, when they are announced by TDDI, they are sold out in 2 hours.

NFI is in my RRIF, while Enercare is in my trading account. The problem is that they were FI when I bought them.
For the fun of it...Keith
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