Investment changes in retirement

Preparing for life after work. RRSPs, RRIFs, TFSAs, annuities and meeting future financial and psychological needs.
longinvest
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Re: Investment changes in retirement

Post by longinvest »

SQRT wrote: 12 Jul 2017 18:19
longinvest wrote: 12 Jul 2017 18:06
SQRT wrote: 12 Jul 2017 17:43 Only PV pension for AA purposes. Makes it more comparable to someone without a pension and the collective wisdom of rule of thumb AA percentages ie 60/40, 100 minus age, etc. A material pension does increase your ability to assume risk, all else being equal.
I ignore personal use real estate (expense not FI) and CPP as it will be immaterial.
I look at it differently. The person without a pension could use part of her portfolio to buy an equivalent annuity and, thus, get the same guaranteed income I will get with mine.

Saying that I can put more money in stocks than this person implies a disturbing assumption; it means that the residual portfolio (after buying the annuity) would be invested 100% (or mostly) in stocks. Why should I accept such an assumption?
Sorry but you lost me. I have a generous pension from my employer. It covers most of my personal expenses in retirement. I feel I can take more risk with my portfolio than someone who has no pension and has to cover his expenses from his portfolio?
Let me put it this way: it's not because I can take more risk that I should take more risk with my (residual) portfolio. I do not agree with the implicit assumption, in most asset-allocation discussions on public forums, that one should take as much risk as possible.
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Re: Investment changes in retirement

Post by longinvest »

Some people promote taking as much risk as possible. Very few others, such as Zvi Bodie, promote taking as little risk as possible.

I've personally selected the middle ground. I take some risk, but I don't go all in. I could easily have a 100% (or even 120%) stocks portfolio. I could also go ahead with a 100% real-return bonds portfolio. In all cases, I'm confident I would retire with dignity. I've decided to go half stocks, half bonds. The fact that I have a pension does not cause me to increase my allocation to stocks. Actually, even if I didn't have a pension, I would still choose the same allocation.

Somebody without a pension, who likes taking risk, could decide to go 100% stocks and wait until the portfolio is big enough to buy a life annuity and keep the residual portfolio 100% in stocks. Somebody else could start with a 60% stocks / 40% bonds portfolio and do the same (keeping the same AA for the residual portfolio). Another could go with 75% real-return bonds, and 25% stocks.

I don't see why having a pension would change anything.
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Re: Investment changes in retirement

Post by SQRT »

longinvest wrote: 12 Jul 2017 18:22
SQRT wrote: 12 Jul 2017 18:19
longinvest wrote: 12 Jul 2017 18:06

I look at it differently. The person without a pension could use part of her portfolio to buy an equivalent annuity and, thus, get the same guaranteed income I will get with mine.

Saying that I can put more money in stocks than this person implies a disturbing assumption; it means that the residual portfolio (after buying the annuity) would be invested 100% (or mostly) in stocks. Why should I accept such an assumption?
Sorry but you lost me. I have a generous pension from my employer. It covers most of my personal expenses in retirement. I feel I can take more risk with my portfolio than someone who has no pension and has to cover his expenses from his portfolio?
Let me put it this way: it's not because I can take more risk that I should take more risk with my (residual) portfolio. I do not agree with the implicit assumption, in most asset-allocation discussions on public forums, that one should take as much risk as possible.
No disagreement with your view. But it seems to me that PV'ing you pension just gets your AA comparable to others with no pension. What you do with that information is up to you and will depend on your risk appetite. I have a fairly high risk appetite. But it makes no difference to me what yours might be.
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Re: Investment changes in retirement

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longinvest wrote: 12 Jul 2017 18:30 Some people promote taking as much risk as possible. Very few others, such as Zvi Bodie, promote taking as little risk as possible.

I've personally selected the middle ground. I take some risk, but I don't go all in. I could easily have a 100% (or even 120%) stocks portfolio. I could also go ahead with a 100% real-return bonds portfolio. In all cases, I'm confident I would retire with dignity. I've decided to go half stocks, half bonds. The fact that I have a pension does not cause me to increase my allocation to stocks. Actually, even if I didn't have a pension, I would still choose the same allocation.

Somebody without a pension, who likes taking risk, could decide to go 100% stocks and wait until the portfolio is big enough to buy a life annuity and keep the residual portfolio 100% in stocks. Somebody else could start with a 60% stocks / 40% bonds portfolio and do the same (keeping the same AA for the residual portfolio). Another could go with 75% real-return bonds, and 25% stocks.

I don't see why having a pension would change anything.
Seems to me that having a pension in hand is quite different than waiting for your portfolio to go up so you can buy one. I don't think I can add anything more here. Cheers.
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Re: Investment changes in retirement

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Yes the way I calculate PV for the pensions increases their value. I do this because then I can the most realistic assessment of the safe portion of my portfolio. It is higher than an annuity table and for sure higher than the company pension. So that makes me more comfortable with a higher percentage of equities.

So far that has worked in my favour in 15 years of retirement. It also helps me to focus on my own mortality every couple of years and that encourages me to be more generous. YMMV
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Re: Investment changes in retirement

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kcowan wrote: 12 Jul 2017 19:06 Yes the way I calculate PV for the pensions increases their value. I do this because then I can the most realistic assessment of the safe portion of my portfolio. It is higher than an annuity table and for sure higher than the company pension. So that makes me more comfortable with a higher percentage of equities.

So far that has worked in my favour in 15 years of retirement. It also helps me to focus on my own mortality every couple of years and that encourages me to be more generous. YMMV
So, you're using the "ask" price, instead of the "bid" price, to estimate the present value of your pension. Couldn't you, instead, simply admit to yourself that you're comfortable with a 100% (or whatever you have) allocation to stocks, in your portfolio, and stop playing mental games? :wink:

(Sometimes, it is useful to play mental games. So, maybe doing it is helpful to you. I just want to understand why you play the game).
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Re: Investment changes in retirement

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longinvest wrote: 12 Jul 2017 13:32 What intrigues me, in the above, is why people try to calculate the present value of lifelong income, instead of the reverse, which is to estimate the lifelong income that their fluctuating portfolio can add to their existing lifelong income, and its variability. The income seems more actionable to me than a present value. What am I missing?
PVing a DB pension becomes, as SQRT has suggested, part of the FI component of one's asset allocation. The only difference between an annuity stream and other FI is that the pension component of the FI is a known quantity ad finitum. Better than a GIC ladder with unknown rates. While the pension component is not actionable (as you correctly note), why would one want the best FI component of one's AA actionable anyway?

That said, another way to look at it is to estimate one's lifelong cash flow needs on an annual basis and subtract out the 'after tax' values of the guaranteed streams, e.g. CPP and DB pension, from that need, resulting in a 'residual' need that the portfolio needs to provide, and develop an AA from that.

Either method is really a cash flow model. Will one method result in a different AA than the other? Maybe depending on whethe one's motivation is to take more equity risk (per SQRT) because he can, or to take even less equity risk because there is no need too. I think one could come to the same conclusion either way. For me, my FI component in my actionable portfolio is way lower with my DB pension than it would be without the DB pension because I can take the equity risk and I like being 'in the game' and 'playing the game'. Nice problem to have.
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Re: Investment changes in retirement

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Sensei wrote: I wonder if FWFers would like to share:
1. to what extent they repositioned their portfolios nearing or after retirement
2. if it was planned or just ad hoc
3. how they are financing their lifestyles if completely retired
I am not retired yet but, due to personal circumstances, I have recently been forced to cut my hours. As a result, I have been drawing an income from my portfolio. I am using this opportunity as sort of a retirement dry run. I will not have a pension when I retire and most of my income will be generated from my portfolio.

I have been keeping good track of my expenses. The goal is to get an objective idea of how much of it is necessary as opposed to discretionary. The data helps me understand how much income my portfolio needs to generate and how much it can be allowed to vary (i.e., lower bound). The main change in my AA has been that I started increasing CAD equity allocation (blue-chip div payers). I am currently at 17% and targeting 25% of total portfolio. I am also contemplating increasing REIT allocation (currently at =~ 4% of total portfolio). My FI component is fairly low but set to increase as I get older.

Overall, my experience is that it takes a while to get used to drawing income from a portfolio. I find myself often running calculations in order to reassure myself that I can count on the income stream.
Sensei wrote:I plan to work part time after 65 which could be nearly enough to live on including pensions. However, I think I'll be fully retired by 68 - 70 depending on health.
Do you plan to stay in Tokyo after full retirement? I imagine it is a very expensive city to live in.
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Re: Investment changes in retirement

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gobsmack wrote: 13 Jul 2017 00:34 Overall, my experience is that it takes a while to get used to drawing income from a portfolio. I find myself often running calculations in order to reassure myself that I can count on the income stream.
Indeed it does. One consolation is dividend growth from stock/ETF portfolios. As an example, the disrtribution fom my VTI holding has approximately doubled since 1/1/2009.

I don't think you can count on that kind of distribution growth from your REITs but on the other hand, REIT distribution income from good REITs with low payout and low leverage are consistent payers...generally in excess of 4% of REIT market value. Kind of like the Energizer bunny...just keeps going.
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Re: Investment changes in retirement

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longinvest wrote: 12 Jul 2017 18:30 I could easily have a 100% (or even 120%) stocks portfolio. I could also go ahead with a 100% real-return bonds portfolio. In all cases, I'm confident I would retire with dignity. I've decided to go half stocks, half bonds.
I presume when you say you "could" you mean that you "could handle the potential loss inherent in such a choice" and still maintain your dignity.
So why would you consciously hobble your financial future?

[Sane] people don't increase the risk in their portfolio for the thrill of it. They do it for the potential reward.
Why do [sane] people decrease the risk in their portfolio if there is no need to do so?
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Re: Investment changes in retirement

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So why would you consciously hobble your financial future?
IMO this should maybe read 'So why would you consciously hobble your "expected/possible" financial future.'
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Re: Investment changes in retirement

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Descartes wrote: 13 Jul 2017 14:58
longinvest wrote: 12 Jul 2017 18:30 I could easily have a 100% (or even 120%) stocks portfolio. I could also go ahead with a 100% real-return bonds portfolio. In all cases, I'm confident I would retire with dignity. I've decided to go half stocks, half bonds.
I presume when you say you "could" you mean that you "could handle the potential loss inherent in such a choice" and still maintain your dignity.
So why would you consciously hobble your financial future?
OK, let me clarify. If I quit my job tomorrow and somehow manage to survive between now and age 70 (even if I had to go on welfare to do it), I will get enough money from age 70 to my death coming in from pensions to be above the official poverty line (25K) and be disqualified from GIS*. I'm considering 3 pensions in this calculation: OAS (full + delay bonus), QPP (what has been acquired as of December 2016 + delay bonus), and workplace pension (acquired amount as of December 2016, not indexed between now and age 65, non-indexed payments starting at 65, considering 3% inflation and death no later than age 100). I am not taking into account any other currently acquired wealth, nor any future acquired wealth or pensions (future QPP and workplace pension plan contributions). I am not considering, either, any of my wife's wealth and OAS/QPP pensions.

* I'm not disclosing the total of my future (delayed) pensions; I'm just saying that it is more than 25K, adjusted to inflation.

I think that it is safe to say that I am likely to continue working and acquiring wealth, as I really like my job. Also, I have long-term disability insurance which would kick in if I somehow became disabled before age 65.

I should be fine regardless of the portfolio allocation I choose, don't you think?
Descartes wrote: 13 Jul 2017 14:58 [Sane] people don't increase the risk in their portfolio for the thrill of it. They do it for the potential reward.
Why do [sane] people decrease the risk in their portfolio if there is no need to do so?
The thing is that zero risk does not exist. Even government pensions could fail to deliver on their promises. We know that stocks are not predictable. But, even real-return bonds which have no inflation risk don't come with any assurance of being able to buy a specific amount of inflation-indexed annuities the day I decide to retire (many years from now). Let's not try to predict the real-return of nominal bonds, or domestic and international stocks; it's simply impossible. So, I have to live in an uncertain world.

I've taken what I consider a relatively rational decision to split my portfolio wealth equally between bonds (less volatile, somewhat more predictable), and stocks (more volatile, impossible to predict but with potential to significantly outperform bonds). Could I do better? Quite probably. Could I do worse? Quite probably. Call it a no-regrets portfolio, if you want**: if stocks do horribly, I won't have put all my wealth into them. If bonds severely underperform, I won't have put all my wealth into them.

** I prefer to call it a lifelong portfolio, as I think that it is a portfolio that could be used all lifelong by any rational investor.

Why should I take more risk? Why should I take less risk?

Actually, I've eliminated what I consider the real risk, for me, which is the risk of not having enough income when I'm older (age 70 and more) and possibly unable to work anymore.
Last edited by longinvest on 13 Jul 2017 18:02, edited 6 times in total.
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Re: Investment changes in retirement

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BRIAN5000 wrote: 13 Jul 2017 17:08
So why would you consciously hobble your financial future?
IMO this should maybe read 'So why would you consciously hobble your "expected/possible" financial future.'
+1 :thumbsup:
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Re: Investment changes in retirement

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I think that many Canadians don't realize how easy it is, for a working single person, to accumulate at least $25K in guaranteed inflation-indexed income from age 70 until death, in Canada*. Just delaying OAS until age 70 guarantees more than $9K. Even with a spotty work records, a typical Canadian could get $11.5K in annual CPP pension (see http://www.financialwisdomforum.org/for ... 75#p593743).

* This means that it is easy for a working couple to accumulate at least $50K, payable while both are still alive. Would be reduced after the death of one spouse.

That's already a total of $20.5K. The missing $4.5K, in the form of a joint life annuity with payments indexed 2% per year, currently costs less than $100K at age 70 (see https://lifeannuities.com/annuity-rates ... joint.html).

So, once this risk is removed, the rest becomes a question of personal preference.

Here's an interesting quote which helps me keep away from putting my portfolio 100% into stocks:
In Where are the Customer's Yachts, Fred Schwed wrote:Like all of life's rich emotional experiences, the full flavor of losing important money cannot be conveyed by literature. Art cannot convey to an inexperienced girl what it is truly like to be a wife and mother. There are certain things that cannot be explained to a virgin either by words or pictures. Nor can any description that I might offer here even approximate what it feels like to lose a real chunk of money that you used to own.
I just imagine what my wife would say if I told her that we lost more than half of our portfolio which we accumulated through hard work and saving.
Last edited by longinvest on 14 Jul 2017 13:57, edited 1 time in total.
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Re: Investment changes in retirement

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longinvest wrote: 13 Jul 2017 18:23
I just imagine what my wife would say if I told her than we lost more than half of our portfolio which we accumulated through hard work and savings.
Fear of Wife is a great motivator. You could easily be a market timer, just show your wife your plan and then live with the consequences if you don't follow it. :)
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Re: Investment changes in retirement

Post by SQRT »

If you are satisfied with your guaranteed expected income in retirement and not concerned with inflation, or have a legacy objective, then by all means reduce your risk. However, I have taken the opposite approach. I could easily live with a 50% haircut to our portfolio. This would still leave me in the top 1% of Canadians. I can think of productive uses of increased income which would include significant gifting. That being the case, why wouldn't I assume a little more risk? Over the past 10 years, and more, I have been well paid to take this risk. Really depends on your risk appetite, mine is pretty high.
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Re: Investment changes in retirement

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SQRT,
SQRT wrote: 14 Jul 2017 07:23 If you are satisfied with your guaranteed expected income in retirement and not concerned with inflation, or have a legacy objective, then by all means reduce your risk. However, I have taken the opposite approach. I could easily live with a 50% haircut to our portfolio. This would still leave me in the top 1% of Canadians. I can think of productive uses of increased income which would include significant gifting. That being the case, why wouldn't I assume a little more risk? Over the past 10 years, and more, I have been well paid to take this risk. Really depends on your risk appetite, mine is pretty high.
I'm particularly surprised by your selection of the past 10 years investment period. It's a period when the risk of stocks actually showed up; taking the additional risk of 100% stocks did not pay.

Here is a growth chart for two portfolios:
  1. (blue) Lifelong:
    • XIC.TO iShares Core S&P/TSX Capd Comp Index ETF 25.00%
    • XSP.TO iShares Core S&P 500 Index ETF Hedged 12.50%
    • XIN.TO iShares MSCI EAFE Index ETF Hedged 12.50%
    • XBB.TO iShares Core CanadianUniverse Bond Index 25.00%
    • XRB.TO iShares Canada Real Return Bond Indx ETF 25.00%
  2. (red) 100% stocks:
    • XIC.TO iShares Core S&P/TSX Capd Comp Index ETF 50.00%
    • XSP.TO iShares Core S&P 500 Index ETF Hedged 25.00%
    • XIN.TO iShares MSCI EAFE Index ETF Hedged 25.00%
Source: Portfolio Visualizer
lifelong-vs-stocks.png
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Re: Investment changes in retirement

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Here's a more typical chart of historical performance for different asset allocations, extracted from the Canadian version of Vanguard’s principles for investing success (Balance) document:

Returns for the 95th and 5th percentiles and on average for various equity/fixed income allocations, 1901–2016
(Click on the chart to enlarge it)
allocations.png
Notes: Equities are represented by the DMS Canada Equity Index from 1901 to 1984, and the S&P/TSX Composite Index thereafter. Fixed income is represented by the DMS Canada Bond Index from 1901 to 1984, the Citigroup World Government Bond Index from 1985 through 2001 and the Bloomberg Barclays Canadian Issues 300MM Index thereafter. Data are through December 31, 2016.
Sources: Vanguard, using data from Morningstar, Inc., and Barclays.


To get the exact average indicated on the chart, an investor would have had to be invested for a period of 116 years, which included the drop of the gold standard and sub-periods of high inflation (very, very bad for nominal bonds). Real-return bonds did not exist for most of that period (and are not included in the chart). That's longer than my investment horizon. Over smaller horizons, there were periods when 100% stocks did not beat 50/50 stocks/bonds, despite being significantly more volatile.

Using historical returns as a basis for investing is not necessarily a good idea. We don't know if the future will be like the past; actually, it's way more likely to be different than similar. Here's a link to an interesting article by William Bernstein about it: Only Two Centuries of Data.
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Re: Investment changes in retirement

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Hi longinvest et al:

You have illustrated very well the basic investing principles that apply to most people.

The group of "most people" are people who invest based upon fear. It is rational for this group of people to invest according to the principles you have laid out. It leads them to the best likely outcome for them.

There is a very small group of people who are not primarily fear driven. The past 10 years that you have illustrated to be a period where higher risk of stocks did not pay off, have been the conditions for this group to do really well. These people would be buying with both fists late 2008, early 2009 almost anything, or say TECK.B at under $10 two years ago. I expect SQRT is a member of this group and have no trouble believing the last 10 years have been fantastic for him in the equities he actually purchased. Docile market conditions that make most people comfortable would be terrible for this group, there would be little fear based opportunity for them on which to capitalize. For this group volatility is a feature, not a bug.

Your data and graphics actually make the case for both groups to do what they should do to get the best outcome for them. Of course great sorrow likely comes to those who think they are in the second group, but actually are members of the first group.

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Re: Investment changes in retirement

Post by longinvest »

Does putting on one's safety belt means that one is driving his car out of fear? I'd call it prudence.
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Re: Investment changes in retirement

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longinvest wrote: 13 Jul 2017 18:23 I just imagine what my wife would say if I told her than we lost more than half of our portfolio which we accumulated through hard work and savings.
I remember losing 12 per cent of our portfolio over two consecutive days in 2001 part of a cumulative loss of 66 per cent). When I told my wife the second evening, she shrugged. It was just George playing with his paper money.

It seems to me that a lot of the discussion on this thread is about one's degree of risk aversion. Unfortunately, as pointed out, you can't really know that until significant losses happen to you. I found out my level of tolerance for risk in 2000 -- 2002, and I invest accordingly. In a way, I was very lucky. My loss was significant enough to be meaningful, but early enough so that I could make the money back through working (and saving).

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Re: Investment changes in retirement

Post by SQRT »

I've been in the market for about 20years. That's the timeframe that is meaningful to me. My total returns have been significantly higher than the TSX. Not as diversified as most(including me) would like. Probably just luck, but I intend to generally continue on this path. I had large losses in 2008/2009 like everybody else. But didn't panic or sell. Like I said it's your risk appetite that is key. Mine is high but I certainly don't expect others to do the same. I can afford to take more risk and do so. Others view it as not needing to take more risk and don't. Different strokes for different folks.
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Re: Investment changes in retirement

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I agree it is different strokes for different folks. I've been investing since about 1990 and experienced the Asian flu (1997), the dotcom bust (2000) and the 2008-2009 crisis. The first two were not that relevant because I was not disproportionately exposed and I was still in my peak earning years. I did learn though that equities can go down, and quickly, and deeper than one might otherwise assume. So when the financial crisis hit in 2008--2009, just 2.5 years after retirement, I knew to 'hang in there', and indeed did some opportunistic buying AND some opportunistic tax loss selling. Still a sobering thought tho and my ex (at that time) trusted me enough with her portfolio to hang in there too.

My annuity* income (CPP and DB pension) is enough to keep me solvent in tough times so I feel I have the opportunity and fortitude and interest and acumen to partake in the opportunities in the equities market. Mind you, I stay away from speculative stocks, tax gimmicks and for the most part, cyclicals. My investment income stream has grown considerably since retirement as well. All of that gives me the sleep-at-night basis that I need. FWIW, I like the VPW methodology and it will remain my guiding light throughout my remaining years.

I think those of us who have been retired for some time need to understand that investors still in accumulation mode are still building their retirement plan and don't have the experiences that retirees currently have. It is prudent to be methodical and disciplined in their approaches. Longinvest's system is disciplined and from his perspective, the appropriate path for him to reach his goals. All of us were in that position at one time though specifics get foggy with time.

* My latest thinking on my small 'relative to the rest of my portfolio' RRSP which is a fixed income ladder earning at best circa 3% currently, is to annuitize it at some point circa age 75 to supplement my non-COLA'd DB pension. It is more of a PITA to administer and rates may fit nicely (I hope) with increased interest rates at that time. We shall see.
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Re: Investment changes in retirement

Post by longinvest »

SQRT,
SQRT wrote: 14 Jul 2017 16:28 I've been in the market for about 20years. That's the timeframe that is meaningful to me. My total returns have been significantly higher than the TSX. Not as diversified as most(including me) would like. Probably just luck, but I intend to generally continue on this path. I had large losses in 2008/2009 like everybody else. But didn't panic or sell. Like I said it's your risk appetite that is key. Mine is high but I certainly don't expect others to do the same. I can afford to take more risk and do so. Others view it as not needing to take more risk and don't. Different strokes for different folks.
First, let me clarify: I fully agree with your principle of letting each investor select his "non-liability-matched" portfolio based on his risk appetite.

What I'm expressing is simply my surprise at your choice of periods (10 and 20 years) to claim that the risk has paid off. Just for the record, in the 20 years spanning from 1997 to 2016, the Lifelong (50/50) portfolio [7.19%] beat (by barely three basis points) the returns of a 100% stocks portfolio [7.16%]*. Let me insist: this is highly unusual based on the post-1900 return history of asset classes.

* With significantly less volatility: 7.4% vs 14.8%.

As for the argument about selecting stocks that beat the TSX, one could have done the same on the bonds side, shooting for long-term bonds which have done particularly well over the last 10 and 20-year periods. Of course, one could have picked specific bonds to beat the long-term bonds index, too. The result of combining this bond portfolio with your hand-picked stock portfolio in equal proportions could have possibly beat your portfolio.

So, I feel relatively safe in claiming that the additional risk of 100% stocks did not pay off in the last 10 and 20 years. This does not mean that one didn't get decent returns; on the contrary! Overall returns were sufficient to grow a portfolio considerably faster than with a savings account. Isn't that what really matters?
Variable Percentage Withdrawal (finiki.org/wiki/VPW) | One-Fund Portfolio (VBAL in all accounts)
BRIAN5000
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Re: Investment changes in retirement

Post by BRIAN5000 »

Not sure if my numbers are typical or not

In 08/09 my equity portfolio was worth $610,000 with $210,000 of CG by the time the carnage was done I was down $300,000. Ate through all my gains from 1995 till then plus into capital. I was able to buy in up until sept/oct of 08 but then I had had enough and can't remember when I started buying again after the bottom in 09 I guess but not sure when. I delayed retirement 3 years to 2011 when the stars aligned with my age and package at work. Now my equity portfolio is substantially larger with about $500,000 in CG I sometimes wonder if I could stand losing 1/2 mil in gains and a few hundred thousand more in principal, we shall see I guess.
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