Switching to a decumulation mindset

[vand]

If anyone is a fan of portfoliocharts (and you all should be) the creator Tyler was interviewed on the Many Happy Returns podcast where they deep-dived into his bulletproof retirement portfolio, which consists of (maybe surprisingly to many):

10% domestic stocks
30% foreign stocks
20% domestic bonds
10% commodities
30% gold

This particular combination gives the universal SWR of 4.4% over 30yrs which improves the commonly cited 4% SWR for efficient stock/bond portfolios not just in the US where most of the backtesting scenarios are done, but for 10 major developed economies including UK and Japan

While this may seem very different to some of the common popular portfolios, this is what the backtests say. while it may be easy to come up with a portfolio that would improve the SWR above this 4.4% just looking at the US, take that same portfolio into another country and it may do worse.

The takeaway is that while accumulation is a game of wealthbuilding and stocks are undoubted a great vehicle to do that, managing your retirement portfolio is more complex - it is foremost about preservation rather than growth, and to this end the benefits of diversification is too powerful to ignore.. the portfolio's goals are drastically different in drawdown; it shouldn't be a surprise that the ideal compostion should also drastically change to facilitate that. Diversification is the only free lunch in investing, and wealth managers would be wise to make use of it.

https://pensioncraft.com/captivate-podc ... portfolio/

[DrFfybes]

The takeaway is that while accumulation is a game of wealthbuilding and stocks are undoubted a great vehicle to do that, managing your retirement portfolio is more complex - it is foremost about preservation rather than growth, and to this end the benefits of diversification is too powerful to ignore.. the portfolio's goals are drastically different in drawdown; it shouldn't be a surprise that the ideal compostion should also drastically change to facilitate that./

This is something I struggle with.

I started saving after uni, age 22 or so. 30ish years later I stopped working and started to live on investments.

They may have to last me 40 years, (plus SP) so why would I want to change the strategy to one that would potentially reduce performance? OK so there is SOR risk, but stopping work early leaves the door open for returning to paid employment so why go more conservative?

10% domestic stocks
30% foreign stocks
20% domestic bonds
10% commodities
30% gold

Gold IMO is a Red Herring. The value is not based on any intrinsic quality, merely that is it a pretty resource that is expensive to produce and so supply is effectively limited, but in practical terms the commercial value is small.

https://www.macrotrends.net/1333/histor ... year-chart (US data).

It still hasn't got back to the inflation adjusted peak value it had in 1980, so a 44 year negative return, and managed to loase 80% of its value between 1980 and 2000.

And people say Bitcoin is a gamble

Paul

[xxd09]

A constant dilemma
Now 21 years rtd and aged 78
It seemed only logical to me that if I had discovered an engine of growth ie an asset allocation that I understood- that had generated a satisfactory savings regime return over many years ie tried and tested-why would I make radical changes to these basic assets and a successful investment policy that would then need to keep working over the next 30 years+ of retirement doing exactly the same thing ie growing at a productive rate
Some caveats obviously……
I might alter equity/bond ratio to preclude complications from a stockmarket drop ie go from 100% equities to 60/40 -I in fact went to 30/70 at retirement-had saved enough? -currently I am at 34/60/6 where 6=2+ years cash living expenses
It depends on withdrawal rate-this obviously set by the amount you have saved 3.3-3.8% seemed to work for me -the retirement portfolio seemed to generate this reasonably easily (portfolio is larger than when I started as it would need to be -inflation etc
All a bit personal but radically changing your tried and tested investment plan at retirement strikes me as a recipe for possible disaster
Entering uncharted waters for the amateur investor is always fraught with problems and at the beginning of retirement is probably not the time to start different and unknown investment pathways
xxd09

[Lootman]

10% domestic stocks
30% foreign stocks
20% domestic bonds
10% commodities
30% gold

Gold IMO is a Red Herring. The value is not based on any intrinsic quality, merely that is it a pretty resource that is expensive to produce and so supply is effectively limited, but in practical terms the commercial value is small.

https://www.macrotrends.net/1333/histor ... year-chart (US data).

It still hasn't got back to the inflation adjusted peak value it had in 1980, so a 44 year negative return, and managed to loase 80% of its value between 1980 and 2000.

And people say Bitcoin is a gamble

I'd agree that 30% gold is a very heavy allocation. And of course there is no income from it (although there are ways to generate an income from gold).

At the same time it does have certain qualities, notably that it is finite, popular, immutable and its value cannot be manipulated by governments (although governments can make it difficult for you to hold or sell gold).

And gold does have an interesting habit of sometimes going up when everything else is going down, so it has a diversification quality that is worth something.

But not 30%. I have about 2% in gold. Some in a gold ETF and some in miners like Barrick and Newmont. I can imagine going to 5% in some circumstances but not any more than that. And I am certainly not in the tinhat hoarder category.

As for crypto, I am not ready yet. I can see nibbling at it the next time it takes a major dump, which it will. But for now I don't need the aggro.

[Urbandreamer]

10% domestic stocks
30% foreign stocks
20% domestic bonds
10% commodities
30% gold

Gold IMO is a Red Herring. The value is not based on any intrinsic quality, merely that is it a pretty resource that is expensive to produce and so supply is effectively limited, but in practical terms the commercial value is small.

https://www.macrotrends.net/1333/histor ... year-chart (US data).

It still hasn't got back to the inflation adjusted peak value it had in 1980, so a 44 year negative return, and managed to loase 80% of its value between 1980 and 2000.

And people say Bitcoin is a gamble

Paul

As someone who holds both a gold ETF and has a small amount of bitcoin, I don't entirely disagree.

However as others have said, some consideration should be given to volatility and the effect of taking money from the portfolio. IF your portfolio is big enough, then possibly you can rely upon income from dividends. If it is somewhat smaller then, arguably you need uncorroborated assets to draw upon. It's all a personal opinion, but the issue for me with the portfolio suggested is not gold, but bonds. It's there intending to be a "safe" counter-correlated asset, however of recent times correlation has been high and performance based upon political decisions, rather than economics or market forces.

Returning to "gold". The fact that it IS expensive to produce and the supply constrained is what makes it a sensible choice for a store of value. The supply of bitcoin is even more constrained and falls every four years. Words are difficult, but I would call these assets (and bonds) savings rather than investments.

[jaizan]

Gold IMO is a Red Herring. The value is not based on any intrinsic quality, merely that is it a pretty resource that is expensive to produce and so supply is effectively limited, but in practical terms the commercial value is small.

It still hasn't got back to the inflation adjusted peak value it had in 1980, so a 44 year negative return, and managed to loase 80% of its value between 1980 and 2000.

Whilst I agree that gold has zero intrinsic value:
1 Gold has been a store of value for thousands of years and has more enduring value than any paper currency. Paper currency can have approximately zero intrinsic value, if badly managed. It's harder for anyone to debase gold that I already own.

2 Whilst Gold may have lost 80% of its value between 1980 and 2000, we can also cherry pick time periods where the stock market has lost 70% or more of it's value.

In retirement, I think the first objective should be to prevent failure of the portfolio.
I think gold helps as a diversifier and the obvious way to reduce the risk of extreme movements in valuations for any asset would be some level of rebalancing.

I currently have 13.4% of my portfolio in gold.

The discussion seems to be wandering away from decumulation to portfolio construction, although admittedly the two are very closely linked.

[tjh290633]

Gold IMO is a Red Herring. The value is not based on any intrinsic quality, merely that is it a pretty resource that is expensive to produce and so supply is effectively limited, but in practical terms the commercial value is small.

https://www.macrotrends.net/1333/histor ... year-chart (US data).

It still hasn't got back to the inflation adjusted peak value it had in 1980, so a 44 year negative return, and managed to loase 80% of its value between 1980 and 2000.

And people say Bitcoin is a gamble

Paul

I can only speak from my own experience. My objective was to provide income in retirement, so I opted for the high yield approach to a large extent. Come 1998 when I retired, bonds and gilts were yielding less than my equities, so there was no point in going down that route. I had been investing in commodities via what is now JP Morgan Natural Resources, which had originally been high yield, but had fallen away and yet was contrarian. I used its high spots to take profits to fund my PEP or ISA, as appropriate. I have to say that sticking to the high yield method has served me well, despite the upsets around 2008. The income from my portfolio is comparable with that from my pensions.

I have modest amounts in mining (RIO, BHP and S32), in oils (BP., SHEL and WDS) and in property (BLND, PHP and SGRO). My method is to use an equally weighted approach when I add a new holding (which is infrequent) and place a limit on holding weights (currently 150% of the median holding weight. Shares whose yield falls to zero are usually sold, while those yielding less than 2% are considered for disposal.

I keep contemplating a switch into investment trusts, but feel no urge to do so.

TJH

[vand]

The takeaway is that while accumulation is a game of wealthbuilding and stocks are undoubted a great vehicle to do that, managing your retirement portfolio is more complex - it is foremost about preservation rather than growth, and to this end the benefits of diversification is too powerful to ignore.. the portfolio's goals are drastically different in drawdown; it shouldn't be a surprise that the ideal compostion should also drastically change to facilitate that./

This is something I struggle with.

I started saving after uni, age 22 or so. 30ish years later I stopped working and started to live on investments.

They may have to last me 40 years, (plus SP) so why would I want to change the strategy to one that would potentially reduce performance? OK so there is SOR risk, but stopping work early leaves the door open for returning to paid employment so why go more conservative?

10% domestic stocks
30% foreign stocks
20% domestic bonds
10% commodities
30% gold

Gold IMO is a Red Herring. The value is not based on any intrinsic quality, merely that is it a pretty resource that is expensive to produce and so supply is effectively limited, but in practical terms the commercial value is small.

https://www.macrotrends.net/1333/histor ... year-chart (US data).

It still hasn't got back to the inflation adjusted peak value it had in 1980, so a 44 year negative return, and managed to loase 80% of its value between 1980 and 2000.

And people say Bitcoin is a gamble

Paul

The only argument I ever hear against gol is "it is still below the 1980 peak when you adjust for inflation"

Yes it is.

And you know what? that is a GOOD thing - why? In a terrible period for paper assets, it did something that allowed those holding it to perform a portfolio-saving rebalancing act. If you didn't hold gold, your portfolio got crushed.

Yes, a 100% gold allocation is a terrible idea, but a 0% portfolio is also far from optimal too. What is important is the whole portfolio, not what any individual component does.

[Spet0789]

A couple of points. Firstly, the author of the report was interviewed on Ramin Nakisa (of Pensioncraft)’s podcast Many Happy Returns. I would recommend.

Gold is an odd asset. It has two key characteristics which make it really interesting in a retirement context. First, it has historically displayed high covariance with risk assets. Second it is an inflation hedge in the long run.

These attributes make it look far better than one might expect in the context of an inflation-adjusted SWR.

[tikunetih]

If anyone is a fan of portfoliocharts (and you all should be) the creator Tyler was interviewed on the Many Happy Returns podcast where they deep-dived into his bulletproof retirement portfolio, which consists of (maybe surprisingly to many):

10% domestic stocks
30% foreign stocks
20% domestic bonds
10% commodities
30% gold

This particular combination gives the universal SWR of 4.4% over 30yrs which improves the commonly cited 4% SWR for efficient stock/bond portfolios not just in the US where most of the backtesting scenarios are done, but for 10 major developed economies including UK and Japan

While this may seem very different to some of the common popular portfolios, this is what the backtests say.

Diversification is the only free lunch in investing, and wealth managers would be wise to make use of it.

A key insight is that portfolios with lesser long term returns than more growth-oriented portfolios, but which deliver their returns more consistently (lower volatility), can support higher safe withdrawal rates.

That's not intuitive, and is one reason why someone may wish to adopt a different asset allocation as they transition from contributing to withdrawing from a portfolio: while accumulating, target the most long-term growthy portfolio your stomach or temperament can handle; once withdrawing, switch targets to a portfolio delivering the highest swr.

A higher swr is not a theoretical benefit but a highly practical one, since it means a higher "safe" income during your retirement, giving the you more money to spend "safely" earlier in your retirement when the utility of higher income is arguably greater.