Risk Averse Portfolio

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Mr. Potter
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Risk Averse Portfolio

Post by Mr. Potter »

I'm helping my 82 yo MIL with her taxable account, she moved away from a high fee investment firm last year and is just wanting to try and stay even with her nest egg. All current factors considered (inflation, rising interest rate risk, market volatility, etc) would this be a reasonable simple 3 fund, low cost portfolio held at Fidelity? She is in a very low tax bracket so that is not a big factor and she does have 2 years of expenses in a separate savings account.

Total Account value $100k
*35% VTI, Total Stock Market er.03
*35% FIPDX, Fidelity Inflation Protected Bond Fund er.05
*30% FXNAX, Fidelity Total Bond Market er.025
Last edited by Mr. Potter on Tue Jan 25, 2022 8:12 am, edited 1 time in total.
aristotelian
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Re: Risk Adverse Portfolio

Post by aristotelian »

Seems reasonable. Only question I have is why so much in TIPS. Not necessarily a bad choice but I suspect some market timing there.
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Re: Risk Adverse Portfolio

Post by nisiprius »

Nobody can say what's best. My personal opinion, not advice, is that for an eighty-year-old this is a very sensible, reasonable portfolio that doesn't go to any extremes.

This chart is only a picture of Morningstar/Ibbotson's institutional opinion of what the words "aggressive," "moderate," and "conservative" mean, and it's based on what real-world target-date funds do.

Image

Notice that 33% stocks is considered to be a "moderate" allocation; "conservative" is only 20%.

You should be prepared to shrug off timing considerations. People may suggest that this isn't a good "time" to buy stocks (because they've been falling in the last few days) or that it isn't a good "time" to buy TIPS (inflation worries have raised their prices). Just ignore it, you have to do something sometime and there's always something to worry about.

Finally, please forgive me... the phrase is "risk averse," without a "d." "Averse" is the word that means a strong dislike. "Having a feeling of opposition, distaste, or aversion; strongly disinclined: investors who are averse to taking risks.
Last edited by nisiprius on Tue Jan 25, 2022 7:57 am, edited 1 time in total.
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Re: Risk Adverse Portfolio

Post by Mr. Potter »

why so much in TIPS. Not necessarily a bad choice but I suspect some market timing there.
I know total bond and tips have pretty similar returns over time, just thinking the Tips would help hold current value better right now considering inflation. That's it, no deep conviction about Tips
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Re: Risk Adverse Portfolio

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Finally, please forgive me... the phrase is "risk averse," without a "d." "Averse" is the word that means a strong dislike. "Having a feeling of opposition, distaste, or aversion; strongly disinclined: investors who are averse to taking risks.
No problem, I feel a bit stupid but I can assure you I learned something today.
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Re: Risk Adverse Portfolio

Post by nisiprius »

I personally love TIPS. I don't understand all the animus against them from mainstream investment advice sources. I would make a few points.

First, many sources, notably including David Swensen's book, actually recommend 50/50 between TIPS and nominal bonds. That's a very mainstream recommendation.

Second, there isn't anything wrong with TIPS. The objections to them are all smartypants competitive-investing things, "based on my insights and/or forecasts and/or statistical analyses of the past, I think a bond portfolio of XYZ will beat TIPS etc." Even at face value it's never by a heck of a lot. An important detail is that if you think in real dollars, it is TIPS that are more predictable and nominal bonds that are less predictable. And since you don't know what the future for inflation is, trying to decide whether TIPS or BNDs will come out ahead is just one more kind of market timing.

Third, at least one mainstream guru, Scott Burns, proposed a lazy portfolio of three funds, which he called the "margarita portfolio," that all of the bond allocation in TIPS. I am not enthusiastic about him or what he's written about it, but the point is that even 100% TIPS is not crazy.

By the way, you can edit a thread title yourself. Just hit the pencil icon on the first post to edit the post, and change the "subject" line. The title of the thread is just the subject line of the initial posting, and the original poster can change it any time.
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Re: Risk Averse Portfolio

Post by Mr. Potter »

nisiprius,
By the way, you can edit a thread title yourself. Just hit the pencil icon on the first post to edit the post, and change the "subject" line.
I didn't know I could change the thread title, thank you. And thank you for your knowledgeable comments.
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Re: Risk Averse Portfolio

Post by mrpotatoheadsays »

Oak&Elm wrote: Tue Jan 25, 2022 7:31 am ... she ... is just wanting to try and stay even with her nest egg. All current factors considered (inflation, rising interest rate risk, market volatility, etc) would this be a reasonable simple 3 fund, low cost portfolio held at Fidelity?

Total Account value $100k
*35% VTI, Total Stock Market er.03
*35% FIPDX, Fidelity Inflation Protected Bond Fund er.05
*30% FXNAX, Fidelity Total Bond Market er.025
No.

From 1970 to 2020, the worst drawdown on a 30/70 portfolio was -14.0%; for a 40/60 portfolio is was -19.6%. The benchmark had a more conservative bond approach, so your 35/65 portfolio would likely swing closer to the -19.6%. The 100% bond portfolio's worst drawdown was -6.1%.

The only way you are guaranteed to "stay even" is by investing in more conservative vehicles such as certificates of deposit.


Reference: https://paulmerriman.com/wp-content/upl ... 0-2020.pdf
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Re: Risk Averse Portfolio

Post by dbr »

I agree the portfolio is fine and I agree with the comments about TIPS.
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Re: Risk Averse Portfolio

Post by Mr. Potter »

The only way you are guaranteed to "stay even" is by investing in more conservative investments such as certificates of deposit.
Thanks, she does have 2 years of expenses in her savings account making .5%, considering inflation is 7% and probably much higher than that wouldn't she be going backward slowly?
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Re: Risk Averse Portfolio

Post by Mr. Potter »

If its good enough for nisiprius and dbr it's good enough for me.
I agree the portfolio is fine and I agree with the comments about TIPS.
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Re: Risk Averse Portfolio

Post by dbr »

Oak&Elm wrote: Tue Jan 25, 2022 8:42 am If its good enough for nisiprius and dbr it's good enough for me.
I agree the portfolio is fine and I agree with the comments about TIPS.
Thanks, but now I think about it, the OP didn't tell us how much she wants to withdraw from this portfolio while "keeping up with her nest egg." Even so the portfolio is as good as she might choose, but the "keeping up" part depends on what she wants to spend.
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Re: Risk Adverse Portfolio

Post by arcticpineapplecorp. »

nisiprius wrote: Tue Jan 25, 2022 7:50 am Nobody can say what's best. My personal opinion, not advice, is that for an eighty-year-old this is a very sensible, reasonable portfolio that doesn't go to any extremes.

This chart is only a picture of Morningstar/Ibbotson's institutional opinion of what the words "aggressive," "moderate," and "conservative" mean, and it's based on what real-world target-date funds do.

Image

Notice that 33% stocks is considered to be a "moderate" allocation; "conservative" is only 20%.
Interesting. If true why does the target date retirement income fund at vanguard contain 30% stocks through death? Granted it's a 2 out of 5 so not the "most" conservative (1 out of 5) and states it's looking for some appreciation. Perhaps conservative is preservation only?

Vanguard life strategy income is 20% stock and next one is moderate which is 40% stock.

https://investor.vanguard.com/mutual-fu ... olio/vtinx
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Re: Risk Adverse Portfolio

Post by dbr »

arcticpineapplecorp. wrote: Tue Jan 25, 2022 8:49 am

Interesting. If true why does the target date retirement income fund at vanguard contain 30% stocks through death? Granted it's a 2 out of 5 so not the "most" conservative (1 out of 5) and states it's looking for some appreciation. Perhaps conservative is preservation only?

Vanguard life strategy income is 20% stock and next one is moderate which is 40% stock.

https://investor.vanguard.com/mutual-fu ... olio/vtinx
As to LS, four funds spaced at 20/40/60/80 is as obvious as it gets. If they had three funds it would have been 25/50/75. The power of 1/n is not to be disputed. :annoyed Why TR Income ends up at 30% I have no idea although it is true that in SWR studies 30% stocks is the location of the cliff below which you don't want to be. I can't imagine Vanguard actually looks at stuff like that though.
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Re: Risk Averse Portfolio

Post by Mr. Potter »

Thanks, but now I think about it, the OP didn't tell us how much she wants to withdraw from this portfolio while "keeping up with her nest egg." Even so the portfolio is as good as she might choose, but the "keeping up" part depends on what she wants to spend.
No anticipated withdrawals for 2 years. Thus why I'm thinking 35% stocks seems reasonable. Plus her SS pays about 75% of her expenses
Last edited by Mr. Potter on Tue Jan 25, 2022 8:57 am, edited 1 time in total.
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Re: Risk Averse Portfolio

Post by dbr »

Oak&Elm wrote: Tue Jan 25, 2022 8:54 am
Thanks, but now I think about it, the OP didn't tell us how much she wants to withdraw from this portfolio while "keeping up with her nest egg." Even so the portfolio is as good as she might choose, but the "keeping up" part depends on what she wants to spend.
No anticipated withdrawals for 2 years. Thus why I'm thinking 35% stocks seem reasonable. Plus her SS pays about 75% of her expenses
But the needed information is what does she expect to withdraw for her remaining life time line -- as a fraction of current value, or value two years from now, if one wants. It might not be wise to spend away all the cash.
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Re: Risk Averse Portfolio

Post by Mr. Potter »

But the needed information is what does she expect to withdraw for her remaining life time line
I assume she would eventually spend all her 2 years of savings, plus this 100k in a brokerage account. If it does all dwindle and she needs extra money to get by she has a 120 acre farm and could sell off sections if desperate. She has had several offers for 10-20 acre sections of land by neighbors.
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Re: Risk Averse Portfolio

Post by dbr »

Oak&Elm wrote: Tue Jan 25, 2022 9:05 am
But the needed information is what does she expect to withdraw for her remaining life time line
I assume she would eventually spend all her 2 years of savings, plus this 100k in a brokerage account. If it does all dwindle and she needs extra money to get by she has a 120 acre farm and could sell off sections if desperate. She has had several offers for 10-20 acre sections of land by neighbors.
So, the statement that she wanted to "stay even with her nest egg" means that it lasts as long as she does. In FireCalc a 15 year retirement at 35% stocks can usually sustain about 5.5% of the initial portfolio value, increased by inflation each year. She can take an income of $5,500/year inflation increased and have certainty of keeping up for fifteen years. If she increased her withdrawals to $7,000/year, inflation indexed, there would be a 25% chance of running out of money before 15 years, but in that model it doesn't happen until the 11th year.

An alternative would be a not inflation indexed SPIA for as long as she lives currently paying $10,000 per year. Or she could put half the $100,000 in the SPIA and invest the other.

With the farm for backup she can take risks. Is there a consideration of selling the farm now? How much money would that amount to? And how much income is she making from the farm?

It is still true that the investment asset allocation makes sense.
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Re: Risk Averse Portfolio

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With the farm for backup she can take risks. Is there a consideration of selling the farm now? How much money would that amount to? And how much income is she making from the farm?
Technically her property is no longer farmed so let's just call it bare land. So no income off land and the current value including home is around $750k. Not to be morbid but I'm guessing the timeline is close to 3-4 years max before she passes or goes to a nursing home, theres a few health issues. I'm thinking selling a 120 year old property would have massive cap gains, not sure how this property would be taxed, I was thinking passing it through her Trust is a much better option.
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Re: Risk Averse Portfolio

Post by dbr »

Oak&Elm wrote: Tue Jan 25, 2022 9:51 am
With the farm for backup she can take risks. Is there a consideration of selling the farm now? How much money would that amount to? And how much income is she making from the farm?
Technically her property is no longer farmed so let's just call it bare land. So no income off land and the current value including home is around $750k. Not to be morbid but I'm guessing the timeline is close to 3-4 years max before she passes or goes to a nursing home, theres a few health issues. I'm thinking selling a 120 year old property would have massive cap gains, not sure how this property would be taxed, I was thinking passing it through her Trust is a much better option.
I think you have a big planning project for the farmland and that dwarfs everything else you are discussing. What she does with the $100k is pretty much irrelevant. She also has a trust? I guess that might be a big deal here too.
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Re: Risk Adverse Portfolio

Post by nisiprius »

arcticpineapplecorp. wrote: Tue Jan 25, 2022 8:49 amInteresting. If true why does the target date retirement income fund at vanguard contain 30% stocks through death?
The obvious answer is that for whatever reason Vanguard follows a "moderate" glide slope rather than a "conservative" one.

Here's a presentation of what some real-world target date funds have chosen to do. Vanguard's is right in the middle.

Image
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Re: Risk Averse Portfolio

Post by Mr. Potter »

Yes, she has a Trust leaving everything to 3 daughters. Obviously her wealth is in the land, I’m trying to help her financially so she doesn’t have to sell the farm unless she wants to. 100k can go quick, that’s why I feel it’s wise to leave some in stocks to hopefully grow it 4-6% every year to keep the principal near the 100k. I didn’t mean to go down this path, just wondering if the 35/65 was a decent somewhat risk averse allocation, was particularly curious what people thought about tips vs tbm.
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Re: Risk Averse Portfolio

Post by Svensk Anga »

Regarding TIPS vs tbm, the advice I have seen is that as one moves to more conservative allocations, TIPS should be favored over nominal bonds, since one is giving up some of the inflation protection of equities. Whether that's 50/50 or some other ratio I couldn't say.
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Re: Risk Averse Portfolio

Post by Mr. Potter »

Thanks Svenks, that’s what I was looking for… curious I think I’ve seen your profile pic before, ever dip that paddle in the BWCA?
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