Stock investment resources

Certainly not the cheapest book around:
Amazon.com: Buying Choices: Margin of Safety: Risk-Averse Value Investing Strategies for the Thoughtful Investor

One reviewers comment:

 

Yeah Klarman has a good record at Baupost. I think the reviewer maybe didn't "get" fooled by randomness judging by the comment. Most far better served by Ellis and Bogle with Bernstein and Taleb to cover risk and randomness. We know some factors have historically outperformed, but we've also seen many value luminaries come a cropper in recent years..it's a numbers thing.

 

I am half way through hus audio book on youtube, very interesting. One thing that stucks with me is i am better off not looking frequently at my portfolio ( he suggested once/year) and the higher impact of negative over positive emotion is like more than twice

 

I certainly don't think that Talebs stuff is prescriptive (his portfolio is about taking advantage of fat tail risk) but there is lots of good stuff that any investor can glean.

 

Based on the strong recommendation of wise old Taylor Larrimore from Bogleheads I'm currently reading the following book:

The Simple Path to Wealth: Your road map to financial independence and a rich, free life eBook: JL Collins, Mr. Money Mustache: Amazon.com.au: Kindle Store

This caught my eye in the above book:

After also reading a number of Bill Bernstein books (and a number of other articles / books) recently I noted a similar comment along the same lines.

In summary if one is wealthy enough to be able to live solely off dividends after allowing for at worst a 50% "temporary" cut in same then other than a cash buffer to cover a couple of years living expenses then all your wealth can be in a broadly diversified portfolio of shares. I personally feel more comfortable having some International Equity diversification given that ASX is small and concentrated. After all these authors live and invest mostly in the US.

The BIG test however is whether you can sleep well at night and stay the course during major market crashes.

After a lot more reading I'm not convinced that in more modern times risk management needs to go quite so far as allowing for a Great Depression scenario. But if your portfolio / psychology can allow for that so much the better. I'm confident ours does.

So after a huge amount of reading / research in recent times and in our case of having been through a few market crashes / bear markets and held our nerve I'm confident that our simple two bucket approach of around four years living expenses in Cash and the rest in Shares (for their income) is right for OUR circumstances.

Anyhow probably boring you. But as retirees I really wanted to ensure that we have considered all the risks, financial and behavioural, based on the worst case scenarios in modern history and are comfortable with our investing approach.

What I think is important is that no one investing approach automatically fits all. Bogleheads aren't wrong just as Dividend Investors aren't wrong. Different levels of wealth and risk tolerance for example can result in very different approaches being suitable for a given investor.

Not advice of course.

 

Meant to add that you probably don't need to buy the book mentioned in my previous post as most of it is available here on the author's blog:

Stock Series

Also in the previous post when referring to investing for dividends in our case that still includes distributions from the likes of VAS and VGS. There is no selling of capital to meet living expenses. So there is no need to hold bonds to smooth capital volatility.

 

Managing Sequence of Return Risk
Posted August 20, 2017 by Ben Carlson

Managing Sequence of Return Risk

 

Based on the reviewers comment and the fact he used the word "pernicious", I am not reading the book..... I believe it would go over my head

 

Yep, been thinking about this recently. Goes to asset allocation. Reading reports by certain fundies on how fixed strategic asset allocation doesnt work, you need to weight for value, keep allocation fluid etc and then they proceed to get clobbered by a 70/30 fixed allocation, despite charging more....say no more.

Sometimes you just need a little luck on your side when it comes to sequencing.

 

I wouldn’t have believed it if I hadn’t googled it with my own eyes. Sequence of return risk being raised on a Property chat site.

Sequence of return is what is exercising my mind at the moment. To get a bit of historical feel I dug up some data and mashed up a spreadsheet.

I’m interested in maintaining purchasing power so like to think in terms of real returns. My definition of real return is nominal over wage growth rather than over CPI.

I got nominal ASX accumulation return data back to 1900 and wage growth data back to 1943. For wage growth prior to 1943 I had to improvise with a bit of regression between the wage data I had and GDP per capita that I had back to 1900. (in other words, the pre 1943 wage growth is even more rubbery than your standard rubbery data prior to 1980 but it’s better than nothing)

I’m not far of turning thirty seventeen so 13 years until preservation age (touch wood).

My desire is to stay 100% invested in shares, so that is the basis of the calculations.

I took 13 year rolling historical snap shots (ie 1901-1914: 1902-1915 etc) and applied the returns to current balance to get a historical perspective of sequence impact in accumulation.

Chart is in multiples of desired income ($ have been removed to protect the innocent)

Starting today with a multiple of 40 the historical data suggests an expected multiple at preservation age between a "real" 16x and 201x.




I dunno if I’ve done something wrong - but me thinks the luck of the draw is going to have a huge impact unless I want to reign in the scope of the range with some inferior long term investments, and I don't.

Next step add 30+ years of drawing to the historical sequences and see where we stand.

 

I'm 57, wife 54 both retired with close to 100% invested in equities. The safest bet to minimise sequencing risk is to be able to live off the natural yield of the portfolio with enough of a cash buffer to see one through a temporary dividend cut equivalent to that of the Great Depression.

What is your goal?

 

0% risk of running out of funds (at least on historical sequence of returns) whilst drawing a predetermined minimum income.

I dunno that I can plan for a worse case than history – where do I draw the line? If we get a worse sequence in the future I guess we will just have to pull the belt in and eat baked beans in the bunker instead of caviar.

Interesting the best outcome in my model (201x required income) is the sequence of real returns that starts in 1921 and runs to 1934 spanning the great depression. It’s amazing how data can sometimes contradict our perceptions. Pre-studying the data my gut instinct would be to fear a great depression re-run but as a capitalist pig it seems inflation is the real enemy. The worst sequence(16x) was commencing 1969- 82 where stagflation ravaged real returns. Wage growth flogged dividend growth in that era, meaning if you were determined to live off dividends alone over that decade you were screaming backwards in real terms, might of had to pull the belt in until your belly button touched your back bone, a tad far for my likings.

 

@dunno
You might find this interview interesting:
Michael Kitces – The 4% Rule and Financial Planning for Early Retirement
And this AMA:
I'm Bill Bengen, and I first proposed the 4% safe withdrawal rate in 1994. Ask me anything! • r/financialindependence

This is something I'm also quite interested in at the moment. Please continue to share your findings!

 

I'm no expert in such matters. But I'll have a go.

During the Great Depression deflation was the issue. One could count on 50% of pre-crash dividends in worst case scenario. A decent buffer of Cash and long term Treasuries proved useful in topping up dividends during this challenging time. Difficult times suggest one should be sensible and adjust spending accordingly. Imagine the challenge of most with little savings! Give me a sizable dividend focused stock portfolio and generous cash buffer any day compared to the vast majority of other unfortunate individuals in a Great Depression scenario.

Trouble with a lot of studies is they assume the investor lump summed their entire wealth into the market right at the peak of where the crash occurred. Hardly a realistic scenario. Keep things in perspective. Fear is our greatest enemy. Master that and the risk is lowered substantially.

Realistically in our post Fiat era inflation is our greatest enemy. For retirees Stocks are a pretty good hedge. Stagflation is a difficult situation. Some suggest commodities are a hedge in such a situation. Certainly plenty of that in ASX.

Bernstein's booklet "Deep Risk" is educational on these matters. The following is a useful starting point in preparing for such challenges:


There is no such thing as a perfect solution. I assume inflation is the greatest risk to our retirement savings. Living on the natural yield of the portfolio, assuming a worse case scenario of having to live off half the dividends for a lengthy period of time and if having to draw on capital the withdrawal rate needs to be below 3%. This will hopefully minimise the risk of us outliving our savings. And should this fail God help most of the rest of the population during such terrible times!

 

I feel the 4% rule is too optimistic in the medium term at least given financial repression forced upon us by Central Banks. As a retiree NOW I assume a withdrawal rate of less than 4% is needed to minimise the risk of us outliving our savings.

@dunno will probably know a lot more than me so I also look forward to his responce.

Great to see this depth of discussion here.

 

@austing you may find the Michael Kitces interview interesting. There is detailed discussion on the correlation of SWR and the Shiller CAPE. Michael concludes that 4% is probably the most conservative possible and would have carried you through the great depression.

If you prefer to read there is a good blog article which I'm still digesting here too -
Understanding Sequence Of Return Risk & Safe Withdrawal Rates

 

Yep I've read these and similar and seen a lot of debate on same on various sites including Boglehead forum and Reddit (Bengen thread in particular) etc. The post GFC experiment by central banks has distorted the market severely. Over the next decade or so I still feel the 4% rule might be overly optimistic. Just a personal view of course based on own research. Maybe I'm overly conservative. But as a retiree with potentially 30 to 40 years ahead of us I think it wise to err on the side of being a bit overly conservative.

 

The Michael kitces stuff is excellent. Thanks.
Valuation at the starting point really matters to the likely future sequence you may face.

Possible should have a different thread if we want to persue this in depth.

 

Yes unfortunately. Despite out best efforts LUCK plays a great role in both accumulation and deaccumulation stage of life.

As a retiree the earlier stages of retirement is where sequencing risk is at it's greatest. Hence we planned accordingly.

 

Hi austing. the 4% rule would be more conservative than spending all dividends. You have to get your head around how they define things, but the 4% rule says you set your withdrawal at 4% of your initial capital and then maintain that 'real' level of spending. Dividends are currently around 5.5% for Aus so if you are spending it all you are spending at a withdrawal rate of 5.5% under the 4% rule definition. The 4% rule would indicate that you should be reinvesting 1.5% of your current dividends to fight a rainy day where dividends fall or inflation increases faster than dividend growth.

I'm off for a ride now but will start a thread called sequence of return risk when I return. Hopefully a thread where we can determine / stress test assumptions on withdrawal rates, living off dividends etc

ps.
that other site will do your head in.