S&P500 is close at high levels, impact of rate rises are yet to be determined.
This could be another case of stock markets climbing the wall of worry and another long bull market.
On the other hand, I’m 3 years from retirement and wondering: “Should I really still be trying to pick up pennies in front of the steam roller just as the driver is becoming more erratic?”
Anyone else close to retirement and dealing with the same question?
If you’re in a position to say “I have enough”, and you feel you might be risking too much, why not simply derisk and sleep peacefully?
Well yes… every night… 
…but into what?
CHF savings account? CHF Obligationen?
That question’s been haunting me too. I hate nominal assets like cash & bonds, cause they get eaten up by inflation. Also, I don’t like the whole monetary policy rate fiddling circus 
Real estate is highly correlated to the stock market, so basically useless to me. Same goes for equity sector or factor tilts, and for commodities.
So in the end, for lack of better alternatives, I settled for some “risk-free” cash anyway (5%), and some systematic managed futures fund (5% diversified bond/currency/commodity momentum). But I’ll continously get rid of them during the first 5 years of retirement.
If Switzerland had TIPS, I’d go for them in an instant. Inflation-protected bonds would be an awesome safety cushion
Why not?
If goal for a portion of wealth is preservation, there are Kassenobligationen from 2% upwards.
Yes you might still lose a bit if inflation re-kicks in, but it’s the best we’ve got that is “risk free”.
The rest can stay in stocks (I don’t think I would ever go below 50% there).
Or dump it into your 2nd pillar while you still can, and get the double whammy of tax savings + some return likely better than 2%.
Yes
I don’t plan to reduce my stock weighting and instead I plan to manage the risk by having a low withdrawal rate. See this thread.
The posts from @thepoorswiss on trinity study are quite helpful. tl dr: higher equity allocation results in lower risk in some circumstances
That was around my aim too, but …
… It’s around 70% currently. More than planned (~30%) is in Festgeld and Obligationen (yielding around 2% - tax - inflation). It “hurts” the expected returns.
I’m worried about getting FOMO on the better stock returns at some point, or simply missing the “best time” to increase the stock allocation.
That’s a great strategy, but if you’re already at your minimal withdrawal rate, you barely have any flexibility with spending.
And retiring on social welfare levels doesn’t seem much fun to me
Totally get you. On the other hand, you wouldn’t want to be retiring at the start of a 13 years bear market. It’ll always be a gamble, I guess, no matter how you invest.
Best deal I could imagine would be an inflation-adjusted monthly pension that covers your basic needs (annuity AHV-style), or a Swiss TIPS-ladder, for the first 5-10 years of retirement, and the rest in 100% VT.
What I meant by low withdrawal rate is spending (say) 3% of net wealth increasing with inflation each year. The most likely outcome is that wealth at death will be a lot higher than at retirement, see the links above
If 3% of nw meant social welfare level spending I would most probably postpone early retirement
well this is the big question. what can you move assets into that still generates sufficient return that allows you to retire?
this is my current strategy. i put a fair bit in at the end of last year and converted more to cash/bonds with a view to paying into pillar 2 later this year or next year.
however, this still leaves a question over the assets that remain outside the pension and what they should be invested in.
Since the end-year interests are usually applied pro-rata from the date of in-payment, it might be better to do it sooner rather than later in the year.
(If the planned amount is there already, of course)
I do it at the end of the year to see what expenses I have during the year to bring taxable income down to the target level.
I find interesting this kind of reasoning (that we all do), since most of us don’t have 100% of nw in stocks, so that 3% is not really comparable to the typical return of stocks (7% annually). On the trinity study they usually say 7% minus inflation (3%) = 4%, but since that study used a 60/40 portfolio, that 7% is already lower (4% stocks + 2%bonds?) If we then have 0% with bonds?
I think you mix up growth rate of the portfolio, when you accumulate, and withdrawal rate, when you also consume the principal. The relationship between them is not so straightforward.
I did mix up because I prefer to have the withdrawal rate lower than the growth rate of the portfolio.
The growth rate is valid also when I stop the accumulation phase (which for me is the phase where I have external funds added).
That is fine, but it is a different approach than used in the Trinity study.
I don’t think we can simply compare CAGR when it comes to sequence of returns risk (which is why the 4% rule is 4% and not 7%, or 10% nominal -3% average inflation). Part of the risk in the withdrawing phase is that if a big enough and lasting enough crash happens early on, your assets may not have the time to recover as you draw them down and too few of them remain when (if) the recovery kicks off.
That being said, Big Ern’s serie about safe withdrawal rates does come to the conclusion that a 100% stocks allocation has higher chances of success than those mixed with bonds over the time periods studied (part 2 linked: The Ultimate Guide to Safe Withdrawal Rates - Part 2: Capital Preservation vs. Capital Depletion - Early Retirement Now).
That only stands if one stays on track when markets crash and even then, the urge to sell can make one’s life stressful and miserable even if they don’t sell so psychological aspects should be taken into account when picking an allocation.
As for what more conservative assets to pick and how to implement them, I have plenty of time to change my mind and am not speaking from experience but my current plan is to borrow a page from the lifecycle investing crowd and accumulate stocks until I reach the nominal amount I want to hold in retirement (then adjusting for inflation each year), then complete it with more conservative assets.
As Swiss investors, I think we are very well served with medium term notes, which are very low risk (insured by esisuisse), grant better returns than most bonds of similar quality and duration denominated or hedged in CHF and can be bought at the date of our choice to make laddering them pretty easy, at the cost of liquidity.
My plan is to start laddering whatever very low credit and market risk instrument grants the best returns for a fix term leading to my target date of retirement so that I can get enough of them maturing at 6 months intervals for their principal+the interest coming from the remaining ones to cover my expected expenses.
I’m not overly worried about inflation in Switzerland and think the stocks part of the portfolio should allow to outpace it.
If you have a 3% bond with no re-investment risk, then you are done as you can just take your 3% each year.
If you have stocks, you need much more than 3% due to volatility and sequencing risk.
In reality, even the 3% bond is not safe as you need to account for inflation. If you assume 2.5% inflation then you are already up to 5.5% required return.
But the inflation is also volatile and create the same kind of sequencing risk, so maybe you need, say 7% nominal return.
Maybe in the end you will need real estate, stocks or some other real asset investments to keep up with inflation if you want to avoid having to build a massive pension pot.
100% shares strategy is nothing but recency bias. Prudent Asset Allocation requires a combination of all the three AA dimensions: Shares, Bonds and Money Markets. 2010 to 2022 made us forget Money Markets, but now as we learnt the lession and paid the price - its time to remember the magic traingle.
There is a simple logic why we need all the three. There are:
Prudent Asset Allocation calls for a combination of both, taking Ex-Post uncertainty (which is a source of additional risk premia) and Ex-Ante predictability (which gives us a pre-defined return). Everything else is a speculation on uncertainty. As economy and society tends to grow, such gamble tends to work out well - but it can at any time go terribly wrong. Or, if we omit Stocks and only invest on Bonds - it is an uber-reliance on predictability that harms return.
Both Ex-Post and Ex-Ante Assets are relevant for / evaluated after a certain period. Whereas Ex-Ante Assets can be further split into “low duration” and “high duration”, that concept doesn’t apply to most marketed Ex-Post Securities we want to invest in (unless we talk about High-Frequency Trading, Futures & Options).
In an idealistic world and notwithstanding High Frequency Trading Algos, our investment universe could be explained as a three point barbell consisting of:
| Short Duration | Long Duration | |
|---|---|---|
| Ex-Ante | Short Term TIPS | Long-Term Treasuries |
| Ex-Post | n/a | Shares |
Based on Efficient Market Hypothesis, we could argue that the combination of these three assets could explain all other assets, be it e.g. Cat Bonds (High Ex-Ante Short-Term Return plus some Ex-Post Risk/Premium), Senior Loans (Moderate Ex-Ante Mid-Term Return; limitted Ex-Post Risk/Premium)…
This is a post where I started from the Other End (Crazy Assets) and conclude that their result still equates to a combination of Stocks, Bonds and MM: Poll: Asset Allocation (other than stocks) - #21 by TeaGhost
or the respective PV Backtest:
Backtest Portfolio Asset Allocation (portfoliovisualizer.com)
The interesting thing is actually that, provided we leave out random events like Gold going crazy after the Gold ETF or de-PEG… out of the equation, the highest Sharp Ratios result from combining Shares, Bonds and MM together. You could either do this explicitly (Long Term Treasuries and Cash) or Implicitly (Mid Term Treasuries). A balanced portfolios sharpe ratio always beats a Stocks, Bonds, MM only Portfolio. Remember - when the dices fall in your favor - its easy to continue with a risky strategy but once dices go to the other spectrum… you will be super happy if you chose a strategy that optimizes your outcome (aka optimizes your sharpe ratio).
Long story short… don’t do 100% stocks only. Never. I know, it was the best strategy the past 50+ years but still - don’t do it. Never.