@johndoe1@Dr.PI
I have a question about both your portfolios. I agree totally that one shouldn’t have 100% stock and a cash buffer in order to prevent sequence risk at the beginning of retirement.
I wonder why no real estate?
It is still a long way for me until FIRE, but when I approach there, I would think more something like:
60% stocks (VT and vested benefits from pension fund splitted between VIAC and Finpension)
20% real estate ( in form of a rental unit or (for more liquidity) real estate funds which is also possible at Finpension I think)
Why no real estate? Mostly because I don’t understand it so well (and I mostly don’t understand why people want to invest in RE ). We own an apartment we live in, and for me this is enough RE.
Investment for yield is tax disadvantaged in Switzerland. I want neither dividends focused nor growth focused portfolio, so market cap stocks portfolio is just fine for me.
Individual apartment/houses are illiquid and transaction fees are high.
RE funds have high fees and (at least they used to) high premium of price vs. NAV.
Risk-return profile is between stocks and bonds. It means I can (in principle) achieve similar return/volatility just by holding stocks and cash in a certain ratio.
Correlation with stocks is too high for RE to be an efficient diversifier. Portfoliovisualizer just gave me the correlation coefficient of 0.62 between US Stock Market and REIT, for what it’s worth.
All this just doesn’t convince me to invest in RE besides owning a place to live.
I’d be very much interested in your analysis. I’ve done some myself in cFIREsim including gold back to 1871, and I got better results than for a pure stock/bond portfolio. However, backtesting gold is tricky, because it was tied to the dollar before the 70ies. Also, cFIREsim uses annual data for simulations (instead of monthly), and I think only indicates success rates, not worst durations of portfolio (which is very different!)
Interestingly, even for 40 years, a simple cash cushion can significantly affect your chances of success. For instance, adding 30 months of a cash cushion to a 75% or 100% stocks portfolio would bring the chances almost up 100%. This could definitely help some people that want to be more conservative.
Finally, let’s look at 50 years of retirement. This time, we can see that it would take at least 40 months of a cash cushion to reach a 100% chance of success with a 4% withdrawal rate and a 75% or 100% stocks portfolio.
40 months of expenses with a 4% withdrawal rate per year dilutes 100% stocks portfolio to 88% stocks. That’s what you should compare with. Not with a portfolio where the cash cushion dilute stocks to 50% or below.
Indeed, having some extra cash is very similar to having extra money in your portfolio. This will result in a lower withdrawal rate and a higher chance of success.
I basically replace bonds with cash. This cash can be also bonds held to maturity. Whatever gives highest yield for a fixed “locking” term.
My main reason is: REITs are very much correlated to the total stock market. My counterpart to stocks are bonds, not REITs. To me, REITs are also a too narrow bet on a very specific sector. Same goes for imho overhyped small cap value, btw. Nothing to say against buying your own property though
EDIT: Just read @Dr.PI response, that’s exactly my line of thinking.
I wonder, why no bonds (apart from cash)? Because you count in future pensions or other income of yours?
I’ve added them because they might perform better in recession periods than equity, while still generating some income, and long-term treasuries are nicely uncorrelated to stocks (at least most of the time ).
Also, most FIRE-sims only give me results for stocks/bonds back to 1871, unfortunately I have no information on cash this far back. Some say, gold was basically cash before the 70ies. I’m kind of confused
Lastly, I don’t have the courage to deviate from what Big ERN, the poor swiss and other FIRE bloggers have concluded based on the trinity study. They all recommend 30-40% bonds for your FIRE-portfolio, as far as I know.
I am definitely don’t have enough wealth to retire before the regular age and live from my portfolio. I am counting on the 1st pillar pension and withdrawals from the 2nd pillar, that should go into the portfolio. And I expect my wife to have 1nd and 2nd pillar pensions, I don’t think I will be able to convince her to withdraw the 2nd pillar. So yes, risk levels are different.
Interestingly, there hasn’t been much discussion about FIRE portfolio allocation on this forum. Is it because people care more about accumulation and frugalism than actual FIRE?
I’d love to hear your opinions on retirement drawdown portfolios, Safe Withdrawal Rates (SWR), research done by Early Retirement Now (ERN) and the Poor Swiss, what kind of stocks/bonds to include in classic 60/40 retirement portfolios, asset correlations, whether to include allocations to gold, real estate, different factors (momentum, value etc.), different sectors (energy, utilities, consumer staples etc.), or even crazier stuff like commodities and alternative investments (managed futures, leveraged etf etc.).
I know many of you own 100% portfolios, which makes total sense in accumulation phase. But not in decumulation (retirement drawdown phase), due to sequence of return risk (portfolio lasts less long with 100% stocks). To be clear: I’m not talking about gambling money, but long-term retirement portfolios.
My guess is that lots of people here are rather far away (+10 years) from FIRE and maybe did not think about it yet as it is too far away. At least for me that’s the case.
I already posted this in another thread but I plan to stay 100% invested in an accumulating ETF and live from margin loans to fund my living costs. So I can decide on a monthly or even daily basis how much money I need and how much money I need to withdraw. This does need some planning, discipline and also more capital then a withdrawal plan where you essentially end up with 0.
Generally speaking no, it should flat out over the years.
What’s only worrying to me is if the stock market doesn’t perform well over a longer timeframe meaning that my portfolio stays more or less the same but my margin keeps increasing because of my living costs coupled with high interest rates.
To mitigate that I plan for a significant higher RE number than needed as a “cushion”. Worst case I have to reduce my spending or search for a job again when margin reaches a certain % of my total portfolio. Ultra worst case the margin lender calls the loan back even when I meet the margin criteria which is a scenario I have not planned for at the moment (but needs to be done at the latest when executing this strategy).
That’s my plan as of today and is in no way perfect. I still have some years to work before me and I can’t predict how the future might shape and if I ever reach my RE number.
It’s highly complex, basically for retirement there’s
a) Boglehead 60/40 total stock/bond market (or BigERN variation: 60/30/10 Gold)
b) Duration matching of bonds according to retirement spending, and stock allocation on top of that. Problem: You’d need TIPS for that to provide inflation protection, which we don’t have in Switzerland.
c) Risk parity portfolios: www.riskparitychronicles.com, www.portfoliocharts.com
So far, I favour c) and particularly the Golden Butterfly portfolio for my first 10 years of FIRE to reduce sequence of returns risk, afterwards I’ll probably scale up to 100% stocks again.
Absolutely, you’re correct. But once I reach a certain total net worth, expected stocks returns outweigh sequence of return risk imho (compounding effect with time).
What I don’t like about 60/40: It sucks in terms of sequence risk in inflationary or stagflationary environments. Golden Butterfly does better, since it’s more diversified.
It’s called a rising equity glide path, I find it quite compelling:
Citing from the executive summary:
" Yet recent research shows that despite the contrary nature of the strategy - allowing equity exposure to increase during retirement when conventional wisdom suggests it should decline as clients age - it turns out that a “rising equity glidepath” actually does improve retirement outcomes! If market returns are bad in the early years, a rising equity glidepath ensures that clients will dollar cost average into markets at cheaper and cheaper valuations; and if markets are good… well, clients won’t have a lot to worry about in retirement anyway (except perhaps how much excess money will be left over at the end of their life)."
Regarding gold: I agree it’s not necessary, but historically 10% gold has improved retirement portfolios, since it’s a powerful uncorrelated diversifier that has kept up with inflation for centuries, and a negative real rate & dollar devaluation hedge. Of course, I wouldn’t hold the gold allocation long-term, but fir the 10year SoRR period yes (get rid of it afterwards)
Yes, believe me I’d love to just use 60/40, it would make life so much easier But imagine a year like 2022: If you’d retired with 60/40 end of 2021, your stock&bonds would have both crashed, leaving you with a horrible sequence of returns slowly killing your portfolio. Majority of total bond etf’s hold average durations of ~7 years I believe, and that hurts badly.
And it’s not just 2022, there have been similarly bad past retirement years for 60/40. Also, it’s not guaranteed government will always raise rates fast enough in inflationary or, even worse, stagflationary environments, leaving 60/40 very vulnerable.
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). We own an apartment we live in, and for me this is enough RE.
But imagine a year like 2022: If you’d retired with 60/40 end of 2021, your stock&bonds would have both crashed, leaving you with a horrible sequence of returns slowly killing your portfolio. Majority of total bond etf’s hold average durations of ~7 years I believe, and that hurts badly.