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The Worst Retirement Investing Mistake

Yesterday, 09:00 AM

? #1

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The Worst Retirement Investing Mistake

The provocative title of an event more provocative interview with Efficient Frontier guru William Bernstein. It seems that he had a lot of clients bail out of the bottom in 2008, and not get back in, and thus suffer "permanent portfolio damage". And now he preaches the philosophy of keeping 20 to 25 years expenses of retirement assets in ultra-safe investments - cash, TIPs, annuities, very short-term govt paper. And only when you have a larger nest egg should you put money in riskier assets including equities. These riskier assets then should be only be counted on as "icing on the cake" i.e. for "play money":

I wanted to deal with what happened in the 2008 financial crisis, which changed how people, myself included, think about risk. A lot of people had won the game before the crisis happened: They had pretty much saved enough for retirement, and they were continuing to take risk by investing in equities.

Afterward, many of them sold either at or near the bottom and never bought back into it. And those people have irretrievably damaged themselves. I began to understand this point 10 or 15 years ago, but now I'm convinced: When you've won the game, why keep playing it?

How risky stocks are to a given investor depends upon which part of the life cycle he or she is in. For a younger investor, stocks aren't as risky as they seem. For the middle-aged, they're pretty risky. And for a retired person, they can be nuclear-level toxic.

from The Worst Retirement Investing Mistake - Yahoo! Finance

This article came out a month ago, and I didn't get a chance to post about it here on this forum. I hadn't really seen a discussion either, other than Midpack's recent reference on a more general SWR discussion: http://www.early-retirement.org/foru...ml#post1235810 Some of us did discuss it there today, but since it's so buried, I wanted to make sure it got more general attention.

I participated in a Morningstar discussion on the article (which is where I learned about it): The Worst Retirement Investing Mistake - Yahoo! Finance

Bernstein's new approach appears to fly in the face of needing equities to hedge inflation risk over the long term for portfolio survival.

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Yesterday, 09:08 AM

? #2

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I'm not so sure of that. If you have 20-25 years of expenses in ultra safe investments...why would you need or want to take on a lot of equity exposure?

Not to mention, most of the 'ultra safe' options listed are unlikely to produce a significant positive return at this stage, so perhaps Bill oughta rethink that strategy.

Sounds like "If you're stupidly rich, don't take on a lot of risk you don't need, and if you take on the risk be prepared to ride through the downturns without flinching". Seems the error here is taking on more portfolio risk than you can handle, buying high and selling low.

Don't do that!

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Yesterday, 09:18 AM

? #5

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I'm not so sure of that. If you have 20-25 years of expenses in ultra safe investments...why would you need or want to take on a lot of equity exposure?

Not to mention, most of the 'ultra safe' options listed are unlikely to produce a significant positive return at this stage, so perhaps Bill oughta rethink that strategy.

Don't do that!

Yep. Agreed - this is really about taking on too much portfolio risk. I wonder, would a person who had, say, 15 years covered in safer fixed income, panic and bail out of their equities? Maybe not.

Usually 25 years expenses [less other retirement income] in retirement assets is considered the minimum one should have to retire, so I don't agree with not needing to have equity exposure just because you've amassed that much. Usually 30 to 33x expenses is considered the minimum amount needed to avoid equity exposure yet still not lose spending power due to inflation.

In the article he mentions short-term Govt. bills, etc. keeping up with inflation. But I'm pretty sure that hasn't been shown to be true, and it's certainly not true right now, and unlikely to be true for a few years yet. Usually, 20% equity exposure is considered the minimum needed for 30 year portfolio survival. I suppose if you have 20 years in short-term bills, cash, etc., and 5 in equities, you match that 20% equity exposure.

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Yesterday, 09:23 AM

? #10

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Yep. Agreed - this is really about taking on too much portfolio risk. I wonder, would a person who had, say, 15 years covered in safer fixed income, panic and bail out of their equities? Maybe not.

Most people are lousy investors. My dad lives in an elderly retirement community. Here's what almost everyone did: invest in a high equity portfolio while in their 70's and 80's, panic when the market dropped and sold all the equities at the bottom, then languished for a year or two and bought back in after it was back up, and had to increase the equity percentage to try to make back what they gave up, since they no longer have enough money to last the rest of their lives.

Its apparently very hard for people to perform to "buy low, sell high".

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