Another Look at Portfolio Planning.

[Fearchar]

It all depends on every person's circumstances.

If you are looking at huge unrealized capital gains, then it'd make sense to just hold.

Are you considering leaving any to the next generation? 

[Fearchar]

My Father has passed and never needed LTC.
Mom (92) does, but it's us siblings mostly that help her.
She has visiting nurses/physical therapist, that don't cost anything.
Same goes for Doc visits.

She inherited shares of McGraw Hill (now SPGI) in the 70's.
It never paid much in dividends and she (my Dad) never sold.

Years ago Dad bought BRK, DE and JNJ.
Never mind dividends, there is just a ton of unrealized capital gains.

So, not much planning other than holding.

[Mustang]

There didn’t appear to be a lot new in the Schwab article. I suspect it was written in 2021 because some of the outcomes are similar to Morningstar’s 2021 Benz/Rickenthaler analysis. But the outcomes were also similar to Bengen’s, the Trinity Study’s and Wade Pfau’s update of the Trinity Study outcomes.

Sequence-of-return problems for fixed withdrawal methods typically occur for those who retire at a market peak such as December 2021. The calculated dollar withdrawal is too high after the market correction. Benz/Rickenthaler updated their analysis in December 2022. They said, “equity valuations declined and cash and bond yields have increased.” With updated computer inputs they said the initial withdrawal rate went from 3.3% to 3.8% with a 90% probability of success even after factoring in more inflation.

These comparison are somewhat apples to oranges. Schawb’s moderate portfolio was 5% cash, 35% bonds, 35% large cap stocks, 10% mid/small cap stocks, and 15% international stocks. Moderate in the other studies was 50% SP500 and 50% intermediate treasury bonds (The Trinity study used corporate bonds with the same results.)

 Four percent is based on an expected 30 year payout period. Even Bengen increased his maximum safe withdrawal rate to 4.5% when he changed the test portfolio to 30% large cap stocks, 20% small cap stocks and 50% intermediate treasury bonds.

Studies based on historical data show actual past success rates. Studies based on Monte Carlo simulations show probabilities of success. Pfau’s used historical data. Schawb and Morningstar’s used simulations. Here is a comparison of the outcomes:

                                            Initial Withdrawal Rate
                                                Morningstar     Morningstar     Pfau’s
Payout Period         Schawb     2021 Study     2022 Study     Update
10-years                 9.5%
15-years                 6.4%             6.4%                 6.6%             6%
20-years                 4.9%             4.9%                 5.2%             5%
25-years                 4.0%                                                            4%
30-years                 3.4%              3.3%                3.8%             4%
40-years                 2.8%              3.2%                                     3%

There may be more data in the studies but this is all I saved in my succession plan. People think of this withdrawal method as a spend down method but it isn’t really. The “4% Rule” is based on the worst case scenario in history. But most retirement periods are not that bad. The average maximum safe withdrawal rate is 6.5%.

Using Wellington and Wellesley I compared a 1971 retiree to a 1990 retiree using the 4% Rule. The starting balance was $500K ($250 each). This is basically a 50/50 portfolio. The cash withdrawal was from the fund with the highest previous EOY balance. After 30 years the 1971 retiree had $2.2M left. The 1990 retiree had $3.2M left. If the worst case does not occur there is plenty of room to increase spending.

From my succession plan:

1. Our primary goal is a livable, stable income for the rest of our lives. If we are successful in our primary goal then we should also be successful in our secondary goal which is to leave a little something to our heirs. If bequeath is a higher priority those investments need to be separate from retirement investments.

2, Simplification is important. Simplification makes both active management and the transition of management to the successor easier.

3. Withdrawals and spending are not the same thing. Any excess withdrawal should be reinvested or saved for later. Cash or savings is the buffer between withdrawals and spending. If excess withdrawals are saved they allow an investor to increase spending when unforeseen circumstances happen.

Everyone has different goals but the Schawb article reinforced my faith in my withdrawal plan. They are not set and forget. A plan is only good until first contact with the enemy, after that innovate and adapt.  I have read that Bengen would sometimes take his clients to 100% cash when the market called for it.  By the way, Kitce once wrote that a 50% probability of success doesn't mean a 50% probability of failure.  It means there is a 50% probability that changes will me needed.

[FD1000]

Jan 20, 2023 19:11:20 GMT Mustang said:

There didn’t appear to be a lot new in the Schwab article. I suspect it was written in 2021 because some of the outcomes are similar to Morningstar’s 2021 Benz/Rickenthaler analysis. But the outcomes were also similar to Bengen’s, the Trinity Study’s and Wade Pfau’s update of the Trinity Study outcomes.

+1
From the article: " a good mix of all three—stocks, bonds and cash—is important."
Warning: bonds here and every article I read ARE NOT CEFs.

Let's use real 50/50 SPY/BND vs "pretend"  50/30/20 SPY/CEF=YYY/BND vs 80/20 SPY/BND

5 years risk/reward (link) shows the following:
1) The second portfolio (using CEFs) had a lot more income.  Income doesn't equal better risk-adjusted return which represents by Sharpe ratio. 
2) 80/20 had the best Sharpe ratio. 50/50 had the second one. The portfolio with CEFs came last
3) The CAGR of the CEFs was the worse. The volatility=SD was close to 80% stocks

This is 10 years (link).
1) 80/20 had the best Sharpe ratio. 50/50 had the second one. The portfolio with CEFs came last
2) The CAGR of the CEFs was a bit better than 50/50 but insignificant. The volatility=SD was close to 80% stocks

Conclusions: the basic of investment has been and always will be TR + risk-adjusted return.  Very high income isn't a guarantee for either of them.

If your portfolio is big enough, you will succeed, no matter what, but CEFs are not the answer.
In our case, I can invest in 20/80 to 100% stocks.  I can definitely have 100% in CEFs and declare they are the best in the world because of the income, or I can use 100% stocks instead, even with only 10% of the CEFs income and have a better Sharpe ratio.

BTW, when I retired I made all the calculation for 44 years. I went to a financial adviser with sophisticated software FOR FREE, at age 60, and his software calculated everything to age 104(no idea why). I needed just several years of 3-4% withdrawal and then about 2-2.5% for the rest.  He told me right away, I'm more than OK.  5 years after retirement and my 10/90 portfolio beat the SP500 and we need about 1%, let's make it 1.5% just in case. Sometimes, miracles happen.

=========

Then, I played more. Instead of using SPY, I used SCHD which have done well in growth + value but also have higher yield>3%. Instead of BND, I used VGIT (IG corp) to mimic W+W.
I compared 50/50 of 3 portfolios SPY/BND...W/W...SCHD/VGIT
The 10 years results show(link) 
1) SPY/BND were close to W/W
2) SCHD/VGIT had the best numbers for everything. Performance, SD, max draw, Sharpe, Sortino
3) SCHD/VGIT higher income from stocks + real bonds proved to be a good source of income. The income was reasonable starting at 2.5%, ending at 4.1%.

[marpro]

“If your portfolio is big enough, you will succeed, no matter what, but CEFs are not the answer.”


Ok, FD. Got it. I have known your answer for several years now. You don't seem to like free money. That is ok with me.

[FD1000]

Jan 21, 2023 0:53:05 GMT marpro said:

“If your portfolio is big enough, you will succeed, no matter what, but CEFs are not the answer.”


Ok, FD. Got it. I have known your answer for several years now. You don't seem to like free money. That is ok with me.

If you can prove it mathematically I will.
Let's think about it logically. If it was free money, don't you think the whole world do it?
Are all the best investors, the best researchers, and the best mathematicians in the world could not figure it out?

But, I'm not against higher income. I recommended value stocks over growth in 01/2022 and stuck with it.  I even posted in 12/31/2022 that CEFs are OK for 2023 after 3-5 lousy years.
YTD chart of PDI,PTY,SPY,COWZ(higher income stocks) shows that CEFs lead, OMG, I nailed this one too. I said that CEFs are OK, based on possible total returns, the only thing that matters.

Attachments:

[steelpony10]

Jan 21, 2023 0:53:05 GMT marpro said:

“If your portfolio is big enough, you will succeed, no matter what, but CEFs are not the answer.”


Ok, FD. Got it. I have known your answer for several years now. You don't seem to like free money. That is ok with me.

             Thanks. I use the ignore function. This is why posters don’t post and leave forums. 

[mnfish]

Jan 20, 2023 19:11:20 GMT Mustang said:

3. Withdrawals and spending are not the same thing. Any excess withdrawal should be reinvested or saved for later. Cash or savings is the buffer between withdrawals and spending. If excess withdrawals are saved they allow an investor to increase spending when unforeseen circumstances happen.

+1

My taxable acct had 3 good years and it is my main source of withdrawals. 2019 +28%, 2020 +12%, 2021 +28%. But I didn't increase my spending other than 2021 when I bought some hunting land. So those excesses are still in the acct and growing. Since 2019 that acct is up 43% after withdrawals.

I ran a PortVis using 50% PCN and 50% PDI for that same time period using the same starting amount and withdrawals and today it would be down 16% from 2019 even though it provided 65% more income than I needed. In fact, in 2022 it provided 100% more income than what was withdrawn, and those excesses were re-invested just like I did in my acct. In July of 2021 it was up 27% but my acct was up over 50%. Now, I've been around long enough to know that CEF prices rise and fall over time just like stocks and they will probably come back but to say that they are some sort of gift from the heavens and provide "free" money is just wrong. If that were the case the big investment houses would own nothing else. 

[Deleted]

Jan 21, 2023 12:52:04 GMT mnfish said:

Jan 20, 2023 19:11:20 GMT Mustang said:

3. Withdrawals and spending are not the same thing. Any excess withdrawal should be reinvested or saved for later. Cash or savings is the buffer between withdrawals and spending. If excess withdrawals are saved they allow an investor to increase spending when unforeseen circumstances happen.

+1

My taxable acct had 3 good years and it is my main source of withdrawals. 2019 +28%, 2020 +12%, 2021 +28%. But I didn't increase my spending other than 2021 when I bought some hunting land. So those excesses are still in the acct and growing. Since 2019 that acct is up 43% after withdrawals.

I ran a PortVis using 50% PCN and 50% PDI for that same time period using the same starting amount and withdrawals and today it would be down 16% from 2019 even though it provided 65% more income than I needed. In fact, in 2022 it provided 100% more income than what was withdrawn, and those excesses were re-invested just like I did in my acct. In July of 2021 it was up 27% but my acct was up over 50%. Now, I've been around long enough to know that CEF prices rise and fall over time just like stocks and they will probably come back but to say that they are some sort of gift from the heavens and provide "free" money is just wrong. If that were the case the big investment houses would own nothing else. 

There would not be enough CEF shares offered for sale, to permit investment houses to own nothing else. The CEF pool has been shrinking, and their assets concentrate in fixed income rather than equity. I find it increasingly difficult to find attractive CEFs with so many now using ROC in their distributions.

[mnfish]

steelpony10, So, do you want to talk about yield on cost?

My cost basis on AAPL is $15.36 so it pays about 6% on my cost. If it ever goes down 88% it will probably still pay me 6%. It has raised its dividend 8.5% in 5 years.
My cost basis on ORCL is $4.12 so it pays about 31% on my cost. If it ever goes down 95% it will probably still pay me 31%. It has raised its dividend 14.75% in 5 years.

I sold enough of both of these long ago to recoup my original investment so it's all free money, be it CEFs or stocks. The biggest difference of course is the Cap Gains. You seem to think that the cap gains in stocks are something to worry about but that worry doesn't apply to CEFs.

Back to topic. Spending your investment is the reason you invested in the first place. Whether you do it using high income investments or gains you've made over the years by selling to realize them.

[Chahta]

The reason I think most people do not have a lot of their portfolio in CEFs is due to extreme volatility and they don’t understand them. They just can’t stomach losing so much on bonds for some reason, even for high yields. For equities not so much.

[marpro]

"So, do you want to talk about yield on cost?"

I am not steelpony10 . Yes, that is the way I understand and that is my opinion too. I retired 15 years ago, and my initial payout was 5.7%. Guess what? I just now calculated based on my original investment, and I have received only 1.4% annual rate of increase in my payment, and the payout is 7.2%. I would have quadrupled the payments. Where did the rest of the money go? The greedy state gobbles the rest.

Assume that I get 14% from PDI on my cost. FIDO says that is my rate as of now. The payment is monthly. If I reinvest, I can double the shares and the payment will double. Assume constant price for simplicity. (1+14/1200)^n = 2 is the formula to recover the money or double the payment. Solving this, I will get it back in 59.75 month – 5 years. I have experienced the payments from both the state and PDI now (PCI until last year for 4 years since 2017). Had I known this, I would not have given my money to the state, but invested it in a PIMCO fixed income CEF. I would have received a lot more money every month. If I had reinvested a part of it, I will be getting a lot more money now. Live and Learn.

The reason the CEF investments are shrinking:

All equity-based CEFs lost a lot of money last year, and NAVs are shrinking. They are not making any money but are distributing the same cash to keep the customers happy but losing the NAV and its value. The prime example is: CLM. Early 2021, its NAV was $15/sh. Now, its NAV is $6.64/sh. The distribution rate was 27% last year. Then, they issued more shares and diluted the price to $8.10/sh in June 2022. But, it keeps losing its value due to the market decline. It seems that CLM has cut its distribution recently, and it is 19.44%. It is still too high with a losing equity market. It is all hope, not a strategy. But, fixed income CEFs are doing well because the interest rate increase was a boon.

Add/Edit: Due to recent reinvestment with lower costs, my actual price/sh has dropped by more than 15%. That means, my personal yield has gone up recently.

[FD1000]

Did you hear the following: "don't fight the tape" (www.investopedia.com/terms/f/fightingthetape.asp)

I learned years ago never to question the tape. I don't like/dislike any categories. I just don't like to own lagging categories.  That could be CEFs, EM or SPY(lost money in 10 years during 2000-2010). If you own better categories, you can't be behind too long.  You can just do trade 2-3 times annually (fd1000.freeforums.net/thread/2/generic-ideas)

[steelpony10]

         Anyone who expects any value growth from any type of bond investment skipped Investing 100.

          My observation is bonds have trading ranges depending on fixed rates. Issuing limited shares a CEF has a larger range because it also borrows money to goose distributions at greater rates when compared to OEF’s (which is a Ponzi model). Equities have even greater and more unpredictable trading ranges including 3/10 years of idle times or negative returns. CEF’s will keep right on rolling like normal bonds in all markets. Probably Investing 200.

           Like other fixed rate based investments my wife I expect to live off CEF distributions, which vary, the rest of our lives no matter what market conditions are. They will never be spent down except as a last resort for LTC only and at whatever the values are at that time. Then it would be time for Medicaid in a nice facility if you planned right like I did for my parents. This will of course be after the other half of our portfolio has all been been converted to CEF’s and cash. My experience is 8-10% distributions vs 3%+ LTC raises per year really slows down the spendown process. Probably an Investing 400 level class. Takes some brains to visualize that.

            Two things I believe to be facts set in stone. As a long term investor I never believed if I sold an investment today that was worth 1k more yesterday I lost money. I’ll never know what markets have in store for any tomorrows, a factual unknown. Fluctuating dailey values are nothing more then part of investing nothing is “lost”. I do know the long term outcome is way better then cash, CD’s, standard bonds etc. This is high school or Adult Ed stuff.

             The other thing I learned in lower elementary is if I give you $10 dollars and you give it back next week I’m basically whole again. If you want to keep giving me $10 (or any amount) a week with no obligation on my part until we part ways I just feel fortunate and don’t give much thought to a “catch” that I have yet to see, hear or read about for the last 20+ years.
 
               I do wish some posters would develop manners beyond a child along with some maturity and realize we all have our ways, no opinions are ever wrong and many paths can get you to your goals. This plan works great for us and allows us to spend freely within reason at all times and is easy to pass on to the less experienced. Of course there are certain individuals that will never get it because they are absolutely positive beyond a doubt that the earth is flat and if you don’t listen to them you’re doomed.
              
                                                                      The End

[Deleted]

steelpony10,

I also am confident that IF - big if - something structural changed to a type of asset you would have the wherewithal to switch gears. It would be wonderful to respect each other's intelligence and individual planning techniques.

Just curious here - maybe I am seeing it wrong - but is discussing how smart a child is compared to us - and that is what is being said - a personal attack and an attempt to ridicule? Maybe, I am just reading it wrong, but it kind of sounds that way to me. If so, there might be a better and more persuasive way to make a point.

Also - 100% agree that a loss is not a loss until realized. But, there are many who disagree, so best to just call it a draw and respect each other's opinion on that. As well, dare I say, the 20 year long argument on these boards of income vs total return investing, Jeeminy - please, please, let that be and get on with investing discussions! Like how do you get better total return, or income if that's your goal. Finally, is there anyone who believes Past Performance is a Guarantee of Future Performance??? No? I didn't think so.

Happy Investing!

[richardsok]

Good post, pony. I appreciated all your wrote until I got to: "....we all have our ways, no opinions are ever wrong ..."

Including myself among the truly fallibles, I rather think a great many opinions out there are very, VERY wrong.

[Deleted]

steelpony10,

Can you repost the original post?

[Chahta]

steelpony10, the capital appreciation part of bond OEFs is why I only buy them low as they are or were now. I did it in 2020 when the covid decline happened and sold in 2022. I will not add to what I have other than reinvesting. This go round I will not be selling and just wait for RMDs to begin. If I did want to add it would be to a new fund I may have to jettison as any decline starts. Of course in my taxable account I don’t play that game. They are munis for income.

[FD1000]

"A lose isn't a lose until realized."

Let's ponder.
1) If this is true, you can never retire. It will take decades to sell. Either your current portfolio matters or not
2) The best retirement papers/researchers tell you to adjust your withdrawal based on what happened last year and your current portfolio. Well, if losses don't count until realized, why bother
3) An investor who made money doesn't make this claim, the one who lost money makes it to comfort himself.

------------
"Anyone who expects any value growth from any type of bond investment skipped Investing 100."

I don't use the above with my funds. When you make money it means you made money. MAINX just made over 30% in several weeks. PTY made over 200% within 2 years from the bottom of 2009. PTY also made a lot more than SPY from 2009 to 2021, we are talking 12+ years, see chart below. PIMIX made more than SPY for 3 years(2010-2), and PIMIX isn't a CEF, and it didn't collapse prior.  The above examples just had good performance regardless of the definition.

Attachments:

[mnfish]

steelpony10,

Not only did you remove the original post but at least a couple of others.

[chang]

Jan 23, 2023 12:32:11 GMT mnfish said:

steelpony10 ,

Not only did you remove the original post but at least a couple of others.

It is somewhat awkward if the original post on a thread is deleted. I reduced the maximum period for editing / deleting posts from two weeks to 24 hours. I think 24 hours ought to be sufficient for a person to correct typos, make edits, etc. to their posts. Two weeks was probably too much. If someone really needs to change / delete a post after 24 hours, please let me know and I will take care of it.

[FD1000]

Jan 20, 2023 13:19:29 GMT Fearchar said:

It all depends on every person's circumstances.

If you are looking at huge unrealized capital gains, then it'd make sense to just hold.

Are you considering leaving any to the next generation? 

Most of our money is in IRA. We are going to take money from taxable accounts and deplete it. Roth IRA don't have tax. Rollover for kids can stretch out, from memory.
Lastly, that's the kids problem, any money is better than none. Maybe I look deeper at age 80.😀
The majority of the money will go to the kids. I was thinking to put ATM on my grave with a max $1000 weekly withdrawal, I want the kids to visit me.