A 45 Year Old Market Insight

[steelpony10]

       Being a golden oldie this is the most violence and hate worldwide I can remember. Piling on more middle east turmoil doesn’t bold well for market certainty any time soon. 

        I thought I might be around for one more market upturn but that seems questionable. In the last 15-20 years, retirement for most, I think it’s not wise to wholly depend on cap gains which disappear at times or skin flint mode. That might be a miserable way to live out your days.

[Mustang]

And, I thought I was a pessimist. You are letting current events get you down.

My lifetime: Cold war; Cuban missile crisis; hiding under school desk if seeing a blinding flash of light; Israeli six-day war, Vietnam draft; Vietnam protests; Fonda sitting on a North Vietnam anti-aircraft gun; being called a baby killer; race riots, Johnson's deficit spending, embarrassing flee from Vietnam; stagflation, double digit interest rates, Berlin wall; twin towers; Desert Storm; Afghanistan, embarrassing flee from Afghanistan, etc.

My grandmother lived through WWI, prohibition, high crime, the stock market crash, lost everything in the bank closings, and still managed to raise six kids during the Great Depression. If any generation had a right to complain it was hers.

Investors nowadays are spoiled. Long-term history to them is 30 years. To many interest rates near zero and P/E ratios of 30 or 40 are normal. That has never been normal and that is not the future. Right now the future looks more like the 70s than the 90s. We are headed toward a recession, spiraling inflation and stagflation. For me that means "Been there, done it."

There were investment returns in the 70s even in equity. There were four years where S&P 500 returns were greater than 15%, one 25%, and one 37%. When I tested Wellington and Wellesley for a 30 year retirement starting in 1971 Wellington did OK but Wellesley did far better.

Still, I think new retirees should be cautious. If counting on the performance of the last 30 years they may experience a sequence of returns problem. The next few years might be a problem as we adapt to a new normal. 1973 & 1974 are good examples.

But, that's just me. When it comes to investments I tend to lean toward the cautious side.

[FD1000]

steelpony10 ,
You may want to brush up on your history. The Middle East violence has been going on for decades. You are lucky to live in the USA. I was lucky to be born and raised in Israel and immigrated to the US in the early 90s. How can you forget much worse wars and conflicts? Mustang mentioned several.
It's never about cap gains and/or income, it's about total returns or risk-adjusted returns. Example: Wellesley has been a good fund for decades, it invest a high % in bond but the yield is never high because high-rated bonds don't have high yield. 
Mustang ,
As usual, great post. I have done a similar research about W+W from early 70s for about 40 years. Wellington performance was about 10% higher per annual average but volatility was 50% higher and Wellesley is a better risk/reward fund. Since 2010, its not as good because stocks shine and bonds didn't. Regardless, Wellesley is one of my favorites for a LT B&H investor. This fund is managed by the oldest management team in the world. Wellington management is conservative and based on team style and another reason that IMO,  a LT B&H investor should use indexes + VG low ER funds managed by Wellington. Both W+W are not that  flexible of their % between stocks to bonds.
So, LT Wellesley would be OK but in the ST, that is its weakness. This fund mostly invest in US LG + high-rated corp bonds. 

Of course, the above isn't going to work for me. Market conditions are not the same in the shorter term. I always used funds with more flexible managers.
During the 70s, there was FKINX(Franklin Income). This fund was more flexible to use other bond categories + change the % of stocks to bonds. The chart below shows that W+W had similar performance but Wellesley had lower volatility = the winner. FKINX did much better than both, about 90% better....and this is exactly the kind of funds I'm looking for. See it (https://www.morningstar.com/funds/xnas/vwiax/chart).
Wellesley has done nicely during 1990-2000. But, YTD it lost 2.25%, VWENX only made 4.4%, but PRWCX doubled it at 9.8%...why? because 50+% of PRWCX bond portion is invested in HY (Corp + bank loans)...and that's the kind of funds I'm looking for.

Retirees that have enough could implement other options, such as staying in MM for months when they see very high risk, or instead use lower volatility funds or sell any fund after a certain % loss. Of course, performance can be lower, but they don't care, they don't want to lose that much.

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[archer]

It is true that there have been problems going back for centuries. How the current conflict in Israel will develop is an unknown. If it spreads to involve other middle east countries, there could easily be a major disruption of global oil, which is already disrupted by Russia. I see no reason for pessimism nor optimism. We have gotten over difficulties in the past but that isn't offering any promise for the future. As for how this topic plays out, we can only deal with with what comes, working with whatever means we have.

[steelpony10]

Mustang ,

      Ha. Ha. I’m always considered myself to be part of the third option, a realist. I’m just speaking of what I consider a short 15-20 year retirement period. I don’t think most would see the odds right now are increasing for “Peace in Our Time”. The problems affecting markets seem worse and haven’t peaked yet. No market stability is in sight and time is ticking away for retirees.

      Sure of course any random event can happen but one has to deal with the present conditions as best as one can beyond relying on the random events that got them here. Hope never entered into any of my decisions.

       Nothing is getting me down, I have it made and the experience to adjust. So I agree with most of your comments. I now think any recovery is farther out though.

[Mustang]

FD1000 , in your charts did you include withdrawals?  Volatility makes a big difference when making withdrawals.

I included an initial withdrawal of 4% with subsequent withdrawals increased for inflation. Starting with $500,000 (EOY 1970), the first withdrawal was $20,000 in January 1971. By 1975 the EOY balance had dropped to $369,000 but it started recovering and was up to $611,000 in 1984. Inflation drove the withdrawal over $50,000 in 1984, over $60,000 in 1989 and over $70,000 in 1993. (Inflation is a killer for retirees.) At the end of 30 years, Wellington had an ending balance of $1.4 million. (Around $340K in 1971 dollars)

Wellesley with exactly the same starting balance and withdrawals dropped to $485,000 in 1975. At the end of 30 years Wellesley had an ending balance of $3.0 million.

Note: The outcome was reversed for a 1990 retirement. Wellesley ended with $2.6 million and Wellington ended with $3.8 million.