Won game - now what?

Wider investment strategy discussions not dealt with elsewhere
Lemon Slice
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Won game - now what?

Postby 1nv35t » December 29th, 2016, 11:58 pm

Some say if you've won the game and have 25, 30, 50, 100 ... whatever years times your yearly spending requirement then they advocate you should stop playing and switch over to safe investments/deposits. Leaving only additional amounts on top of that in riskier investments. Why take risk if you don't need to type mentality.

But what is safe? Some say there is no such thing. Even apparently safest choice of a Index Linked Gilt ladder (TIPS in the US) aren't dead certs as taxation rules can be changed, or no new issues to fill the gaps etc.

Reading around and 50/50 total stock/total bond seems to be a popular choice of 'safe', with historic indications of similar real rewards across periods of both expansion and contraction (relatively consistent).

Ray Dalio (Bridgewater) likes 10% gold 20% short term treasury, 30% T-Bills, 40% inflation bonds as a 'safe' choice.

William Bernstein has suggested that if you're up at around 100x spending levels then 100% stocks is the safest choice.

Yet others suggest buying annuities to lock in certainty/security. Investing any surplus in stocks for the benefit of heirs.

What would you/have you done having won the game?

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Re: Won game - now what?

Postby ap8889 » December 30th, 2016, 5:13 am

I haven't won the game yet, but am likely to reach FI sometime around 2021 if I keep my nose to the grindstone for a few more years.

I plan to keep 2 years in cash as a buffer, and the rest in shares. Bonds have no attraction for my own situation, though others would no doubt find their uses.

Basically once FI, I see inflation as the big risk, and equities offer some protection that bonds don't.

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Re: Won game - now what?

Postby Urbandreamer » December 30th, 2016, 9:54 am

Well, if the target has changed from wealth creation to maintaining your wealth then it may be worth considering the cockroach portfolio.

http://www.retirement-planner.co.uk/285 ... -portfolio

It's only aim it to survive whatever happens.

Personally I would have huge issues buying any government bonds at all, but that's more an ideological issue.

In terms of risk, by which I assume you mean possibility of lose rarther than gain, bonds also look a bad bet at the moment. However "risk" free only exists as a concept.

The argument is that to preserve wealth, gains and losses should balance.
I'd re-jig it, probbably as:

25% equities
25% cash savings
25% property funds
25% gold

BTW, it's very difficult to be 100% equity and I'm not sure that anyone truely recommends it. I am 100% equity, if you ignore our house, my expected FS pension, the expected state pension, my wifes cash savings...... Yet does not our familly wealth include those things?

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Re: Won game - now what?

Postby swill453 » December 30th, 2016, 10:06 am

ap8889 wrote:I plan to keep 2 years in cash as a buffer, and the rest in shares. Bonds have no attraction for my own situation, though others would no doubt find their uses.

Yep that's exactly my plan (though actually 3 years normal expenditure in cash). Been doing it for 2.5 years now, and made no changes to my investments when I retired.


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Re: Won game - now what?

Postby saechunu » December 30th, 2016, 10:24 am

It depends to what extent you've 'won'. There are those I know whose walkover victories have swollen their coffers by so much they don't need to consider these 'details'. My winning margin looks much narrower and a spot of extra time could still see victory slip away so I need to be prudent, conservative, which I do with a Three Buckets All-Weather approach:

# Three Buckets:
1. Spending: >18 months income requirements held as cash in instant access accounts.
2. Savings/Reserves: minimum of 3 years (prefer 5) income requirements held as ILSCs, ladders of term savings accounts, or similar vehicles.
3. Investments: remainder held as long time horizon investments, split in a barbell manner:
~50% Mixed Asset funds - emphasis on protection against different economic (& thus market) outcomes; this provides the ballast of the Investments bucket.
~50% Equity Growth funds - emphasis on asset-light, high returns on capital and high free cash flow, low cyclicality, ie. quality & moats; this is the long term growth engine of the Investments bucket.

# Living expenses drawn from Spending bucket.

# Spending bucket replenished from Investments’ natural yield + top-slicing better performing Investment asset classes & categories.

# Savings/Reserves drawn only in unusual circumstances:
- To boost Spending bucket for emergency expenditure (where drawing Investments would be imprudent - such as when low asset prices prevail);
- To boost Investments if unusually attractive valuations become available which happens occasionally;
...and then replenished later (via phased, reverse dollar-cost averaging) from Investments when valuations are again richer.

This is what I do and has been calibrated so that I sleep easy at night and can ignore markets for lengthy periods of time free of money or market concerns.

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Re: Won game - now what?

Postby SalvorHardin » December 30th, 2016, 10:37 am

1nv35t wrote:William Bernstein has suggested that if you're up at around 100x spending levels then 100% stocks is the safest choice.

As a member of the 100x club (mid-50s, retired since my early forties, no pensions) I favour massive investment in shares. Currently my asset allocation is roughly 96% shares, 4% cash and 0% bonds. I see no point in my investing in bonds given that I am a relatively young retiree, my dividends are more than adequate and if inflation returns then non-index-linked bonds are about as much use as a chocolate fireguard.

In my 35 years of investing I have never owned a bond, not even an index-linker. Besides, equity yields are greater than bond yields at the moment - the reverse yield gap which has dominated investing since the 1950s has now reversed. I'd much prefer a 3.3% income from Unilever than 1.25% from 10-year Gilts.

The big change to my portfolio since retiring is that I've largely disinvested from smaller companies, switching into investment trusts and large companies (especially Commercial Property, Consumer Goods and North American Railroads - the latter two sectors have strong Buffett-style moats). This is mostly because big companies are safer (see moats), but also because I had a lot invested in smaller oil companies (mostly Soco and Dragon Oil) and when the markets started to fall in 2008 I took the view that I should disinvest from the sector PDQ otherwise I might need to start looking for a job!

I keep at least one year's expenses in an instant access account. My gold insurance is about 7% in small cap Canadian gold explorers, rather than gold, because of the geared exposure to the gold price. Whilst this may seem like a lot it used to be a lot less; this sector has been a staggeringly good performer in 2016.

There's about as much chance of my buying an annuity in the next twenty years as my starting for Manchester United in their next match! Speaking with my former Actuary's hat on annuities are insurance against outliving your capital and are a bond-substitute (and I hate bonds - a legacy of the 1970s inflation and the havoc it played with my pocket money!). Annuities can be amazingly useful for older retirees, and those in bad health, who are worried about income (they then pay a high income because by then life expectancy is only a few years).

For anyone who hasn't come across "moat" in investment, it's a characteristic of a business' products which provide protection against competition. Things which restrict the ability of competitors to commoditize its products or actually restrict entry into its markets. A good example is North America's railroads - no-one is going to build another railroad nowadays because it's too difficult so your sole competition is trucks and air transport where your cost advantages for hauling medium and long-haul bulk freight are too difficult for them to beat.


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