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Recently I read Jonathan Clements’ piece Enough Already.? The basic idea was to encourage older investors who have made gains in the risk assets, typically stocks, though it would apply to high yield bonds and other non-guaranteed investments that are highly correlated with stocks.? His pithy way of phrasing it is:
If I have already won the game, why would I keep playing?
His inspiration for the piece stems from a another piece by William Bernstein [at the WSJ] How to Tell if Your Retirement Nest Egg Is Big Enough.? He asked a question like this (these are my words) back in early 2015, “Why keep taking risk if your performance has been good enough to let you reduce risk and live on the assets, rather than run the possibility of a fall in the market spoiling your ability to retire comfortably?”
Decent question.? If you are young enough, your time horizon is long enough that you can ignore it.? But if you are older, you might want to consider it.
Here’s the problem, though.? What do you reinvest in?? My article?How to Invest Carefully for Mom?took up some of the problem — if I were reducing exposure to stocks, I would invest in high quality short and long bonds, probably weighted 50/50 to 70/30 in that range.? Examples of tickers that I might consider be MINT and TLT.? Trouble is, you only get a yield of 2% on the mix.? The short bonds help if there is inflation, the long bonds help if there is deflation.? Both remove the risk of the stock market.
I’m also happier in running with my mix of international stocks and quality US value investments versus holding the S&P 500, because foreign and value have underperformed for so long, almost feels like 1999, minus the crazed atmosphere.
Now, Clements at the end of the exercise doesn’t want to make any big changes.? He still wants to play on at the ripe old age of 54.? He is concerned that his nest egg isn’t big enough.? Also, he thinks stocks will return 5-6%/year over the long haul (undefined), versus my model that says 2-6%/year over the next ten years.
What would I say?? I would say “do half.”? Whatever the amount you would cut from stocks to move to bonds if you were certain of it, do half of it.? If disaster strikes, you will pat yourself on the back for doing something.? If the market rallies further, you will be glad you didn’t do the whole thing.
What’s that, you say?? What am I doing?? At age 56, I am playing on, but 10-12% higher in the S&P 500, and I will hedge.? At levels like that future market outcomes are poor under almost every historical scenario, and even if the market doesn’t seem nuts in terms of qualitative signals, the amount you leave on the table is piddly over a 10-year horizon.? If I see more genuine nuttiness beyond certain logic-free zones in the market, I could act sooner, but for now, like Jonathan, I play on.
Full disclosure: long MINT and TLT for me and my fixed income clients
Hi david, for some reason (maybe my web browser? or perhaps comments are closed) I can’t comment on your projected stock market returns article so I hope its acceptable for me to ask this here. For this formula
10-year annualized total return = 32.77% ? (70.11% * Percentage of total assets held in stocks for the US as a whole)
where do you get the data for total assets held in stock for the US? From the Fed’s Z1 report? And do you just compare stocks vs debt, or include all real estate… and then govt debt too, mortgage back securities etc.?
Thanks for clarification, I just couldn’t seem to back into the stock estimate you use. assuming it must be around 40% (40%*70.11% = 28% ) to get to the 4-5% return you have had for the last 6-8 quarters.
Thanks so much for the clarification and love reading you site!
If you look at the early articles in the series (it’s in one of the first three, they all have the same initial title) the fields from the Z.1 report are spelled out there. Also, in the first article there is a link to Economic Philosopher’s piece on the topic where his more complex formula is. Sadly, some of those fields in the Z.1 report disappeared. One other note: the Fed backwardly updates some of its Z.1 data, making it impossible to run the analysis on data available at the time in order to check how this would have worked in the past. Before I run the analysis each time, I look to see how much the measurement of the “past” has changed.
The figure is a percentage of (public and private) stocks only vs everything else. The most recent value was 40.22%, and it has been as high as 48.19% (March 2000) and as low as 19.54% (June 1982). Average is 31.94%.
Thanks so much. And yes stinks that the data is hard or impossible to back test on data available at the time.
David,
Well said. Hedge now….short term puts are cheap. Also, moving out of stocks will create large capital gains and investors should donate to their favorite charities or Donor Advised Fund to share their wealth.
Best regards, Tom
Agree on value and em. That would be the main portfolio change I would consider.
In the next 18 months you might underperform. I think there is more in the tech move. Em should do well. So might underperform for the short term.
Agree not really anything else to invest in. I don’t agree with your model of stock returns. But they should be below historically returns – maybe 7% over the long-term.