In addition to running Monte Carlo simulations I think you can still use historical data by picking dates that had high CAPE 10 ratios and plug them into PRC Historical Sequence Analysis on the Run Analysis page. For example you could use these starting dates:
Date CAPE RATIO
Aug 1929 32.56
Jan 1937 22.24
Oct 1965 23.93
Sept 1999 40.55
I like using Oct 1965, not only is the CAPE high but inflation starts to take off.
Sept 1999 is also interesting. On 9/20/1999 the S&P 500 was at 1,277. Today its at 4,369. Patience pays off.
Another way to reduce risk is to buy 20 year Treasure bonds which are now at 4.55%. They pay out semi-annually, and you can sell them in the future if you need the money before 20 years, and if rates are lower then, very likely, you won't have a problem selling them, win-win. @hines202 what do you think of that idea??
Another way to reduce rick is to buy 20 year Treasure bonds which are now at 4.55%. They pay out semi-annually, and you can sell them in the future if you need the money before 20 years, and if rates are lower then, very likely, you won't have a problem selling them, win-win. @hines202 what do you think of that idea??
@pizzaman Not only do I love it, I recently recommended a 20-year treasury bond as a solution for a new client that are both in their 70s and no longer want to play/risk the market. The husband is the financial driver but in very poor health. He wanted something as guaranteed as possible and fool-proof (i.e. no complexity) for his wife after his passing, so this was perfect for them. These aren't callable, so the sweet rate gets locked in. I'm very thankful the annuity people didn't get ahold of them first!
@pizzaman Historical simulations can provide some value, but I worry about them not being realistic because so many other things have changed since past periods. We have so many new/different tax/retirement laws, checks/balances built into the financial systems, new ways to combat economic downturns, etc.
Simple example - when the market crashed in 1929 it just kept falling. Now we have circuit breakers. When inflation became a huge problem starting in 1965, we didn't have experience with that sort of thing and screwed it up and made it worse. We just had a perfect storm for inflation recently (trap people in their homes for over a year and load up their bank accounts with money - then set them free to send the world on a sudden spend spree) and look how well it's been mitigated this time (gone from 9+% to 3.2% and without any real recession, booming jobs, big market recovery). Yep, interest rates are "higher" but historically reasonable (we've been spoiled due to the need to keep them low during covid).
I'm of the camp that feels debt is for suckers anyway, for the most part 🙂 Most of my clients have no debt (some other than a low remaining mortgage balance). The ones that do have debt issues, I send them off to moneycoachgroup.com who has a new guarantee of eliminating their debt (a non-scam one, which is rare).
We never know what's next (alien invasion, anyone?) but I like how Monte Carlo uses historical data combined with current law/circumstances as well as future looking projections on things like market returns, taxes, inflation, and other factors.
Thanks for the confirmation on using 20 year US Treasuries, it seems like a very good deal with todays rates!
If todays financial markets are as you say "have so many new/different tax/retirement laws, checks/balances built into the financial systems, new ways to combat economic downturns, etc.", which I agree with, it seems to me that using historical data from 1965 to the present makes the historical analysis even more valuable. If your financial planning works in PRC using the 1965 historical data, then it will be even more likely to work given todays financial markets for the reasons you provided ????.
I don't think that Monte Carlo has anything to do with being realistic. Its a random outcome generator. Other than using some historical data to provide guardrails so you don't get extreme outcomes, like 80% annual gains or losses (the top and bottom 10% Monte Carlo results are still outside of what has ever happened in history), I don't believe you can incorporate current law/circumstances or future looking projections into the analysis. Struart @smatthews51 care to chime in??
I think buying a 20-year bond to cover some of your living expenses is a way to buy income. But you need to hold the bond to maturity, or you are still exposed to both interest rate risk and inflation risk. The inflation risk can only be removed by purchasing TIPS. The interest rate risk for a 20-year bond is significant if you need to sell it before it matures. Looking at the I-Shares Treasury 20+ bond fund as a proxy for interest rate risk, it had a negative 31% return in 2022. The standard deviation since 2000 has been about 13% compared to the S&P 500 of 15%. So, an ill-timed sale could result in substantial loss. A
If you look at historical 20-year bond rates, they were in the 6% range around the year 2000 so rates are not as high as they feel. Also one other thing to keep in the back of your mind is that the term premium on most bonds is currently negative compared to historical term premiums of plus 1-2% so if we return to more normal term premiums the 4.5% rate today could go to 5.5% to 6.5% resulting in principal loss in the event of a sale. I am not predicting that, but it could happen.
Another way to buy income is to buy an immediate annuity from a company like New York Life that is AA+ rated that currently pays a lifetime income for a couple 70 years old of about 7%. That would provide about 56% more income per dollar allocated primarily due to mortality credits. These are not investments; they are transfer of risk or longevity insurance. You give up all your principal compared to a bond where you get your principal back in 20 years. Although you will get your principal back in 20 years, the purchasing power will only be about 55% compared to today assuming a 3% inflation rate. Both have inflation risk associated with purchasing power of the income stream.
My point of all this is not to say that buying a 20-year bond is a bad idea or that annuities are better, it is simply to say that they are both tools with different trade-offs in terms of income and risks. I don't think we should dismiss something viable; we should evaluate all our viable options and then determine what fits our preferences.
Using historical CAPE values similar to todays to run PRC may be a useful for a visual. However, CAPE is only related (not the only variable) to stock returns but not bond returns. Starting bond yields are the best predictor of future returns over the duration of the bond portfolio you have. The starting yield for bonds may not always correspond to high CAPE values making the analysis problematic. And you only see a few outcomes that will not capture the entire range.
Monte Carlo analysis is one of the best tools to help us see the range of possible outcomes given the mix of stocks and bonds and their expected future ROR and standard deviations. Having enough secure income (however you buy it) is (in my opinion) one of the best ways to take some of the weight off relying on our portfolios. If we constrain our spending early in retirement because we are worried about our portfolio going down and find out when we are 80 we could have spent a lot more, it is too late. Spend it now.
@golich428 Many good points ????. As indicated by @hecht790 a few posts back, your risk tolerance is very important to get a handle on.
I am certainly not an expert on bonds, but I don't think comparing directly buying US Treasurys offered today to a bond fund is an apples to apples comparison. Correct me if I am wrong, but a bond fund of 20-year treasurys includes bonds bought over numerous past years that would bring the average down. If the bond fund held nothing but recently bought 20 year bonds and sold the old ones, then the bond fund would just buy short term notes. Does it work some other way?? I don't know.
@pizzaman Comparing a long duration bond fund to a 20-year bond is more like comparing a green apple to a delicious red apple - they are both apples but different attributes. I was just using the bond fund to illustrate the potential risks associated with long duration bonds. The potential for loss and the volatility experience (on paper if you don't sell) are going to be similar early in the life of the bond. A single bond duration will decline over time, but a bond fund maintains a range of maturities, so duration won't change significantly. The other risk that I did not mention when you hold a single bond is illiquidity risk.
There are many flavors of bond funds. However, there are many treasury bond index funds that target a certain maturity range. They trade bonds to keep the maturity as close as possible to the index's range. In a rising rate environment, that means the YTM is going to increase, but you need to hold the fund long enough to realize those returns.
For example, Vanguard has three maturity ranges: Short (1-3 yrs), duration of 1.9 years, Intermediate (3-10 yrs), duration 5.1 yrs and Long (>10 yrs) with duration of 15.8 yrs. A bond funds duration can be a good estimate of how the price will change as interest rates change. For example, a fund with a duration of 1.9 years will decline 1.9 percent if interest rates increase 1% compared to a fund with a duration of 15.8 years that will decline 15.8%. A single bond will experience similar losses if sold when rates increase, and the opposite is also true.
For my fixed income portion of my portfolio, I have been in short term bond funds for years because I did not feel that an investor was being compensated for the extra risk of buying longer duration bond funds. This worked well for me in 2022 as I did not experience the large losses that I would have seen if I was invested further out on the maturity curve. That is starting to change with yields for intermediate funds starting to look attractive for the same reason you mention - locking in "reasonable" rates longer term. For money I don't plan to spend in the next 7 to 10 years, I have started to slowly move my fixed income portfolio into intermediate duration funds but will retain a large allocation to short term funds as well because I can't predict what interest rates will do going forward.
Again, this is my preference. I have nothing against someone wanting to lock in the current yield on a long-term bond if that is what they prefer.
Very interesting, thanks! I similarly have my bond allocation in short term brokered CD's and US Treasuries (in fact, all of it). I was thinking of, as per your idea, converting some of my equity holdings (which is at 80%) in to the US 20-year Treasury who's principal I won't need for several years if not until maturity. One other thing about bond funds is you are paying expense ratios, and since the bonds in a bond fund rarely reach maturity, you are dependent of the fund manager knowing what he/she is doing.
Here is an overview web site on bond funds: https://www.thebalancemoney.com/how-bond-funds-work-2466568
Here is an illustration that compares owning a single bond to a bond fund. It is an oversimplification, but I think they make some good points.
www.northerntrust.com/documents/commentary/investment-commentary/maturity-bond-funds-vs-individual-bonds.pdf
Trying to wrap my head around bond funds vs individual bonds. The pdf you posted is geared toward municipal bonds, but its says likely to apply to taxable bonds as well. From the article: "We debunk this myth by illustrating that both bond funds and individual bonds are subject to the same market pricing mechanism through time. This pricing mechanism is the set of current and future interest rates across maturities – the term structure of interest rates." If this is true (I am trying to apply this to individual US Treasuries) then I would think if you are not interested in the diversity of bonds a bond fund can provide as suggested in the article, you could ladder US Treasuries by maturity date. If you have an account with one of the big boys like Fidelity, you don't pay for buying the US Treasuries, no expenses ratios, and US Treasuries are not subject to State and Local taxes. Would that make buying US Treasuries just as good as buying a bond mutual fund? Just asking, trying to understand bonds ????.
I am not sure that a bond ladder is better or worse than buying a bond fund. A ladder and bond fund are different strategies. The sources of return on a bond are the return of principal, coupon interest and interest on interest (reinvestment of coupons). Reinvesting the coupons from a bond ladder would be an additional challenge to manage and I would not want to do that. I would rather have a bond fund where my distributions are automatically reinvested.
Maybe someone else on the forum has given this more thought, it is not something I have considered or researched.
NEW YORK, Aug 23 (Reuters) - A recent spike in U.S. bond yields has come alongside muted expectations for inflation, a sign to some bond fund managers that economic resilience and high bond supply are now playing a larger role than second-guessing the Federal Reserve.
“The narrative has very much changed over the last few months,” said Calvin Norris, Portfolio Manager & US Rates Strategist at Aegon Asset Management.
While the timing and size of the central bank's monetary tightening actions have preoccupied bond investors for well over a year, the market may have reached "an inflection point in terms of the primary driver of sentiment," BMO Capital Markets analysts said in a note last week.
SOFT LANDING
Annual consumer price growth has slowed down from a peak above 9% in June 2022 to around 3%, considerably closer to the Fed's 2% target after policymakers delivered 525 basis points of rate hikes starting in March 2022.
Meanwhile, expectations for inflation over the next decade as measured by the Treasury Inflation-Protected Securities market have remained relatively stable in recent months. The 10-year breakeven inflation, at 2.35%, is about 5 basis points higher since the beginning of the year, while 10-year nominal yields have increased by about 50 basis points.
So Greg, Pizza - what are you using for your real ROR's for money market, stock and bonds these days?
@golich428 Well, the "ratings" for these insurance companies and annuities are just BS. We had a recent advisor-only meeting with Chris Tobe, who used to be an annuity product designer and exec for some big insurance companies, until his conscience got the better of him. He's now an expert witness in this area. What he had to say was quite shocking. Here's a post from him in 2022. https://commonsense401kproject.com/2022/05/11/annuities-are-a-fiduciary-breach/
Also, The Retirement and IRA Show podcast (excellent!) featured my question on this topic (challenging annuities) on their August 12 episode (around the 12 minute 30 second mark) and it caused them (and they *sell* some annuities) to go on a prolonged rant about how f'd up the products, regulation, and ratines are.
Some highlights:
The insurance companies own or heavily influence the ratings companies. AIG failed, but was bailed out by the US for trillions to avoid the catastrophe it would have caused. There's no guarantee that will happen in the future.
The state "bailout" funds actually aren't funded at all, don't exist, aren't guaranteed, pay pennies on the dollars or cap very low ($100k) and basically just try to find other insurance companies to pick up failed company policies.
There's a big trend toward big insurers selling off annuities, permanent life policies (pensions also!) to off-shore private equity firms who aren't accountable to anyone, have almost no regulation, no stringent reserve requirements and accounting practices like US-based ones. They can gamble with the money, pay their execs and shareholders big money, then just poof go away and default on the policies.
Giving away a big chunk of your nest egg for this kind of risk is akin to buying a single stock. You're betting it all on the viability of this insurer or whomever they decide to sell your policy to.
The fees are egregious, often 3% or more and quite hidden and not transparent. The contracts are beyond complex.
Sure, late in life immediate annuities or QLACs are a bit safer due to immediate returns, but do you want to be dealing with a policy sale or default that late in life?
Yes, Wade Pfau is all about this stuff. But he now works for the industry. He doesn't "sell" annuities as he says, but he represents them as a paid advocate, I believe. Not exactly objective. The American College of Financial Services is closely tied to the insurance industry.
I really think this is all a sham that could result in a 2008 type event in the future. We can't bail them all out, especially if most of the damage is done by failed off-shore companies who have just stolen/squandered the money. That's why many folks are taking the lump sum for pension plans now. Too much risk, no control over your own money.
@nc-cpl I was using (real) 5.0% for stocks but I think I will lower that down to 4.5%. Was using 1% for bonds but thinking of upping that to 2.0%, and was using 0% for money market, but thinking of upping that to 2.0% given the current rates for short term brokered CD's and US T-bills. General inflation will stay at 4.0%. And you??
