Bernstein - Implementing Liability Matching and Risk Portfolios - in 2020

itwasntme001

Deleted_User said:

itwasntme001 said:

Linton said:

JohnWinder said:

That approach of Bernstein's will be suitable for some financial circumstances and personalities. There are others pushing the same idea, but we hear of few people who put it into practice, so its appeal seems narrow, despite it's apparent good sense (as you'd expect from Bernstein).

Zwelcher includes it in his book (but regret I can't remember the book title). He talks about the topic in terms of an 'income floor' - no matter how badly the investment world turns into, your assets provide a 'guaranteed' income floor such as you'd get from a lifetime annuity. His view is that, along the lines of the '4% rule', if your SWR is less than 3.5% then building an income floor with a LMP is not so necessary. But if your assets aren't adequate for that, he suggests putting some of them at 'high risk' as a way of building up a 'safe floor' to an adequate level, even if you need to put 'stop loss' limits on those investments to protect your prospective floor from finishing up too low.

Lussier in his book 'Successful investing is a process' likes the LMP approach despite its low expected returns, but he 'tweaks' it by suggesting having some assets in LMP and some in an at-risk portfolio (the mix depending on risk aversion and how well covered the liabilities are).  He proposes a dynamic management of all the assets, moving from the at-risk to the LMP depending on value measures like PE10 and yield. He also likes to track asset class volatility and correlations and make AA adjustments in the at-risk portfolio accordingly. That seemed a bit complicated to me, so I wave it away.

Huxley in 'Asset Dedication' suggests a 'watered-down' LMP by buying a non-rolling bond ladder for the first 5 (or more) years  of retirement, and puts the rest in shares.  This avoids a bad SoR (as long as it lasts <5 yrs!). The ladder amount must anticipate inflation (or use an inflation linked product), and you extend it for the next 5 yrs either at the end of the first five or yearly, or after there’s a good year or two for shares. He says this approach is better than trying to match your risk aversion with a stock/bond mix, there being no quantitative way to do this; I think that's the first time I'd read that, and it had a ring of common sense to it. How do 'they' convert your risk questionnaire score of 'x out of 100' into a 60/40 mix, in any validated way?

I think Bernstein and others suggests the following assets for a LMP: a non-rolling bond ladder; a lifetime inflation linked annuity; and long term health care insurance. But he's American so you won't need the last one.

While interest rates are low, lifetime annuities seem expensive and there may not be many products on offer. But that's the nature of these times, so you just put up with it if you want a LMP.  Exactly the same consideration applies to a non-rolling ladder of inflation linked government bonds: yields are negative, so you'll pay more for them than you'll get back in the end; but that's the cost of having a LMP which is as near as possible to a bullet-proof investment as you can do. It doesn't seem quite so bad when the alternative is a 'risk portfolio' of stocks and bonds, both having high prices and low yields from quantitative easing.

Cash is probably not a good choice for a LMP as it has no secured inflation protection; and a twenty five year retirement needs inflation protection.

Neither do bonds except for Index Linked bonds for partial protection against well above currently normal inflation levels.  However "safe" bonds carry the risk of large reductions in capital value once interest rates rise.  The only viable inflation protection available at the moment sadly is equity or an inflation linked annuity. The latter has the major disadvantage of being totally inflexible.  Of course there are physical assets like gold, fine art etc which should in the long term match inflation but their volatility would rule them out in my view.

My own strategy is I think similar to LMP, though I had never heard of LMP before this thread, For the inflation matching I rely on Wealth Preservation funds, hoping a manager with that objective can balance equity and other investments better than I can or have time to do.  This is coupled with a highly diversified equity/bond/others Income portfolio to provide a somewhat reliable income despite changing capital values.

I agree with your comments on just going for a particular equity/bond mix.  In retirement you have specific needs which cannot be adequately covered by a simple 20/40/60/80 % bond allocation chosen on your psychological attitude to risk.

I would not count on equities protecting against unexpected inflation.  Historically equities did well at inflation rates around 3-4% but above that equities suffered quite badly

Bernstein disagrees.

What evidence does he have to the contrary?

Linton

itwasntme001 said:

Linton said:

JohnWinder said:

That approach of Bernstein's will be suitable for some financial circumstances and personalities. There are others pushing the same idea, but we hear of few people who put it into practice, so its appeal seems narrow, despite it's apparent good sense (as you'd expect from Bernstein).

Zwelcher includes it in his book (but regret I can't remember the book title). He talks about the topic in terms of an 'income floor' - no matter how badly the investment world turns into, your assets provide a 'guaranteed' income floor such as you'd get from a lifetime annuity. His view is that, along the lines of the '4% rule', if your SWR is less than 3.5% then building an income floor with a LMP is not so necessary. But if your assets aren't adequate for that, he suggests putting some of them at 'high risk' as a way of building up a 'safe floor' to an adequate level, even if you need to put 'stop loss' limits on those investments to protect your prospective floor from finishing up too low.

Lussier in his book 'Successful investing is a process' likes the LMP approach despite its low expected returns, but he 'tweaks' it by suggesting having some assets in LMP and some in an at-risk portfolio (the mix depending on risk aversion and how well covered the liabilities are).  He proposes a dynamic management of all the assets, moving from the at-risk to the LMP depending on value measures like PE10 and yield. He also likes to track asset class volatility and correlations and make AA adjustments in the at-risk portfolio accordingly. That seemed a bit complicated to me, so I wave it away.

Huxley in 'Asset Dedication' suggests a 'watered-down' LMP by buying a non-rolling bond ladder for the first 5 (or more) years  of retirement, and puts the rest in shares.  This avoids a bad SoR (as long as it lasts <5 yrs!). The ladder amount must anticipate inflation (or use an inflation linked product), and you extend it for the next 5 yrs either at the end of the first five or yearly, or after there’s a good year or two for shares. He says this approach is better than trying to match your risk aversion with a stock/bond mix, there being no quantitative way to do this; I think that's the first time I'd read that, and it had a ring of common sense to it. How do 'they' convert your risk questionnaire score of 'x out of 100' into a 60/40 mix, in any validated way?

I think Bernstein and others suggests the following assets for a LMP: a non-rolling bond ladder; a lifetime inflation linked annuity; and long term health care insurance. But he's American so you won't need the last one.

While interest rates are low, lifetime annuities seem expensive and there may not be many products on offer. But that's the nature of these times, so you just put up with it if you want a LMP.  Exactly the same consideration applies to a non-rolling ladder of inflation linked government bonds: yields are negative, so you'll pay more for them than you'll get back in the end; but that's the cost of having a LMP which is as near as possible to a bullet-proof investment as you can do. It doesn't seem quite so bad when the alternative is a 'risk portfolio' of stocks and bonds, both having high prices and low yields from quantitative easing.

Cash is probably not a good choice for a LMP as it has no secured inflation protection; and a twenty five year retirement needs inflation protection.

Neither do bonds except for Index Linked bonds for partial protection against well above currently normal inflation levels.  However "safe" bonds carry the risk of large reductions in capital value once interest rates rise.  The only viable inflation protection available at the moment sadly is equity or an inflation linked annuity. The latter has the major disadvantage of being totally inflexible.  Of course there are physical assets like gold, fine art etc which should in the long term match inflation but their volatility would rule them out in my view.

My own strategy is I think similar to LMP, though I had never heard of LMP before this thread, For the inflation matching I rely on Wealth Preservation funds, hoping a manager with that objective can balance equity and other investments better than I can or have time to do.  This is coupled with a highly diversified equity/bond/others Income portfolio to provide a somewhat reliable income despite changing capital values.

I agree with your comments on just going for a particular equity/bond mix.  In retirement you have specific needs which cannot be adequately covered by a simple 20/40/60/80 % bond allocation chosen on your psychological attitude to risk.

I would not count on equities protecting against unexpected inflation.  Historically equities did well at inflation rates around 3-4% but above that equities suffered quite badly with the 1970s being an extreme example.

The problem now is that it is possible for equities to do badly at lower rates of inflation.  We saw this in March 2018.  When you have rates so low as they are now, any surprise up tick in inflation will cause bond yields to rise and therefore stocks fall, if there is not enough nominal growth (i.e. stagflation).  Stocks are long duration assets, particularly for markets with high PE multiples such as the US.  So stocks will be more sensitive to rate moves.

One should never count absolutely on anything, and in the worst cases each one of us will just have to muddle though. The best one can do in setting up a retirement portfolio is to implement a wide range of measures that may help dealing with whatever the future brings.  If nothing else this should ensure that one's situation is better than many other people's.

Yes, stocks are long duration assets, that is why one invests in other things for the short/medium term.  What happens over say 5 years is irrelevent for equity investing, never mind what happened in as specific a date as March 2018.

In the long term equity should broadly match inflation.  The reason is straightforward, inflation is a decrease in value of a currency against other assets.  Shares are "other assets".  At the more detailed level,  in the long term the value of companies  overall should broadly rise with inflation since their income, costs and therefore profits should also rise with inflation.   

Linton

itwasntme001 said:

Prism said:

Audaxer said:

Linton said:

JohnWinder said:

That approach of Bernstein's will be suitable for some financial circumstances and personalities. There are others pushing the same idea, but we hear of few people who put it into practice, so its appeal seems narrow, despite it's apparent good sense (as you'd expect from Bernstein).

Zwelcher includes it in his book (but regret I can't remember the book title). He talks about the topic in terms of an 'income floor' - no matter how badly the investment world turns into, your assets provide a 'guaranteed' income floor such as you'd get from a lifetime annuity. His view is that, along the lines of the '4% rule', if your SWR is less than 3.5% then building an income floor with a LMP is not so necessary. But if your assets aren't adequate for that, he suggests putting some of them at 'high risk' as a way of building up a 'safe floor' to an adequate level, even if you need to put 'stop loss' limits on those investments to protect your prospective floor from finishing up too low.

Lussier in his book 'Successful investing is a process' likes the LMP approach despite its low expected returns, but he 'tweaks' it by suggesting having some assets in LMP and some in an at-risk portfolio (the mix depending on risk aversion and how well covered the liabilities are).  He proposes a dynamic management of all the assets, moving from the at-risk to the LMP depending on value measures like PE10 and yield. He also likes to track asset class volatility and correlations and make AA adjustments in the at-risk portfolio accordingly. That seemed a bit complicated to me, so I wave it away.

Huxley in 'Asset Dedication' suggests a 'watered-down' LMP by buying a non-rolling bond ladder for the first 5 (or more) years  of retirement, and puts the rest in shares.  This avoids a bad SoR (as long as it lasts <5 yrs!). The ladder amount must anticipate inflation (or use an inflation linked product), and you extend it for the next 5 yrs either at the end of the first five or yearly, or after there’s a good year or two for shares. He says this approach is better than trying to match your risk aversion with a stock/bond mix, there being no quantitative way to do this; I think that's the first time I'd read that, and it had a ring of common sense to it. How do 'they' convert your risk questionnaire score of 'x out of 100' into a 60/40 mix, in any validated way?

I think Bernstein and others suggests the following assets for a LMP: a non-rolling bond ladder; a lifetime inflation linked annuity; and long term health care insurance. But he's American so you won't need the last one.

While interest rates are low, lifetime annuities seem expensive and there may not be many products on offer. But that's the nature of these times, so you just put up with it if you want a LMP.  Exactly the same consideration applies to a non-rolling ladder of inflation linked government bonds: yields are negative, so you'll pay more for them than you'll get back in the end; but that's the cost of having a LMP which is as near as possible to a bullet-proof investment as you can do. It doesn't seem quite so bad when the alternative is a 'risk portfolio' of stocks and bonds, both having high prices and low yields from quantitative easing.

Cash is probably not a good choice for a LMP as it has no secured inflation protection; and a twenty five year retirement needs inflation protection.

I agree with your comments on just going for a particular equity/bond mix.  In retirement you have specific needs which cannot be adequately covered by a simple 20/40/60/80 % bond allocation chosen on your psychological attitude to risk.

Linton, I know that a straightforward 60/40 globally diversified equity bond portfolio will not suit all retirees, but for someone looking for a withdrawal rate of around 3.5% per annum increasing with inflation, is there any reason why you would consider their specific needs would not be covered by such a portfolio?

For me I am not aware of a time that there has been such a situation where there has been such a high equity price at the same time there was such a low interest rate (and high bond price). The previous two bad periods for initial retirement, 1929 and 1969 started from a base of around 4-5% interest rates. I would be worried that a 60/40 might drop both equities and bonds if we encountered anything similar to 1969 again. Hopefully, a bit like in that period with Japanese equities rising another country would step in with a big growth story next time - maybe China or India.

I am hoping that by the time I retire the interest rates have recovered a least a bit.

This is why there is a stronger argument of moving assets to wealth preservation funds which are examples of all weather portfolio (although not exactly the same).

It is also an argument for having your equity allocation in global tracker funds as opposed to regional or managed.  Missing a region/sector/style over a rapidly changing macro environment can have a detrimental impact on your equity allocation's performance.

My reason for not investing in global trackers is that market cap weighting leads to particular regions and sectors  being less well covered than they justifiably could be whilst over-exposing one's wealth to failure in one area.  It also leads to a momentum focussed investment style as winners (individual shares, regions, sectors)  are allowed to increase their relative allocation without constraint.

itwasntme001

Linton said:

itwasntme001 said:

Linton said:

JohnWinder said:

That approach of Bernstein's will be suitable for some financial circumstances and personalities. There are others pushing the same idea, but we hear of few people who put it into practice, so its appeal seems narrow, despite it's apparent good sense (as you'd expect from Bernstein).

Zwelcher includes it in his book (but regret I can't remember the book title). He talks about the topic in terms of an 'income floor' - no matter how badly the investment world turns into, your assets provide a 'guaranteed' income floor such as you'd get from a lifetime annuity. His view is that, along the lines of the '4% rule', if your SWR is less than 3.5% then building an income floor with a LMP is not so necessary. But if your assets aren't adequate for that, he suggests putting some of them at 'high risk' as a way of building up a 'safe floor' to an adequate level, even if you need to put 'stop loss' limits on those investments to protect your prospective floor from finishing up too low.

Lussier in his book 'Successful investing is a process' likes the LMP approach despite its low expected returns, but he 'tweaks' it by suggesting having some assets in LMP and some in an at-risk portfolio (the mix depending on risk aversion and how well covered the liabilities are).  He proposes a dynamic management of all the assets, moving from the at-risk to the LMP depending on value measures like PE10 and yield. He also likes to track asset class volatility and correlations and make AA adjustments in the at-risk portfolio accordingly. That seemed a bit complicated to me, so I wave it away.

Huxley in 'Asset Dedication' suggests a 'watered-down' LMP by buying a non-rolling bond ladder for the first 5 (or more) years  of retirement, and puts the rest in shares.  This avoids a bad SoR (as long as it lasts <5 yrs!). The ladder amount must anticipate inflation (or use an inflation linked product), and you extend it for the next 5 yrs either at the end of the first five or yearly, or after there’s a good year or two for shares. He says this approach is better than trying to match your risk aversion with a stock/bond mix, there being no quantitative way to do this; I think that's the first time I'd read that, and it had a ring of common sense to it. How do 'they' convert your risk questionnaire score of 'x out of 100' into a 60/40 mix, in any validated way?

I think Bernstein and others suggests the following assets for a LMP: a non-rolling bond ladder; a lifetime inflation linked annuity; and long term health care insurance. But he's American so you won't need the last one.

While interest rates are low, lifetime annuities seem expensive and there may not be many products on offer. But that's the nature of these times, so you just put up with it if you want a LMP.  Exactly the same consideration applies to a non-rolling ladder of inflation linked government bonds: yields are negative, so you'll pay more for them than you'll get back in the end; but that's the cost of having a LMP which is as near as possible to a bullet-proof investment as you can do. It doesn't seem quite so bad when the alternative is a 'risk portfolio' of stocks and bonds, both having high prices and low yields from quantitative easing.

Cash is probably not a good choice for a LMP as it has no secured inflation protection; and a twenty five year retirement needs inflation protection.

Neither do bonds except for Index Linked bonds for partial protection against well above currently normal inflation levels.  However "safe" bonds carry the risk of large reductions in capital value once interest rates rise.  The only viable inflation protection available at the moment sadly is equity or an inflation linked annuity. The latter has the major disadvantage of being totally inflexible.  Of course there are physical assets like gold, fine art etc which should in the long term match inflation but their volatility would rule them out in my view.

My own strategy is I think similar to LMP, though I had never heard of LMP before this thread, For the inflation matching I rely on Wealth Preservation funds, hoping a manager with that objective can balance equity and other investments better than I can or have time to do.  This is coupled with a highly diversified equity/bond/others Income portfolio to provide a somewhat reliable income despite changing capital values.

I agree with your comments on just going for a particular equity/bond mix.  In retirement you have specific needs which cannot be adequately covered by a simple 20/40/60/80 % bond allocation chosen on your psychological attitude to risk.

I would not count on equities protecting against unexpected inflation.  Historically equities did well at inflation rates around 3-4% but above that equities suffered quite badly with the 1970s being an extreme example.

The problem now is that it is possible for equities to do badly at lower rates of inflation.  We saw this in March 2018.  When you have rates so low as they are now, any surprise up tick in inflation will cause bond yields to rise and therefore stocks fall, if there is not enough nominal growth (i.e. stagflation).  Stocks are long duration assets, particularly for markets with high PE multiples such as the US.  So stocks will be more sensitive to rate moves.

One should never count absolutely on anything, and in the worst cases each one of us will just have to muddle though. The best one can do in setting up a retirement portfolio is to implement a wide range of measures that may help dealing with whatever the future brings.  If nothing else this should ensure that one's situation is better than many other people's.

Yes, stocks are long duration assets, that is why one invests in other things for the short/medium term.  What happens over say 5 years is irrelevent for equity investing, never mind what happened in as specific a date as March 2018.

In the long term equity should broadly match inflation.  The reason is straightforward, inflation is a decrease in value of a currency against other assets.  Shares are "other assets".  At the more detailed level,  in the long term the value of companies  overall should broadly rise with inflation since their income, costs and therefore profits should also rise with inflation.   

My reason for mentioning stocks being long duration assets is nothing about investing with a long time horizon in mind.  It was simply to suggest that stocks are risky assets and one should be mindful of the impact interest rates can have on the performance of these assets, OVER THE LONG TERM.  We don't know if/when we will soon start a long term bond bear market and in such a scenario it is perfectly feasible for stocks to suffer.  Certain companies, sectors, styles, regions will do well.  Others won't.  Perhaps the threshold for inflation/rates at which point the general stock market does badly is lower now than ever before.

There's no rule to suggest stocks should match inflation, short term or long term.  Performance will come down to starting valuations and future profits.  How do you know inflation will increase future profits making stocks continue to perform?  Inflation may very well increase costs more than revenue resulting in profits falling or not rising as much as is priced in at the starting valuations.  And then if you factor in rising interest rates which suppresses valuations, suddenly you will find stocks very richly priced.

I think you need to open your mind a bit about the possibilities.

itwasntme001

Linton said:

itwasntme001 said:

Prism said:

Audaxer said:

Linton said:

JohnWinder said:

That approach of Bernstein's will be suitable for some financial circumstances and personalities. There are others pushing the same idea, but we hear of few people who put it into practice, so its appeal seems narrow, despite it's apparent good sense (as you'd expect from Bernstein).

Zwelcher includes it in his book (but regret I can't remember the book title). He talks about the topic in terms of an 'income floor' - no matter how badly the investment world turns into, your assets provide a 'guaranteed' income floor such as you'd get from a lifetime annuity. His view is that, along the lines of the '4% rule', if your SWR is less than 3.5% then building an income floor with a LMP is not so necessary. But if your assets aren't adequate for that, he suggests putting some of them at 'high risk' as a way of building up a 'safe floor' to an adequate level, even if you need to put 'stop loss' limits on those investments to protect your prospective floor from finishing up too low.

Lussier in his book 'Successful investing is a process' likes the LMP approach despite its low expected returns, but he 'tweaks' it by suggesting having some assets in LMP and some in an at-risk portfolio (the mix depending on risk aversion and how well covered the liabilities are).  He proposes a dynamic management of all the assets, moving from the at-risk to the LMP depending on value measures like PE10 and yield. He also likes to track asset class volatility and correlations and make AA adjustments in the at-risk portfolio accordingly. That seemed a bit complicated to me, so I wave it away.

Huxley in 'Asset Dedication' suggests a 'watered-down' LMP by buying a non-rolling bond ladder for the first 5 (or more) years  of retirement, and puts the rest in shares.  This avoids a bad SoR (as long as it lasts <5 yrs!). The ladder amount must anticipate inflation (or use an inflation linked product), and you extend it for the next 5 yrs either at the end of the first five or yearly, or after there’s a good year or two for shares. He says this approach is better than trying to match your risk aversion with a stock/bond mix, there being no quantitative way to do this; I think that's the first time I'd read that, and it had a ring of common sense to it. How do 'they' convert your risk questionnaire score of 'x out of 100' into a 60/40 mix, in any validated way?

I think Bernstein and others suggests the following assets for a LMP: a non-rolling bond ladder; a lifetime inflation linked annuity; and long term health care insurance. But he's American so you won't need the last one.

While interest rates are low, lifetime annuities seem expensive and there may not be many products on offer. But that's the nature of these times, so you just put up with it if you want a LMP.  Exactly the same consideration applies to a non-rolling ladder of inflation linked government bonds: yields are negative, so you'll pay more for them than you'll get back in the end; but that's the cost of having a LMP which is as near as possible to a bullet-proof investment as you can do. It doesn't seem quite so bad when the alternative is a 'risk portfolio' of stocks and bonds, both having high prices and low yields from quantitative easing.

Cash is probably not a good choice for a LMP as it has no secured inflation protection; and a twenty five year retirement needs inflation protection.

I agree with your comments on just going for a particular equity/bond mix.  In retirement you have specific needs which cannot be adequately covered by a simple 20/40/60/80 % bond allocation chosen on your psychological attitude to risk.

Linton, I know that a straightforward 60/40 globally diversified equity bond portfolio will not suit all retirees, but for someone looking for a withdrawal rate of around 3.5% per annum increasing with inflation, is there any reason why you would consider their specific needs would not be covered by such a portfolio?

For me I am not aware of a time that there has been such a situation where there has been such a high equity price at the same time there was such a low interest rate (and high bond price). The previous two bad periods for initial retirement, 1929 and 1969 started from a base of around 4-5% interest rates. I would be worried that a 60/40 might drop both equities and bonds if we encountered anything similar to 1969 again. Hopefully, a bit like in that period with Japanese equities rising another country would step in with a big growth story next time - maybe China or India.

I am hoping that by the time I retire the interest rates have recovered a least a bit.

This is why there is a stronger argument of moving assets to wealth preservation funds which are examples of all weather portfolio (although not exactly the same).

It is also an argument for having your equity allocation in global tracker funds as opposed to regional or managed.  Missing a region/sector/style over a rapidly changing macro environment can have a detrimental impact on your equity allocation's performance.

My reason for not investing in global trackers is that market cap weighting leads to particular regions and sectors  being less well covered than they justifiably could be whilst over-exposing one's wealth to failure in one area.  It also leads to a momentum focussed investment style as winners (individual shares, regions, sectors)  are allowed to increase their relative allocation without constraint.

That's a perfectly valid reason and i would agree with you on this point.  But you need to not only consider the fact you are not investing in a market cap weighted global tracker, but also what you are investing instead for your equity allocation.  Straying away from a market weight global tracker results in less of a passive approach and more active which implies you are taking a view on the market with all the risks that this entails.

The risks come from the fact that you miss out on the winners continuing to be winners and/or you overweighted on something that will be the losers.

Linton

I take no view whatsoever as to the future of the market. My aim is to invest more broadly than the market so as to catch more of the winners and suffer less from individual failures.  ISTM investing in a global tracker with 60% US is taking more of a view than myself with 40% US in my Growth portfolio.    Another example: the HSBCs FTSE ALL World Index's largest holding is Apple at 3.8%.  My largest holding is below 2%, which means I have more  invested in a broader range of other companies. I am unaware of any data showing that the Market Cap  correlates with superior performance, at least to the extent that is provided by the global trackers.

Linton

itwasntme001 said:

Linton said:

itwasntme001 said:

Linton said:

JohnWinder said:

That approach of Bernstein's will be suitable for some financial circumstances and personalities. There are others pushing the same idea, but we hear of few people who put it into practice, so its appeal seems narrow, despite it's apparent good sense (as you'd expect from Bernstein).

Zwelcher includes it in his book (but regret I can't remember the book title). He talks about the topic in terms of an 'income floor' - no matter how badly the investment world turns into, your assets provide a 'guaranteed' income floor such as you'd get from a lifetime annuity. His view is that, along the lines of the '4% rule', if your SWR is less than 3.5% then building an income floor with a LMP is not so necessary. But if your assets aren't adequate for that, he suggests putting some of them at 'high risk' as a way of building up a 'safe floor' to an adequate level, even if you need to put 'stop loss' limits on those investments to protect your prospective floor from finishing up too low.

Lussier in his book 'Successful investing is a process' likes the LMP approach despite its low expected returns, but he 'tweaks' it by suggesting having some assets in LMP and some in an at-risk portfolio (the mix depending on risk aversion and how well covered the liabilities are).  He proposes a dynamic management of all the assets, moving from the at-risk to the LMP depending on value measures like PE10 and yield. He also likes to track asset class volatility and correlations and make AA adjustments in the at-risk portfolio accordingly. That seemed a bit complicated to me, so I wave it away.

Huxley in 'Asset Dedication' suggests a 'watered-down' LMP by buying a non-rolling bond ladder for the first 5 (or more) years  of retirement, and puts the rest in shares.  This avoids a bad SoR (as long as it lasts <5 yrs!). The ladder amount must anticipate inflation (or use an inflation linked product), and you extend it for the next 5 yrs either at the end of the first five or yearly, or after there’s a good year or two for shares. He says this approach is better than trying to match your risk aversion with a stock/bond mix, there being no quantitative way to do this; I think that's the first time I'd read that, and it had a ring of common sense to it. How do 'they' convert your risk questionnaire score of 'x out of 100' into a 60/40 mix, in any validated way?

I think Bernstein and others suggests the following assets for a LMP: a non-rolling bond ladder; a lifetime inflation linked annuity; and long term health care insurance. But he's American so you won't need the last one.

While interest rates are low, lifetime annuities seem expensive and there may not be many products on offer. But that's the nature of these times, so you just put up with it if you want a LMP.  Exactly the same consideration applies to a non-rolling ladder of inflation linked government bonds: yields are negative, so you'll pay more for them than you'll get back in the end; but that's the cost of having a LMP which is as near as possible to a bullet-proof investment as you can do. It doesn't seem quite so bad when the alternative is a 'risk portfolio' of stocks and bonds, both having high prices and low yields from quantitative easing.

Cash is probably not a good choice for a LMP as it has no secured inflation protection; and a twenty five year retirement needs inflation protection.

Neither do bonds except for Index Linked bonds for partial protection against well above currently normal inflation levels.  However "safe" bonds carry the risk of large reductions in capital value once interest rates rise.  The only viable inflation protection available at the moment sadly is equity or an inflation linked annuity. The latter has the major disadvantage of being totally inflexible.  Of course there are physical assets like gold, fine art etc which should in the long term match inflation but their volatility would rule them out in my view.

My own strategy is I think similar to LMP, though I had never heard of LMP before this thread, For the inflation matching I rely on Wealth Preservation funds, hoping a manager with that objective can balance equity and other investments better than I can or have time to do.  This is coupled with a highly diversified equity/bond/others Income portfolio to provide a somewhat reliable income despite changing capital values.

I agree with your comments on just going for a particular equity/bond mix.  In retirement you have specific needs which cannot be adequately covered by a simple 20/40/60/80 % bond allocation chosen on your psychological attitude to risk.

I would not count on equities protecting against unexpected inflation.  Historically equities did well at inflation rates around 3-4% but above that equities suffered quite badly with the 1970s being an extreme example.

The problem now is that it is possible for equities to do badly at lower rates of inflation.  We saw this in March 2018.  When you have rates so low as they are now, any surprise up tick in inflation will cause bond yields to rise and therefore stocks fall, if there is not enough nominal growth (i.e. stagflation).  Stocks are long duration assets, particularly for markets with high PE multiples such as the US.  So stocks will be more sensitive to rate moves.

One should never count absolutely on anything, and in the worst cases each one of us will just have to muddle though. The best one can do in setting up a retirement portfolio is to implement a wide range of measures that may help dealing with whatever the future brings.  If nothing else this should ensure that one's situation is better than many other people's.

Yes, stocks are long duration assets, that is why one invests in other things for the short/medium term.  What happens over say 5 years is irrelevent for equity investing, never mind what happened in as specific a date as March 2018.

In the long term equity should broadly match inflation.  The reason is straightforward, inflation is a decrease in value of a currency against other assets.  Shares are "other assets".  At the more detailed level,  in the long term the value of companies  overall should broadly rise with inflation since their income, costs and therefore profits should also rise with inflation.   

My reason for mentioning stocks being long duration assets is nothing about investing with a long time horizon in mind.  It was simply to suggest that stocks are risky assets and one should be mindful of the impact interest rates can have on the performance of these assets, OVER THE LONG TERM.  We don't know if/when we will soon start a long term bond bear market and in such a scenario it is perfectly feasible for stocks to suffer.  Certain companies, sectors, styles, regions will do well.  Others won't.  Perhaps the threshold for inflation/rates at which point the general stock market does badly is lower now than ever before.

There's no rule to suggest stocks should match inflation, short term or long term.  Performance will come down to starting valuations and future profits.  How do you know inflation will increase future profits making stocks continue to perform?  Inflation may very well increase costs more than revenue resulting in profits falling or not rising as much as is priced in at the starting valuations.  And then if you factor in rising interest rates which suppresses valuations, suddenly you will find stocks very richly priced.

I think you need to open your mind a bit about the possibilities.

There is no point in thinking about all the possibilities of what may happen in the future, the chances are that what does happen wont be on your list.  For every investment stategy there is a set of possible (in the sense of not breaking the laws of physics) events where it will fail.  All one can do is to make some basic assumptions, invest in line with those assumptions and let events take their course.

In particular one assumption has to be that equities will increase in value over the long term at least in line with inflation.   If you do not believe that you would be foolish to invest anything more than a minor portion of your wealth in them.

However, even if one is happy to assume that equities will broadly rise with inflation it would be foolish for someone relying on investments to pay for retirement to put all their wealth into equities. One does know from history that in the medium term equities cannot be relied on.  It is another basic assumption that this will continue to be the case, which means one has to design one's portfolio to deal with it.

Given you have opened your mind to all future possibilities, it would be useful if you can let us know how those considerations are represented in your own investment strategy. 

itwasntme001

Linton said:

I take no view whatsoever as to the future of the market. My aim is to invest more broadly than the market so as to catch more of the winners and suffer less from individual failures.  ISTM investing in a global tracker with 60% US is taking more of a view than myself with 40% US in my Growth portfolio.    Another example: the HSBCs FTSE ALL World Index's largest holding is Apple at 3.8%.  My largest holding is below 2%, which means I have more  invested in a broader range of other companies. I am unaware of any data showing that the Market Cap  correlates with superior performance, at least to the extent that is provided by the global trackers.

How do you invest your equity allocation exactly?  If you are changing weights relative to the market cap (by the design of your portfolio), you are taking a view vs the market.  Nothing wrong with that (I am doing that too), and you admit to taking a view because your comment implies market cap approach may not be the best way in your opinion.  So you have purposefully under-weighted US vs the market because you think the market has it wrong with the future relative performance of US vs the rest of the world.

itwasntme001

Linton said:

itwasntme001 said:

Linton said:

itwasntme001 said:

Linton said:

JohnWinder said:

That approach of Bernstein's will be suitable for some financial circumstances and personalities. There are others pushing the same idea, but we hear of few people who put it into practice, so its appeal seems narrow, despite it's apparent good sense (as you'd expect from Bernstein).

Zwelcher includes it in his book (but regret I can't remember the book title). He talks about the topic in terms of an 'income floor' - no matter how badly the investment world turns into, your assets provide a 'guaranteed' income floor such as you'd get from a lifetime annuity. His view is that, along the lines of the '4% rule', if your SWR is less than 3.5% then building an income floor with a LMP is not so necessary. But if your assets aren't adequate for that, he suggests putting some of them at 'high risk' as a way of building up a 'safe floor' to an adequate level, even if you need to put 'stop loss' limits on those investments to protect your prospective floor from finishing up too low.

Lussier in his book 'Successful investing is a process' likes the LMP approach despite its low expected returns, but he 'tweaks' it by suggesting having some assets in LMP and some in an at-risk portfolio (the mix depending on risk aversion and how well covered the liabilities are).  He proposes a dynamic management of all the assets, moving from the at-risk to the LMP depending on value measures like PE10 and yield. He also likes to track asset class volatility and correlations and make AA adjustments in the at-risk portfolio accordingly. That seemed a bit complicated to me, so I wave it away.

Huxley in 'Asset Dedication' suggests a 'watered-down' LMP by buying a non-rolling bond ladder for the first 5 (or more) years  of retirement, and puts the rest in shares.  This avoids a bad SoR (as long as it lasts <5 yrs!). The ladder amount must anticipate inflation (or use an inflation linked product), and you extend it for the next 5 yrs either at the end of the first five or yearly, or after there’s a good year or two for shares. He says this approach is better than trying to match your risk aversion with a stock/bond mix, there being no quantitative way to do this; I think that's the first time I'd read that, and it had a ring of common sense to it. How do 'they' convert your risk questionnaire score of 'x out of 100' into a 60/40 mix, in any validated way?

I think Bernstein and others suggests the following assets for a LMP: a non-rolling bond ladder; a lifetime inflation linked annuity; and long term health care insurance. But he's American so you won't need the last one.

While interest rates are low, lifetime annuities seem expensive and there may not be many products on offer. But that's the nature of these times, so you just put up with it if you want a LMP.  Exactly the same consideration applies to a non-rolling ladder of inflation linked government bonds: yields are negative, so you'll pay more for them than you'll get back in the end; but that's the cost of having a LMP which is as near as possible to a bullet-proof investment as you can do. It doesn't seem quite so bad when the alternative is a 'risk portfolio' of stocks and bonds, both having high prices and low yields from quantitative easing.

Cash is probably not a good choice for a LMP as it has no secured inflation protection; and a twenty five year retirement needs inflation protection.

Neither do bonds except for Index Linked bonds for partial protection against well above currently normal inflation levels.  However "safe" bonds carry the risk of large reductions in capital value once interest rates rise.  The only viable inflation protection available at the moment sadly is equity or an inflation linked annuity. The latter has the major disadvantage of being totally inflexible.  Of course there are physical assets like gold, fine art etc which should in the long term match inflation but their volatility would rule them out in my view.

My own strategy is I think similar to LMP, though I had never heard of LMP before this thread, For the inflation matching I rely on Wealth Preservation funds, hoping a manager with that objective can balance equity and other investments better than I can or have time to do.  This is coupled with a highly diversified equity/bond/others Income portfolio to provide a somewhat reliable income despite changing capital values.

I agree with your comments on just going for a particular equity/bond mix.  In retirement you have specific needs which cannot be adequately covered by a simple 20/40/60/80 % bond allocation chosen on your psychological attitude to risk.

I would not count on equities protecting against unexpected inflation.  Historically equities did well at inflation rates around 3-4% but above that equities suffered quite badly with the 1970s being an extreme example.

The problem now is that it is possible for equities to do badly at lower rates of inflation.  We saw this in March 2018.  When you have rates so low as they are now, any surprise up tick in inflation will cause bond yields to rise and therefore stocks fall, if there is not enough nominal growth (i.e. stagflation).  Stocks are long duration assets, particularly for markets with high PE multiples such as the US.  So stocks will be more sensitive to rate moves.

One should never count absolutely on anything, and in the worst cases each one of us will just have to muddle though. The best one can do in setting up a retirement portfolio is to implement a wide range of measures that may help dealing with whatever the future brings.  If nothing else this should ensure that one's situation is better than many other people's.

Yes, stocks are long duration assets, that is why one invests in other things for the short/medium term.  What happens over say 5 years is irrelevent for equity investing, never mind what happened in as specific a date as March 2018.

In the long term equity should broadly match inflation.  The reason is straightforward, inflation is a decrease in value of a currency against other assets.  Shares are "other assets".  At the more detailed level,  in the long term the value of companies  overall should broadly rise with inflation since their income, costs and therefore profits should also rise with inflation.   

My reason for mentioning stocks being long duration assets is nothing about investing with a long time horizon in mind.  It was simply to suggest that stocks are risky assets and one should be mindful of the impact interest rates can have on the performance of these assets, OVER THE LONG TERM.  We don't know if/when we will soon start a long term bond bear market and in such a scenario it is perfectly feasible for stocks to suffer.  Certain companies, sectors, styles, regions will do well.  Others won't.  Perhaps the threshold for inflation/rates at which point the general stock market does badly is lower now than ever before.

There's no rule to suggest stocks should match inflation, short term or long term.  Performance will come down to starting valuations and future profits.  How do you know inflation will increase future profits making stocks continue to perform?  Inflation may very well increase costs more than revenue resulting in profits falling or not rising as much as is priced in at the starting valuations.  And then if you factor in rising interest rates which suppresses valuations, suddenly you will find stocks very richly priced.

I think you need to open your mind a bit about the possibilities.

There is no point in thinking about all the possibilities of what may happen in the future, the chances are that what does happen wont be on your list.  For every investment stategy there is a set of possible (in the sense of not breaking the laws of physics) events where it will fail.  All one can do is to make some basic assumptions, invest in line with those assumptions and let events take their course.

In particular one assumption has to be that equities will increase in value over the long term at least in line with inflation.   If you do not believe that you would be foolish to invest anything more than a minor portion of your wealth in them.

However, even if one is happy to assume that equities will broadly rise with inflation it would be foolish for someone relying on investments to pay for retirement to put all their wealth into equities. One does know from history that in the medium term equities cannot be relied on.  It is another basic assumption that this will continue to be the case, which means one has to design one's portfolio to deal with it.

Given you have opened your mind to all future possibilities, it would be useful if you can let us know how those considerations are represented in your own investment strategy. 

I am not talking about all possibilities.  I am asking you to introduce another perfectly feasible possibility of equities not performing well under inflation.  Equities can suffer very badly in a stagflation economy where you have inflation but little/no growth.  Your comments suggest you are only thinking 1 dimensionally - just inflation.  You need to include growth as a 2nd dimension to see more accurately the possible performance of equities as well as all the other asset classes.

Equities should increase by more than inflation over the very long term (but by no means is that a truism), however for long stretches of time, perhaps decades they can very well underperform even inflation.

shinytop

itwasntme001 said:

Linton said:

itwasntme001 said:

Linton said:

itwasntme001 said:

Linton said:

JohnWinder said:

That approach of Bernstein's will be suitable for some financial circumstances and personalities. There are others pushing the same idea, but we hear of few people who put it into practice, so its appeal seems narrow, despite it's apparent good sense (as you'd expect from Bernstein).

Zwelcher includes it in his book (but regret I can't remember the book title). He talks about the topic in terms of an 'income floor' - no matter how badly the investment world turns into, your assets provide a 'guaranteed' income floor such as you'd get from a lifetime annuity. His view is that, along the lines of the '4% rule', if your SWR is less than 3.5% then building an income floor with a LMP is not so necessary. But if your assets aren't adequate for that, he suggests putting some of them at 'high risk' as a way of building up a 'safe floor' to an adequate level, even if you need to put 'stop loss' limits on those investments to protect your prospective floor from finishing up too low.

Lussier in his book 'Successful investing is a process' likes the LMP approach despite its low expected returns, but he 'tweaks' it by suggesting having some assets in LMP and some in an at-risk portfolio (the mix depending on risk aversion and how well covered the liabilities are).  He proposes a dynamic management of all the assets, moving from the at-risk to the LMP depending on value measures like PE10 and yield. He also likes to track asset class volatility and correlations and make AA adjustments in the at-risk portfolio accordingly. That seemed a bit complicated to me, so I wave it away.

Huxley in 'Asset Dedication' suggests a 'watered-down' LMP by buying a non-rolling bond ladder for the first 5 (or more) years  of retirement, and puts the rest in shares.  This avoids a bad SoR (as long as it lasts <5 yrs!). The ladder amount must anticipate inflation (or use an inflation linked product), and you extend it for the next 5 yrs either at the end of the first five or yearly, or after there’s a good year or two for shares. He says this approach is better than trying to match your risk aversion with a stock/bond mix, there being no quantitative way to do this; I think that's the first time I'd read that, and it had a ring of common sense to it. How do 'they' convert your risk questionnaire score of 'x out of 100' into a 60/40 mix, in any validated way?

I think Bernstein and others suggests the following assets for a LMP: a non-rolling bond ladder; a lifetime inflation linked annuity; and long term health care insurance. But he's American so you won't need the last one.

While interest rates are low, lifetime annuities seem expensive and there may not be many products on offer. But that's the nature of these times, so you just put up with it if you want a LMP.  Exactly the same consideration applies to a non-rolling ladder of inflation linked government bonds: yields are negative, so you'll pay more for them than you'll get back in the end; but that's the cost of having a LMP which is as near as possible to a bullet-proof investment as you can do. It doesn't seem quite so bad when the alternative is a 'risk portfolio' of stocks and bonds, both having high prices and low yields from quantitative easing.

Cash is probably not a good choice for a LMP as it has no secured inflation protection; and a twenty five year retirement needs inflation protection.

Neither do bonds except for Index Linked bonds for partial protection against well above currently normal inflation levels.  However "safe" bonds carry the risk of large reductions in capital value once interest rates rise.  The only viable inflation protection available at the moment sadly is equity or an inflation linked annuity. The latter has the major disadvantage of being totally inflexible.  Of course there are physical assets like gold, fine art etc which should in the long term match inflation but their volatility would rule them out in my view.

My own strategy is I think similar to LMP, though I had never heard of LMP before this thread, For the inflation matching I rely on Wealth Preservation funds, hoping a manager with that objective can balance equity and other investments better than I can or have time to do.  This is coupled with a highly diversified equity/bond/others Income portfolio to provide a somewhat reliable income despite changing capital values.

I agree with your comments on just going for a particular equity/bond mix.  In retirement you have specific needs which cannot be adequately covered by a simple 20/40/60/80 % bond allocation chosen on your psychological attitude to risk.

I would not count on equities protecting against unexpected inflation.  Historically equities did well at inflation rates around 3-4% but above that equities suffered quite badly with the 1970s being an extreme example.

The problem now is that it is possible for equities to do badly at lower rates of inflation.  We saw this in March 2018.  When you have rates so low as they are now, any surprise up tick in inflation will cause bond yields to rise and therefore stocks fall, if there is not enough nominal growth (i.e. stagflation).  Stocks are long duration assets, particularly for markets with high PE multiples such as the US.  So stocks will be more sensitive to rate moves.

One should never count absolutely on anything, and in the worst cases each one of us will just have to muddle though. The best one can do in setting up a retirement portfolio is to implement a wide range of measures that may help dealing with whatever the future brings.  If nothing else this should ensure that one's situation is better than many other people's.

Yes, stocks are long duration assets, that is why one invests in other things for the short/medium term.  What happens over say 5 years is irrelevent for equity investing, never mind what happened in as specific a date as March 2018.

In the long term equity should broadly match inflation.  The reason is straightforward, inflation is a decrease in value of a currency against other assets.  Shares are "other assets".  At the more detailed level,  in the long term the value of companies  overall should broadly rise with inflation since their income, costs and therefore profits should also rise with inflation.   

My reason for mentioning stocks being long duration assets is nothing about investing with a long time horizon in mind.  It was simply to suggest that stocks are risky assets and one should be mindful of the impact interest rates can have on the performance of these assets, OVER THE LONG TERM.  We don't know if/when we will soon start a long term bond bear market and in such a scenario it is perfectly feasible for stocks to suffer.  Certain companies, sectors, styles, regions will do well.  Others won't.  Perhaps the threshold for inflation/rates at which point the general stock market does badly is lower now than ever before.

There's no rule to suggest stocks should match inflation, short term or long term.  Performance will come down to starting valuations and future profits.  How do you know inflation will increase future profits making stocks continue to perform?  Inflation may very well increase costs more than revenue resulting in profits falling or not rising as much as is priced in at the starting valuations.  And then if you factor in rising interest rates which suppresses valuations, suddenly you will find stocks very richly priced.

I think you need to open your mind a bit about the possibilities.

There is no point in thinking about all the possibilities of what may happen in the future, the chances are that what does happen wont be on your list.  For every investment stategy there is a set of possible (in the sense of not breaking the laws of physics) events where it will fail.  All one can do is to make some basic assumptions, invest in line with those assumptions and let events take their course.

In particular one assumption has to be that equities will increase in value over the long term at least in line with inflation.   If you do not believe that you would be foolish to invest anything more than a minor portion of your wealth in them.

However, even if one is happy to assume that equities will broadly rise with inflation it would be foolish for someone relying on investments to pay for retirement to put all their wealth into equities. One does know from history that in the medium term equities cannot be relied on.  It is another basic assumption that this will continue to be the case, which means one has to design one's portfolio to deal with it.

Given you have opened your mind to all future possibilities, it would be useful if you can let us know how those considerations are represented in your own investment strategy. 

I am not talking about all possibilities.  I am asking you to introduce another perfectly feasible possibility of equities not performing well under inflation.  Equities can suffer very badly in a stagflation economy where you have inflation but little/no growth.  Your comments suggest you are only thinking 1 dimensionally - just inflation.  You need to include growth as a 2nd dimension to see more accurately the possible performance of equities as well as all the other asset classes.

Equities should increase by more than inflation over the very long term (but by no means is that a truism), however for long stretches of time, perhaps decades they can very well underperform even inflation.

So what is your strategy and what is your money in?