A.I.M. Users Bulletin Board

[ls7550]

RE : Retirement AIM

Just like as is advised on this Forum the Equity allocation should be on the high side . . .between 60 and 95 %, depending on the market condition. This is a very individual thing and is related to the skill of the investor in regards to thinking what is going to happen;

60% to 95% equities is a massive risk to take in retirement IMO Conrad.

Ben Graham advocated 50-50 stock/bonds.

Larry Swedroe has highlighted how if you hold more volatile/rewarding assets you can reduce down stock, increase bonds and potentially yield similar overall reward (a.k.a his fat tail minimisation of 30% spicier stocks, 70% inflation bonds). Have a look at the estimates of real returns for a range of assets such as http://www.portfoliosolutions.com/the-portfolio-solutions-30-year-market-forecast-for-2012/

Arithmentic sum of weighted real gains :

54% US large-cap stocks, 46% 10 year treasury notes = 3.57%
i.e. (0.54 x 5.5) + (0.46 x 1.3) = 3.57

30% US small-value (SCV) stocks, 70% 20 year TIPS = 3.58%
i.e. (0.3 x 7.5) + (0.7 x 1.9) = 3.58

i.e. 30/70 SCV/TIPS might approximate to the rewards from a 50-50 large cap stock/10 year bond

AIM HI 80/20 can yield similar reward to 100% buy and hold, so that 30% stocks might be reduced further to 24%.

Half in 2x leveraged ETF/half in TIPS, rebalanced once yearly can yield the same as 100% in the 1x (non leveraged), so that 24% might be reduced down to 12%.

That's in the Nassim Taleb mostly safe, a little highly speculative camp, 10% to 15% spicier equities, rest in safe. Yet that might yield comparable reward to a more common 50-50 stock/bond asset allocation.

There is however no true safe investment. Even 100% TIPS might be openly defaulted (although unlikely) or default via stealth, such as high inflation, high taxation. A better choice than risking a large amount in a single 'safe' investment is to diversify. Perhaps some long dated TIPS, a Bridgewater safe portfolio (10% gold, 20% T-Bonds, 30% T-Bills, 40% inflation bonds (I-Bonds perhaps)), a Permanent Portfolio and perhaps even including your home as part of that (exempt from taxes (at least that's the case in the UK), value tends to rise with inflation over the longer term).

If you're holding 90% in inflation + x% safe assets, 10% in speculative, then the most you can lose is 10%. If x is 2% and the 10% doesn't lose all, but perhaps only 80%, then a recovery can occur in 4 years or less of having encountered such a devastation - in inflation adjusted terms. In the average case of perhaps a 50-50 common stock/bond portfolio averaging 4% real, the 10-90 might equally achieve such a reward. And if that's also including your home value as a 'inflation bond' asset, that might be comparing 4% real of total wealth to 4% of 50-50 investors liquid asset wealth.

Clive.