Hi Dex,
I do have an embedded bond allocation. Sorry that I was not clear on that matter.
When suggesting the portfolio asset allocation, I divided the portfolio into only 2 groupings for simplicity. Instead of the usual stocks, bonds, cash diversification, I mentally lumped the bonds and the cash into one grouping and call it Fixed Income.
In my earlier post, the 75% and 60% levels that I would assign to equities and hard assets would be complemented with 25% and 40%, respectively, fixed income segments to finish the mandatory 100% portfolio allocation.
As noted by MFOer Fundalarm, an investor might want to consider his SS and pension incomes as part of his overall bond asset allocation. From my perspective, that is an optional judgment on the part of each investor. I have no strong feelings one way or the other.
Remember that the portfolio that I suggested was purely hypothetical for an investor who had 1 million dollars to invest now. It does not represent my current holdings or asset allocation. I currently do own bonds, but mostly the short-term and a few intermediate-term varieties.
Best Wishes.

FYI:
Regards,
Ted
http://www.marketwatch.com/story/sp-500-weekly-gain-best-since-july-2013-2014-04-17/print?guid=9F2C31FF-0990-4F44-A97B-B58366E139E9
Major Stock Indexes: http://markets.wsj.com/us

Dex-
Just a note to let you know that I completely agree with your evaluation of the opportunities that our generation enjoyed (I'm 75) vs the terribly diminished prospects ("current reality", as you put it) that today's younger folks face.
Like MJG, we also have dual SS and defined pension benefits, and are able to fund our living expenses from those sources without needing to draw down our savings and investment reserves. It's true that we were always very conservative in our expenses and discretionary spending, with an eye towards retirement, and we did manage our financial affairs wisely as it turns out. But in today's environment even doing all of that stuff won't be all that much help. Some folks tend to look down from their mountaintops and assume that everyone has the same opportunities and plain good luck that they did. It simply ain't so.
Regards-

I reject your assertion that success was an absolute given for my generation. That’s just plain wrongheaded thinking that lacks an historic perspective. If success was the outcome, it was achieved by hard work, sacrifice, and a little luck.
I like stories to illustrate a point.
I’m optimistic; you’re pessimistic. That dichotomy is honest, is very acceptable, and is likely not to change. That’s okay. Let’s agree on that.
By the way, hard assets represents a fourth investment category in addition to equities, bonds, and cash. It is an investment with intrinsic value. Typically, that bucket includes holdings like precious metals, oil, natural gas, timber, farmland, and commercial real estate.
Take Care and Best Wishes.

I didn't make any absolutes in my posts.
Except for my comment about you and college I was writing about your generation and how it differs from the economic opportunities of other generations. My comments reflect the historical records.
What did I write that is pessimistic? So, I'm not agreeing with you on that I am pessimistic.
We all have our stories. I was able to work through & pay for myself college in the 70's working minimum wage jobs - school in the days; work at night. Now that school is $60,000/year plus other expenses. That is the historical and current reality people are facing these days.
I appreciate the time and place I was born into. And I know if I were born just 5-10 years latter my life would have been drastically different - for the worse because of the economic differences in time.
Thanks for the 'hard asset' definition. Why no bonds - high yield or US Gov't in your allocation?
Regards

FYI:
Regards,
Ted
http://www.cnbc.com/id/101593196

Given the recent out-performance in small caps, especially the Walthausen Small Cap Value Fund (WSCVX), I am considering selling it in favor of the Walthausen Select Value Fund (WSVRX). Asset size is much lower ($39 million vs. $853 million) for WSVRX and the fund focuses more on larger cap stocks. Plus you still get the excellent stock picking of the Walthausen Company. Any opinions?
Thanks
Jim

Hi rjb112,
Wow, you’re a bulldog on fixed income issues and doubts. That’s meant as a compliment, an attaboy.
You pose a delicately balanced retiree scenario. Under the conditions that you postulated, the imaginary retiree is always on the cusp of a cash shortfall since he is tightly coupled to annual market returns.
That retiree has failed to plan well before his retirement years. He should have deployed Monte Carlo simulators to test the sensitivity of his estimated retirement drawdown requirements to market vicissitudes and his portfolio asset allocation design. A parametric Monte Carlo analysis would have identified the relationship between his candidate drawdown schedules and his portfolio survival probabilities. Parametric exploration is always needed because of the uncertain future market performance in all broad investment buckets.
In general, these analyses usually project that a 3% to 4% annual portfolio withdrawal rate will permit that portfolio to survive for 30 plus years with a 95% likelihood of success. A 100% guaranteed survival rate is rare except for an extremely well endowed portfolio or a near-zero drawdown schedule.
Certainly, particularly during the early retirement years, a run of bad luck, of consecutive negative annual performance, can destroy even the most conservative planning. I suppose that’s what you fear. Yes it can happen. Under such a scenario, additional savings must be identified to balance the necessary adjustment to the portfolio’s withdrawal schedule.
Before retiring, I completed these types of Monte Carlo perturbation calculations. It is amazing how flexible route correction rules can improve survival likelihoods in the positive direction. For example, most Monte Carlo simulations assume that withdrawal dollars will be adjusted for inflation. If the marketplace goes south for a year or two, simply not giving yourself that inflation increase will have a profound impact on the portfolio’s survival probabilities. Again this puts pressure on the retiree to tighten his belt. That surely is not pleasant, but it is reality.
This problem with our imaginary retiree has its roots in his pre-retirement working years if he was too risk adverse. If his risk tolerance was very low, he positioned too much of his savings in short-term fixed income products. Historical data suggests that equity real (minus inflation) returns are of order 6.5% with a standard deviation of say 15%. Short-term fixed income real returns are about 0.5% with near-zero variability.
The annual compound return for equities is reduced to 5.3% because of its annual variability; the compound return for the fixed income component remains at 0.5%. Over a 35 year nest-egg accumulation period, the end wealth differential is huge if the saver puts 10% or 20% into fixed income components.
The end wealth multiplier for the 10% fixed income portfolio is 5.19; the multiplier for the 20% fixed income weighting is only 4.42. For this example, the more aggressive portfolio delivers a 17.4% higher retirement starting end wealth.
The takeaway lesson is that during their accumulation phase, folks would benefit by emphasizing equity commitments over fixed income products. Over the long haul, an equity heavy portfolio is less risky than a fixed income portfolio if retirement inflation adjusted end wealth is the goal.
Based on your closing paragraph, I still feel that you are placing far to much emphasis on recovery percentages from a nearby market peak value. The actionable measures are the health of the retiree’s current portfolio, its projected survival time, the estimated future returns, and the necessary drawdown rate to maintain a lifestyle. Where the equity markets peaked is history, and not really meaningful given the current circumstances of the retiree.
For your 2000 meltdown example, the immediate negative market period exceeded one year, but was starting to recover before the downturn reached its second anniversary. If the retiree had properly done his retirement planning, he might well have not accepted an inflation increase for one or maybe two years. Yes, he would have been forced to sell some additional holdings in a down market (he always sells to reach his needed withdrawal rate). He could limit the damage by only selling fixed income units.
I hesitate to invade your personal decision making. That’s your job alone. However, I do hope that my stories do influence some of your thinking on the matter. Except perhaps for a reversion-to-the-mean propensity, ironclad forever rules do not exist in the investment universe. Flexibility in action and flexibility in thinking are mandatory assets for an individual investor.
Only you are responsible for your actions. I trust I contributed to your flexibility in thinking.
Best Wishes.

Our family income must only support myself and my wife of 53 years. She was a military bride. Our kids have been on their own dollar for a long time, and they are all doing quite well. Although money was very tight earlier in life, we have no financial issues or worries presently. I make no smart investment claims. Our family has been prudent savers, conservative, and lucky. Like most others, our family has shared both lucky and unlucky experiences. We lost a son to cancer.
Every generation experiences a similar set of good fortune and hard obstacles. The world will always be a dangerous place. I vividly remember many more challenging wars with greater sacrifice demands than the current conflicts. I remember double digit inflation in the 1970s and long, exasperating gasoline lines.
Both my wife and I collect social security benefits and have separate company pensions. With just a little spending adjustments we could likely live on that income alone.
If I had one million dollars today, my portfolio would depend on my age and my risk profile. If I were 30, something like 75% of that million would be in equities and hard assets. If I were 50, about 60% of my holdings would be in equities and hard assets. Diversification works.

Thanks for the reply. What is a 'hard asset'?
Human beings are greatly influenced by our genetics and life experiences.
We can not really discuss you genetic optimism - if you have it from there.
Your optimism from life experience is one we can generalize about. You were born in the USA at a time in world history where a baby bust provided a fertile period for success. A person of your generation almost had to try to fail. They were sucked up by the growth. That you went to college in the 50s speaks to the opportunities you had.
Re-read the example I gave above. They do not have such opportunities. Their future is more similar to what we see in Europe now. In addition, the population growth from 7B in 2000 to 10B in 2050s will put pressure on wages and increase commodity prices.
Will stock market prices be up by 2050? Yes, will the person in my example have money to put into the market - probably NO. They will be living paycheck to paycheck.
Even today, you and your wife are an a abnormality - defined pensions (with health benefits?) - very few people have that. I think your perspective would be different if you had to live off your savings alone.
So I can see how you are optimistic - you can live off your pension and SS income. You really do not need your savings to live.
In a way, you do not have any 'skin in the game'.
Please do not take any of this as an insult. It is not intended to be at all. It is a different perspective. A great deal of investing is emotion. With your situation - 2 defined pensions (health ins?), social security, no children to provide for, no chance of losing your job - the emotional aspect of investing is minimal.

I always thought it would be an interesting study to compare long term performance of Vanguard's Primecap Funds VHCOX VPMCX and VPCCX (managed by advisor Primecap) and the Primecap Odyessy's Funds POAGX, POSKX and POGRX. I'm sure there are other Vanguard advised funds and the Advisor's in house funds.
As far as past performance goes, it appears POAGX has consistently out performed some very good Vanguard Primecap funds as well as the other two Primecap Odyssey funds listed here in the 5 year chart.

Interesting. Based on what's been said I'm inclined to update passwords, user names, secret questions and whatever else. Going slow however. By estimate, we got around 25 different ID/password combinations - maybe more. If you have an IPad you're likely using several just for that. One to unlock, one to access data files and another for I tunes. And, with 4G, another for the cellular account and - OH (forgot) another to access email!
And we never use the same ID or password more than one time. The burden keeping track is a bit overwhelming. And, lately many sites prompt for pretty complex passwords too, containing upper & lower case, symbols, numbers, etc. ... YIKES.
Wondering if use of public wifi is perhaps involved in these breeches. Anything confidential we do only over 3G or 4G or by phone.

@MJG: Thanks for your thoughtful and most valuable comments.
"That’s why I proposed the one to two year cash reserve"........"I’m mentally prepared to accept some low probability cash flow shortfalls"........"I suggest that in a market meltdown situation, any income shortfalls might well be accommodated by modest changes in spending habits"
Let's take a specific scenario for a retiree where 'any income shortfalls' cannot be accommodated by further changes in spending habits, because the expenses are already quite lean. And let's define 'income shortfall' as necessary living expenses minus (social security income plus unpredictable distributions from mutual funds), for a person without a company pension.
Under this scenario, we are no longer in a 'low probability' for cash flow shortfalls situation, as bear markets are high probability events.
In this scenario, I cannot see how a near-cash reserve of 1-2 years to cover income shortfall would be sufficient, if the objective is to not sell equity mutual funds during a bear market for stocks. One would be meeting all living expenses from the near-cash reserve until the equities bear market was over and some reasonable recovery of equities had taken place.
I fully agree with you that few investors would have lump summed into equities at the peak before the bear started, and that having a requirement to recover equity prices to the prior peak level is too stringent for determining when one should tap equity mutual funds to start paying living expenses again.
Under this new scenario, do you still think only a 1-2 year near-cash reserve could be prudent for the average investor? I think those reserves have to be able to last a lot longer than 1-2 years, else the investor is risking having to sell equities when their prices are significantly down. I would think Jim Stack's figure of 3.8 years would be a bare minimum number under this scenario, and probably much longer.
Off the top of my head, I think that after the bear market started in January 2000, by March 2003, equities were still down 45%. So our (above scenario) investor had already lived off his shortfall reserves for 3 years, and equity price recovery was nowhere close to where equities should be tapped to pay for living expenses.

FYI:
Regards,
Ted
http://www.chicagotribune.com/business/sns-rt-us-cybersecurity-heartbleed-funds-20140416,0,3053842,print.story

I am always amused when people label something as the start of a recovery after seeing a day or two of market movement. It could be so or it could be the same as the last two dead cat bounces especially if the broader market turns south. This is where some relevant charting can be used to get the situational awareness I referred to in an earlier post today. This allows one to make probabilistic decisions.
This is a technical chart for IBB with some of the most common indicators.

This sets the moves in context. The trend is downwards and as usually happens the price keeps bouncing down the lower bounds of the channel (2x SD). These things can't really predict anything but keeps the current moves in context.
It could fall down again like the last two times or it could really be the start of a significant move up. Different people bet at different times. Some at the first bounce back, some just before the 200 SMA because often it is a strong resistance, some after it comes back up over the 200 SMA and some after seeing a confirmation, for example, moving above the 20 or 50 day SMA. There is no right or wrong decision except in retrospect.
However, this can be very useful in assessing potential upside/downside and make bets accordingly with the right stop limit suggested by the chart in case the expectation is not met. The gains come from making that bet being right not mysteriously predicted by the patterns.
It is better than looking at a day or two of market action. The context can be useful in bettering the odds for the entry (or exit).

@MJG,
I appreciate your postings regardless of their length. You are another example of why MFO is a great destination on the web.
Congrats on 53 years of marriage. A wonderful feat.

Hi Dex,
I believe I fully appreciate the primary thrust of your personal questions.
Who is this MJG guy? Does he really know anything about which he writes? Is he fair and honest in his market viewpoints and analyses? Is he trustworthy?
The Internet is a terrific resource; it is a world of information within almost everyone’s grasp. But that ease of access also encourages charlatans and swindlers with their false representations. Credibility is a daunting hurdle that is difficult to jump with these brief exchanges.
On MFO, I have tried to satisfy that natural skepticism by carefully documenting my posts with applicable data, reliable references and elongated explanations. A few MFO members complain about the length of my posts.
I try very hard not to make unsupported assertions. As my earlier correction testifies, I do not always succeed. I have been posting on MFO since its inception, and for many years on its FundAlarm forerunner. I will stand on that record and its consistency.
I’m not 60 years old; I am 80. I have been investing since the mid-1950s and actually attended Columbia University while Benjamin Graham taught there. Our paths never crossed.
Our family income must only support myself and my wife of 53 years. She was a military bride. Our kids have been on their own dollar for a long time, and they are all doing quite well. Although money was very tight earlier in life, we have no financial issues or worries presently. I make no smart investment claims. Our family has been prudent savers, conservative, and lucky. Like most others, our family has shared both lucky and unlucky experiences. We lost a son to cancer.
Every generation experiences a similar set of good fortune and hard obstacles. The world will always be a dangerous place. I vividly remember many more challenging wars with greater sacrifice demands than the current conflicts. I remember double digit inflation in the 1970s and long, exasperating gasoline lines.
I don’t find the current world situation to be particularly threatening. That’s especially true if one contrasts the present miniscule nuclear threat against that which existed in the 1960s. In that decade, the USSR targeted tens of missiles against every major US city.
I too share some of your concerns about today’s political dysfunction, but that is something that I can’t control. Therefore I will adjust and survive.
Both my wife and I collect social security benefits and have separate company pensions. With just a little spending adjustments we could likely live on that income alone.
If I had one million dollars today, my portfolio would depend on my age and my risk profile. If I were 30, something like 75% of that million would be in equities and hard assets. If I were 50, about 60% of my holdings would be in equities and hard assets. Diversification works.
These are grand generalizations and need refinement based of specific preferences. Other MFO members are much better qualified at assembling detailed portfolios, so I defer to their superior talents.
I still believe that the US has a bright future. Be patient and persevere. You will win the battle; we will win the battle.
Best Wishes.

Active management actually does not give *too* much downside protection, but some, sure. And some guys are way way better than others, absolutely, as we retirees try to uncover. The thing to do is hold on, and have enough cash or access to cash to hold on.
For the postwar period and especially for the last 30-35 years, I do not think your other assertions really hold and should be counted on to inevitably happen:
>> Sure, it corrects often, like you note. But will this time be different? Will it go -30...-40...-50%? Worse?
no
>> Stocks can go to zero.
no!
>> Markets can go to (near) zero.
nah
>> Just about every asset class in every sector in every country has proven it can draw down -70...-80...-90%.
Some specific examples since 1945 would be helpful, but there are none, in the way described.
>> In the long run, markets of all kinds tend to go up. But in between, they are subject to extremes...
In any case, this all seems very strange to me coming from a researcher like you. And what would you propose one do instead, or do keeping in mind these statements of yours as if true? Keep many decades' worth of bonds/CDs and invest whatever rest is left? I don't think so.

Hi Guys,
Admittedly, I am an optimistic person. During the latter years of my other life, I was a major organizer and contributor to an endless number of aggressive, challenging engineering work proposals.
Best Regards,

MJG, a couple of questions:
How old are you?
Do you have dependents?
Do you have a defined pension plan?
Will you be receiving Social Security?
If you will be receiving Social Security and/or pension; What percentage of you expenses it be when you collect both?
If, you were 60 today without a job Social Security and a pension how would you invest, let's say, $1,000,000 today - all you have, currently in cash? And, you had to live off it from today at age 60 until 90?
As, an aside, a person born in 1990 is now 24. In there lifetime they have seen:
2 major stock market downturns
3 USA wars
Major intervention by the Federal Reserve
If, they went to college they might have significant debt.
In the current employment market their chances of a defined pension plan is slim to none.
Health benefits have been cut, eliminated, or they have to pay for Obamacare with their after tax dollars.
Gov't debt is approaching 18T and an European style VAT is likely.
The chances of this generation amassing the wealth of those born between 1947-1955, is slim.
So, I'm guessing these people will not be as optimistic about their financial picture.

FYI:
Regards,
Ted
http://www.mfwire.com/common/artprint2007.asp?storyID=48105&wireid=2

Hi rjb112,
Thank you for your discerning and kind commentary.
Indeed, the duration and magnitude of both Bull and Bear markets depend upon definitions. The simple plus or minus 20% rule is very common and is the one that I used in my post. In that rule, the 20% is measured from either the high or low water marks immediately before the reversal.
Your astute comments are more market secular cycle in character. They are based on penetrating these previous high or low records. Since the two most recent Bear slides both exceeded -40%, the 20% reversals were only partial by the secular definition, and obviously produced a different duration measurement. Nothing wrong with any of this record keeping as long as we are all familiar with the operative ground-rules.
Cash reserves are costly since they automatically tradeoff investment opportunity for mental comfort. How far we each commit to that tradeoff is a personal balancing matter. Some financial wags are satisfied with a 6 month reserve. I am not so sanguine. That’s why I proposed the one to two year cash reserve. In the end, it’s your decision.
My own decision is that a reserve that covers all potential outliers, that is really deep into protecting against Black Swan events, is far too costly. I’m mentally prepared to accept some low probability cash flow shortfalls so that I can capture more of the higher likelihood investment opportunity paydays. Again the tradeoff is in your camp.
I consider some retirement income as a dead certainty; Social Security and corporate retirement commitments are in that category. Many financial planners recommend assessing these sources as guaranteed fixed income. For many retirees, these constant cash inflows represent a high fraction of the retiree’s daily needs. I suggest that in a market meltdown situation, any income shortfalls might well be accommodated by modest changes in spending habits.
Early in my retirement, I was challenged by this exact scenario. Spending changes are a workable option. Delaying the purchase of an automobile, eating out less frequently, skipping a vacation cruise holiday, and even making the kids initiate a low interest rate college loan do miracles for the financial balance sheet in short order. And they were only temporary anyway.
From my perspective, measuring a market against an earlier peak level is unattractive and inappropriate. It is a false standard for an individual investor because almost nobody entirely entered the marketplace at that precise, unfortunate time. Admittedly, it is a positive signal for a continuing Bull market overall when these high water resistance markers are penetrated. But an individual’s portfolio and his adjustment decisions should not be exclusively tied to historical landmarks.
I’m an enthusiastic and happy Vanguard client. These days, I basically do my banking with them through their short-term corporate bond mutual fund. I do so irregularly and infrequently. I do not sweat small price changes in that fund; it’s noise level stuff at the fraction of a penny level.
And note that “a penny saved will depreciate rapidly”.
Rjb112, you seem to be a highly motivated investor and a financially focused person. That’s goodness unless you allow these positive attributes to squeeze out other important living functions. I guarantee that you will make bad investment decisions. Remember, for every trade there is a successful side, but, also someone was on the wrong side.
I surely have been on that wrong side more than I like to acknowledge. However, I have managed to reduce my error rate over the years. I attribute that reduction to the formulation of my earlier Super Six ( S6), or now Superior Seven (S7), rule discipline.
The original S6 components in general are (1) savings, (2) simplicity, (3) statistics, (4) stability, (5) selectivity, and (6) strategy. Recently I added John Bogle’s stay the course admonishment as the Number (7) “stay” component to form S7.
For example, in the savings component, it took me awhile to recognize that by decreasing my spending only a small percentage, I could double my savings rate. That’s a nice little piece of wisdom.
You are fully aware of my addiction to statistics as a workhorse to guide investment planning and decisions. It is an important element in my list, but I do not permit it to function in isolation to other factors. That admission might shock a few FMOers.
By stability I mean behavioral emotional stability, by selectivity I mean the active and/or passive mutual fund management decision, and by strategy I default to my asset allocation decisions which do morph over time.
I hope you found this reply at least a little informative and useful for your investment purposes.
Best Wishes.

Bee, I have not had a chance to look at these at all, but I can tell you that fund rankings hardly ever have much impact on our decision process. There are myriad reasons for this, but one of the best examples involves the recent arbitrary re-classification of OSTIX from multi-sector bond to high yield bond. In the process, the fund went from 5* rating to 2* overnight. So we don't really use ratings at all in our screening process. Truly bad funds will be obvious in other data points, a lot of funds with 5* ratings probably do not deserve them, and now we have M* offering predictive analyst ratings that are simply another marketing tool for M* and the funds who achieve the top ratings. It is amazing how much one can learn from reading a prospectus, the SAI, annual report and then digging through fund data.