FYI:
Regards,
Ted
March 17, 2016
Dear WEALTHTRACK Subscriber,
“Caution is appropriate.” So said Federal Reserve Chairwoman Janet Yellen in a press conference Wednesday after the Fed decided to halve the number of rate hikes planned this year, from four to two. With the Fed Funds’ target remaining between 0.25% and 0.50% another two increases would leave the benchmark rate below 1% by year-end.
There were other significant developments this week. Donald Trump won four of the five Super Tuesday Republican primary races, including Senator Marco Rubio’s home state of Florida, causing Rubio to drop out. Despite a loss in Ohio’s primary to its Governor John Kasich, Trump has a comfortable delegate lead over his major challenger, Senator Ted Cruz. On the Democratic side, Hillary Clinton pulled well ahead of Senator Bernie Sanders.
Also this week, U.S. crude-oil futures closed above $40 a barrel, the highest since December of last year and the Dow Industrials turned positive for the year in Thursday’s trading, after being down more than 10% in early February.
New this week on our website, we’ll have a link to a report on how much workplace diversity affects the bottom line. It will be available to PREMIUM members tonight and to everyone else over the weekend. According to research published by McKinsey & Company, companies in the top quartile of racial and ethnic diversity are 35 percent more likely to have financial returns above their respective national industry medians. And companies in the top quartile for gender diversity are 15 percent more likely. Food for thought for management and investors!
I have always been a big believer in meritocracy. I like to think that in America, people of equal skills, talent and education will be judged on their merits, not by who they are or where they come from, which is why I couldn’t figure out why more women were not advancing in the financial services industry. Women are certainly well represented on air, online and in print in financial journalism. But why are there still so few women in executive and management roles on Wall Street?
Last week I got some surprising answers while emceeing a fascinating and enlightening conference on increasing gender diversity in the financial services industry. “Beyond Talk: Taking Action to Achieve Gender Balance in the Financial World” was co-sponsored by The California State Teachers’ Retirement System, known as CalSTRS and State Street Global Advisors.
Leaders at both organizations have gone “beyond talk” and initiated practices to recruit, promote and mentor women in the industry. They are putting substantial resources into the effort.
SSGA just launched the SSGA Gender Diversity Index ETF, symbol SHE, comprised of more than 140 U.S. companies which have greater numbers of women in leadership positions than other companies in their sectors. CalSTRS invested $250 million in SHE at its launch.
On the television show this week, are you better off with a robot? That is the topic we are revisiting during this final weekend of winter fund-raising on public television. We are interviewing an under the radar value investor who created a robot portfolio to test the theory that statistically cheap stocks will outperform the market over time – and lo and behold they have.
As a long-time financial journalist I have seen investment theories and strategies come and go. Wall Street firms have devoted billions in their quest to find proprietary magic formulas for outperformance.
Michael Lewis’ best-selling book, now a movie, “The Big Short” did a masterful job of describing various mathematical and computer science algorithms that contributed to the financial crisis. They were so complex and arcane that even their creators and certainly their customers had little idea of what was in them and how they would really work in the real world.
This week’s guest has a much simpler approach, which much to his surprise when he first tried it 17 years ago does work, but it comes with a large caveat: it is not appropriate in the vast majority of portfolios. He only applies some of it himself.
He is John Dorfman, Chairman of Dorfman Value Investments, an investment management firm he founded in 1999 that manages money in separate accounts for high net worth individuals, family offices and a few institutions.
He is a deep value investor who runs concentrated stock portfolios that have outperformed the S&P 500 by a wide margin over the years. Dorfman is also a journalist. I knew him at The Wall Street Journal and even though he switched to money management full time in 1997 he still writes financial columns.
One of his most popular, which has been his first column of the year for the last 17 years, is devoted to his 10 stock robot portfolio.
Dorfman starts with all U.S. stocks with a market value of $500 million or more. Then he eliminates those with debt greater than equity. He then picks the ten stocks selling for the lowest price earnings multiples of the past year’s earnings.
The result is the “Robot Portfolio” has had a compound average annual return, with dividends included, of nearly 16%, compared to just over 4% for the S&P 500.
Given the spectacular performance of his robot portfolio why doesn’t Dorfman just use that method for all of his accounts? He will tell us.
If WEALTHTRACK isn’t showing on your local station this week due to local station fund-raising campaigns, you can always watch it on our website. You will also find a link to Dorfman’s 2016’s Robot Portfolio there.
Thank you for watching. Have a great weekend and make the week ahead a profitable and productive one.
Best Regards,
Consuelo
John Dorfman Website:
http://dorfmanvalue.com/

Many retirees choose to take the lump sum option with the thought in mind to pay off all debt because they say it is impossible to do with the annuity option. Therefore reduced principal right out of the gate. Many are not sophisticated investors, many retired before the great recession, many have withdrawal rates too high...approved by financial advisers who know they will not get the assets unless they approve the high withdrawal rate. So they are way down the wrong path within two weeks of retirement.

Getting back to the question as to "where" should retirement withdrawals come from this study researched a number of options and I liked this quote enough to pass it along:
In virtually all the scenarios, "it pays to eat your bonds first, equities later."
Withdrawal scenarios studied:
1. Withdraw money from either stocks or bonds and then rebalance the portfolio annually to the initial stock/bond proportion. This harvesting rule will be referred to as “Rebalance.”
2. Withdraw money from the asset that had the highest return during the year and do not rebalance. This will be referred to as “High First.”
3. Withdraw money from the asset that had the lowest return during the year and do not rebalance. This will be referred to as “Low First.” To the extent that historical rates of return on bonds tend to be lower than historical rates of return on stocks, the following two additional methods of harvesting withdrawals will be referred to as “Bonds First” and “Stocks First.”
4. Take withdrawals from bonds first and do not rebalance.
5. Take withdrawals from stocks first and do not rebalance.

Study:
time-diversification-vs-rebalancing-in-retirement-portfolios/

Yes, that was the Spitzer and Singh study cited ...

Interesting Read using a three fund portfolio (VFINX, VUSTX, VSGBX or VFITX) and a 200 mda filter.
From the link:
"The popular 60/40 Stocks/Bond portfolio performs well over the past 24 years, but adding a simple moving average to this portfolio has increased returns, reduced the duration of draw downs, and substantially reduced portfolio draw down. Adding in an intermediate term bond fund as the cash fund accomplished even more, it increased annual returns more than 10% over the buy and hold portfolio, while having close to 1/3 of the daily draw down numbers. Avoiding draw down and still being involved in market upswings was the goal of this strategy, and it worked well in this instance. There were a few concerns, namely being involved in the cash filter fund for too much duration, not being diverse enough to capitalize on gains across different markets, and the potential of missing out on some of the market upsides. However, these concerns did not prevent us from accomplishing the goals of reducing draw down and risk along with increasing return in this particular example."
iema-blog.com/2016/02/6040-stockbonds-portfolio-with-market.html

They could probably run a 10 period monthly moving average on the prices of the assets as to reduce daily generated "whipsaws" ( as many "needless" whipsaws occurring in the past have been contained "within" the monthly data ) and reduce the amount of "management" time, ie. looking at the calculations daily / subjecting oneself too frequently to market data - leading to possible cognitive investing biases ...
Also, using healthcare for the 60% allocation has produced alpha ( appreciably ) above VFINX ( 13% CAGR, Sharpe 1.0 -21% max DD with non MA strategy / rebalance annually 1986 - 2015 )

Getting back to the question as to "where" should retirement withdrawals come from this study researched a number of options and I liked this quote enough to pass it along:
In virtually all the scenarios, "it pays to eat your bonds first, equities later."
Withdrawal scenarios studied:
1. Withdraw money from either stocks or bonds and then rebalance the portfolio annually to the initial stock/bond proportion. This harvesting rule will be referred to as “Rebalance.”
2. Withdraw money from the asset that had the highest return during the year and do not rebalance. This will be referred to as “High First.”
3. Withdraw money from the asset that had the lowest return during the year and do not rebalance. This will be referred to as “Low First.” To the extent that historical rates of return on bonds tend to be lower than historical rates of return on stocks, the following two additional methods of harvesting withdrawals will be referred to as “Bonds First” and “Stocks First.”
4. Take withdrawals from bonds first and do not rebalance.
5. Take withdrawals from stocks first and do not rebalance.

Study:
time-diversification-vs-rebalancing-in-retirement-portfolios/

In a stripped down form, I believe this is what one gets out of Buffett's advice for his future widow - 10% short term government bonds (effectively a cash substitute) and 90% in an equity index fund.
https://blogs.cfainstitute.org/investor/2014/03/04/warren-buffetts-90-10-rule-of-thumb-for-retirement-investing/
That's 2.5-3 years of buffer. As you noted, the length of the overvaluation period (do you mean undervaluation when a retiree is disinvesting?) is unknown, but that is likely enough to insulate one from the worst of it. If that period extends further, one does not need to replenish the buffer, merely sell off enough equity to meet cash flow needs. Once stocks return to a reasonable valuation level, the buffer can be refilled.
Personally, I'm more comfortable with a 4-5 year buffer and a more diversified equity portfolio, but generally find this a good approach.

Newer academic thinking about investment glide path allocations and withdrawal rates in retirement years ( Weigand and Iron / Sptizer and Singh *) has shown that an investor / retiree spend from bonds first and stocks last ( and build a "safe money" fund or bucket of approx. 2 years of expenses which can be used if needed or spent before bonds ). Under this thinking, a misconception about conventional 60 / 40 "glide path" schemes is, that a "bond" allocation be recommended "early" in the investment lifecycle. Yet, the young investor demographic ( age 20's to 50 ) has "time" compounding / "time" to ride out volatility advantages on their side and they aren't so invested in knowing the quarter to quarter fluctuations of their 401K portfolios. So it is logical to assume that a "maximizing" of asset growth by having a much higher portion of assets in equities is warranted and, consequently, should extend into an investors "final years".
Being a late 50's retiree with a somewhat limited but reasonable Roth IRA accumulation and with an extensive expertise in quantitative tactical allocation, I operate under the framework of "preservation of capital" model with an appreciation of what the Weigand and Iron study conveys. As the forward 15 year equity market returns, as measured by CAPE ** and price to book measures are extrapolated to be sub par, preserving capital and asset growth within alternating strategic periods of equity ( small cap value, mid cap growth ), money market, and occasional bond investment through the use of quantitative tactical methods, is my preferred choice. Many "equities heavy" buy and hold investors / retirees may have to ride out the overvaluation period, perhaps spending down their safe money portion and/or retirement asset stake, as is implied by "sequence of return risk". The unknown is how deep and how long the overvaluation period is; this accompanied by varying inflation / disinflation .
Historically, a simple, mechanical, low transaction price / moving average cross strategy has produced decent risk mitigation / capital preservation during these periods of CAPE overvaluation ***.
Some favorite quotes from retirement planner literature are: "Hope for the best, plan for the worst", "You can't predict, but you can prepare ".
* "Market Signals for When to Employ a Bonds-First Withdrawal Sequence to Extend the Longevity of Retirees’ Portfolios" R. Weigand
"Is Rebalancing a Portfolio During Retirement Necessary?" John Spitzer Sandeep Singh
** https://docs.google.com/document/d/1I4sH5UV6fS6UfCNiPl1AsB2SOMF1an1PRt8YH0dgOeQ/edit?usp=sharing
*** https://docs.google.com/presentation/d/1mdon_cto48rvs2_lKWyMWrfqSIh8K0phfe7tThle8qQ/edit?usp=sharing
https://docs.google.com/presentation/d/1Sn6BKRCKRU5tensBDFTkJXI3v2wRQ4M1bt8VoIM2Zmc/edit?usp=sharing

My experience with hundreds of clients over the years (no matter how many projections we run prior to retirement, MonteCarlo or not) is that those with public pensions (after working 30+ years) seldom have spending problems. The public pension system is very generous, and it allows folks to retire with most of their pre-retirement income continuing. If they also have no mortgage and other heavy debt, they are even in better shape. If the spouse has good social security benefits, even better. With these folks, the withdrawal rate on their other savings is not much of an issue.
For other clients, our experience has been that folks tend to spend less following down years for the markets, then discover that some of the "necessary" spending they did previously is not so necessary any more. The first 4-5 years of real retirement are when folks do the most traveling and other unusual expenses. But even then, with the exception of those who have always lived beyond their means, in the last 2-3 years folks have been more aware of their spending. As I have noted previously, those with no mortgage and other debts always seem to worry less than those with debts. And for good reason...their expenses without those things are almost always 30-60% lower.

Hi Davidrmoran,
Using a set of rolling market returns is a step in the right direction over the original Trinity study approach, but it is a very small step. It still only reflects the exact sequence of returns that were historically registered by the marketplace.
Market returns will never repeat that precise order. All evidence points to a purely random series of returns. Monte Carlo methods capture that random characteristic. By running 1000 randomly selected return sequences, a user gets a better feeling for the spread in possible outcomes by an order of magnitude or so.
Given a withdrawal schedule, Monte Carlo projects the likelihood of portfolio survival for elapsed time and projected market return stats. Alternate scenarios and drawdowns are easily explored if the survival prospects are not attractive. I used Monte Carlo as one tool in making my retirement decision.
Thank you for asking.
Best Wishes.

I have personally known 4 people who chose a lump sum option from their employer in retirement vs annuity option. All 4 are in serious trouble now.

Ya I know someone who did the same thing when he retired 5 years ago at 62 and is in trouble now.
Spent every dime. Really sad to see someone work 30+ years at a tough job and end up with so little in retirement.
Maybe our schools need to teach the kids a jingle (to the tune of a Dinsey song I remember as a kid):
"D-I-S-C-I-P-L ... I-N-E spells Discipline." (dumb - I know)
Gets back to BobC's comment too about avoiding credit card debt.

Hi Guys,
Whenever a MFO discussion on retirement planning and drawdown schedule is initiated, my contributions are predictable and fairly consistent. Sorry about that, but I’m a firm believer that Monte Carlo methods are especially appropriate tools to provide actionable guidance.
I believe I posted on this subject recently, but I’ve forgotten the Discussion title. So I will repost my comments as follows:
“Simple heuristics (rules-of-thumb) are fine when making common everyday decisions like buying a hamburger or not, but are totally inadequate when making complex, significant decisions like those about retirement.
The retirement when, where, how much do I need, drawdown rate, portfolio size and placements seem hopelessly intertwined to permit a comfortable and confident decision. But a financial tool is readily accessible that significantly attenuates doubt, and it’s not rule-of-thumb based.
I’ve proposed this approach many times on MFO, but I don’t hesitate to do so once again. That tool is Monte Carlo simulation analyses. I do not apologize for being a broken record in this instance.
Many such tools are easily accessible for free on the Internet. Two such codes that I have previously recommended are the PortfolioVisualizer and the MoneyChimp codes. Here are direct Links to these Monte Carlo simulators:
https://www.portfoliovisualizer.com/monte-carlo-simulation
http://www.moneychimp.com/articles/volatility/montecarlo.htm
Please give them a few tries. The inputs are self-explanatory, and the codes are fast. Many scenarios can be explored over a short commitment of time. Endless what-if scenarios can be examined with end portfolio average value and portfolio survival likelihoods as their primary outputs. Thousands of cases are randomly constructed for the projected market returns.
The PortfolioVisualizer tool has more user options, but the MoneyChimp version also does yeomen work. Since these are Monte Carlo-based codes, each time a simulation is made, expect slightly changed predictions. That somewhat captures the fragile nature of the uncertain future.
Retirement decisions will be dramatically improved by application of these simulators. Imperfect analyses (even estimating the range of possible market returns is risky business) almost always beats poorly informed guesstimates. Before making a retirement decision, give the Monte Carlo codes a test ride. They are powerful stuff for everyone.
And for normal circumstances and drawdown rates, a 2 million dollar portfolio is not necessary for a portfolio with some equity holdings. Do the analyses to challenge the robustness of that statement.”
I hope my repost is helpful to some newer MFO members. Portfolio volatility degrades end wealth. That’s why when constructing a portfolio one goal is to minimize its standard deviation (volatility). Low component standard deviations and low component correlation coefficients work to accomplish that goal.
A simple equation demonstrates the need to minimize portfolio standard deviation to achieve a higher cumulative return. Cumulative annual return is roughly equal to average annual return minus one-half times the square of the portfolio’s standard deviation. Note the minus sign. Standard deviation always operates to reduce average annual returns over the years.
Good luck and good planning for your retirement, and for the likelihood of your portfolio’s survival.
Best Wishes.

Different issue but in the ballpark in answer to bee's question......I have personally known 4 people who chose a lump sum option from their employer in retirement vs annuity option. All 4 are in serious trouble now. I have known 2 who chose the annuity option and they are spending the entire check Jimmy Buffet style on the beach because they know another check will be in the mailbox in 30 days. This brings up a separate set of questions which I will bring up in a separate discussion thread soon.

I would like to hear from other retirees who have successfully navigate a portfolio's downside risk in retirement from the point of view of a safe withdrawal "method". In other words, along with a SWR (Safe Withdrawal Rate) there also needs to be guidance on managing a SWM (Safe Withdrawal Method). What part of the portfolio will serve as the vehicle for this safe withdrawal "rate" and when will that withdrawal happen. Cash seem to be a part of a retiree portfolio that might help with this.
@hank lamented as to the "when" with his comment,"We don't take a lot out, but have been traditionally taking the full year's distribution in January. Worked well up until this January. Got stung a little. In the future we'll stagger withdrawals over a full year." As a follow up question, what did you decide to redeem; stock, bonds, or cash?
Obviously redeeming and withdrawing shares of equities that have lost 50% of their value (due to market volatility) doesn't sound like a very safe withdrawal method, but holding cash (or a cash like investment) as the withdrawal vehicle would seem to help remove market volatility out of a portfolio withdrawal.
I have found that saving into market volatility (both up or down) isn't nearly as a emotional as spending down a portfolio's assets. Separating out a portion of one's portfolio into cash for emergencies or for future spending might be one way to calm the emotional side of the withdrawal.
Thanks for the thread @shipwreckedandalone...Additional thoughts?

The rate is important, but living within ones means in retirement is even more important. I have said it many times before, and I say it again: Starting retirement with no mortgage and no burdensome credit card debt can be the most important goal of retirement planning. This alone can reduce spending by 30-50% and makes a huge impact on the withdrawal rate.

Thanks for this "message in a bottle", it led me to these two articles:
7twelveportfolio.com/Downloads/A-Better-Balanced-Fund.pdf
aaii.com/journal/article/the-importance-of-diversification-in-retirement-portfolios.touch

For those who might like to listen in:
Wednesday, March 23, 2016
3p.m. ET
30-Minute Live Webcast Followed by Q&A
Current market fluctuations may have you concerned — particularly as you approach or are in retirement. T. Rowe Price can help you take steps to more confidently manage your investments despite market uncertainty.
Sign up here:
TRP event webcast

"Meanwhile, the T. Rowe Price Retirement series has fallen to Silver--still a strong vote of confidence--from Gold. Solid underlying funds and a steady asset-allocation approach give the series a discernible edge over most peers. However, the team's tendency to stick with the status quo when underlying manager concerns arise gives pause, and continued asset growth might lead to a small shift away from active management, a driver of the series' outstanding long-term results." [my emphasis]

Is this a M* poke-in-the-ribs to TRP? Suggesting..... even though underlying funds are actively managed, it is their understanding that the overall asset allocations will be "managed" as well; and, when the manager(s) of underlying funds express trepidation in outlook for certain assets in the near future, then M* expects TRP to tweak the allocation invested in those assets (and they are not seeing that done). Hmmm, should this perceived shortcoming be enough to warrant a rating downgrade?

Good evening all,
An interesting subject: "Cash Is Now A Sin."
Even though I think of myself as a good Christian according to this article I am a big sinner by holding such a sizeable cash position within my portfolio.
In review of a few recent Xray analysis the funds within my portfolio, which consists of forty seven, currently hold an average of 3% in cash which is down from the year ending analysis number of about 5% in cash back in December. My fixed income funds usually hold more cash than my equity funds.
As I entered 2016, combined, my portfolio was holding about 25% in cash. Now, my cash bubbles at about 22% due to the buys I made during the recent market selling stampede, scheduled retirement distributions plus the funds themselves are now holding less cash than they were at year end. My portfolio, on average, generates about 1.25% in cash (yield) per quarter on amount invested. With this, I could easily be close to a 23% cash allocation by the end of the first quarter.
I'll continue to hold the large cash allocation as I am thinking of selling some of my equities since the S&P 500 Index is currently selling at a TTM P/E Ratio of 23 according to the WSJ. With this, stocks are not currently cheap and are richly priced from my perspective using the Rule of Twenty. Since, I am above my target allocation (50%) to stocks, now at about 53%, soon might be a good time to pair back a few of my equity positions and rebalance as summer approaches.
I am thinking my sizeable cash allocation is a blessing and orginates from Biblical teaching. Besides, when I make harvest of my plantings, and book profits, the Lord gets his share.
Have a good evening,
Old_Skeet

There are so many ways of closing a fund that it's hard to fathom cash flow management being a difficult issue.
There is of course the hard close, where even existing investors cannot add more money. This should not impede funds with excess cash, as Lewis pointed out. Then there are funds that allow money to trickle in by restricting the amount that existing investors can add. The Vanguard Primecap funds that Mona mentioned are a good example of these. They used to be restricted to $25K addditional per SSN per year. Vanguard has since relaxed that a bit, allowing $25K per account type per SSN per year. (Vanguard also allows Flagship clients to open new accounts.)
Most funds that are closed still allow existing investors to add money (soft close). Some go further. Many funds allow new accounts via retirement plans (usually if the plan already has some minimum amount in the fund when counting all participants). Or they may allow clients of investment advisers to open new accounts.
Some funds that are closed via third party intermediaries are still open to investors that invest directly. American Century Midcap Value (ACMVX) and Vanguard Wellington (VWELX/VWENX) are good examples of that. I've seen funds that close off access through major brokers (typically Fidelity and Schwab) but leave access open through other brokers. Sorry, no current examples come to mind.
The point is that cash inflow is more like a spigot than an on/off switch. It's fairly easy to turn that knob. The problem with inflows comes about not because there's no spigot, but if there's no pressure behind it. That is, a fund won't attract cash when the market is plummeting and no one wants to put money in, regardless of whether it's closed or not.

Speaking for myself I used that refrain to address investing in a particular niche of a specific sector of the market, that being major oil companies. At present I see them as a fresh caught fish flopping around in the bottom of the boat. They're smelly but they ain't dead yet. I will be patient while waiting for price stabilization or upward movement. Pipeline companies - now they're a different story. Just as cloudy perhaps but in my mind oil and gas are still going to flow through them no matter what the price of the fuel is so I continued to trudge on through the smoke.
To be honest with you I have no idea whatsoever if we've hit a bottom in prices and I mostly don't care. I have an investment plan and as long as my portfolio continues to contribute to my bottom line and fund my semi-retirement everyday needs I'm good. That squiggly line which everyone seems to think represents what my stuff is worth only gets my attention when either bankruptcy or an offer to good to refuse looms. That doesn't work for everyone but I'm good.

To return briefly to David's comments on FPACX, which I endorse. Thanks for showing me how to painlessly reduce my too-numerous fund holdings. However, (please note I did not say, "That being said…") I can't see LCORX as an alternative but I would put in a plug for the local (Indiana) talent at the Bruce Fund (BRUFX). It's a relatively large non-retirement position for me and one that's been a keeper for 8-9 years.