Reply to @scott: "I've become a lot longer-term in nature with my investments..." Precisely!!! Consider the market investment road you traveled to reach that point and how long it took you to reach that end. I'm assuming that it's a radical departure from the vista you perceived when you began your investing travels. It certainly is for me.
When I first started investing/saving it was simply a matter of me thinking that the stock market provided the best bang for my buck. Raised by depression era parents with a "make do with what you've got lifestyle" I knew we struggled but we were fed, housed and healthy. What there was allocated to saving was in the form of US Savings Bonds, shoe boxes full of them. As I and my 6 siblings left the house I could see my dad begin to tinker with buying stocks while my mother kept filling the shoe boxes. I began with short-term CD's simply because I didn't want my savings tied up for the longer terms dictated for holding savings bonds. Eventually I moved into mutual funds and witnessed half of my retirement savings wiped out by Black Monday. The move to individual equities coincided with the tech craze and we all know how that turned out. Point being - I had a momentum 'buy' plan but no 'sell' plan whatsoever. As far as I was concerned I was just a stock market genius right up to the point where I had my head handed to me. Thus began the evolution to an investment plan with goals other than making a killing and a more disciplined diversified approach which probably mirrors yours in many respects although our holdings are likely radically different. The key is the "plan."

Well that's a nice tale but I'm not buying it as the sole answer. Why? Frankly I think a lot of people are afraid of the stock market. Loss aversion to be sure but many simply don't trust the stock market anymore and/or they don't understand it. I think it has a lot to do with possibly the losses they may have incurred relative to the tech bomb of 2000 and the slump of 2008. It also has a lot to do with their fear of not having a good paying job with a pension or retirement that they can rely on like those investors who came before them. It seems as though many of those safety nets of yore now come with big, big holes in them.
Boomers who do have investment money or market exposure are worried that another crash may wipe them out or at the very least send them back out into the work force ergo - they want the 'safety' of bonds. Today's workers worry about what little they may be able to invest, if any, and want the perceived safety of bonds as well because they don't know if their jobs will be there tomorrow. Many, many others think the market is just a scam manipulated by the well to do and insiders. Flash crashes and computer glitches don't leave them feeling warm and fuzzy. Bottom line people want to see what little they have sitting there when they need it or look for it. It's their rock and they are sick and tired of the Goldman Sachs', rating agencies and numerous others out there taking it from them correctly or incorrectly.
Finally think also about your own investments. How many of you skim off profits from your winning positions as a rule or on a regular basis. I'm guessing the percentage is low because many believe that these investments will just keep going up. Likewise, when many experience a losing position they will hang on to it for dear life on the belief that it will revert eventually. I don't think that's a good plan. I believe that one needs to have a sell discipline in addition to a buying regimen or plan and that both should be firmly in place before you begin investing. Far too many just take whats handed to them.

Thanks man.
I first went into FAAFX pretty big on 25 July 2011 and added the following month. Totaling about 50% of portfolio. Like you, I just felt Mr. Berkowitz made perfect sense to me. And, thanks to being FAIRX heavy through the credit crisis, I trusted his shop. Back then anyway, I liked holding just 3-4 funds.
I modulated a bit through 2012, added a separate BAC holding, but cut FAAFX to under 10% last September with decision to retire at year end. Wanting to reel-in portfolio volatility.
With recent announcement to close Fairholme to new investors and me getting better handle on retirement finances, I upped our stake. I also got back into FAIRX and bought FOCIX. Mr. Berkowitz now manages a quarter of our portfolio.
He is a money manager I have come to appreciate through good times and bad. And when I ask myself the question: Will he make us money over the next three years? I believe he will. So, we're in.
Hopefully I am right. And hopefully we investors continue to have opportunity to stay with Fairholme.

Reply to @ron:
Hi Ron,
Indeed it is different strokes for different folks. But even admitting that each retiree must seek his own unique comfort zone, a few general policy rules are suitable for almost all retirees.
I have done a zillion Monte Carlo simulations using a host of Monte Carlo codes including one that I developed for my own early application needs. Results do vary a little, but some general rules of engagement can be extracted from the myriad solutions.
The most obvious generic finding is that time dominates all other considerations, both in the accumulation phase and in the projected distribution phase. Almost everyone recognizes this non-controversial factor.
A very critical factor, especially during a portfolio’s drawdown phase, is returns volatility, its standard deviation. A few misguided MFO members insist that portfolio volatility is meaningless. That position is simply plain wrong.
What is critical for portfolio survivability is compound return. A rigorous equation links compound return to both annual average return and its standard deviation. Given an annual return, a volatility increase works to reduce compound return. During its drawdown phase, high volatility operates to enhance portfolio failure (bankruptcy) rates.
That’s why many financial advisors recommend a larger commitment to bond-like products within retirement; it operates to reduce overall portfolio standard deviation.
The MRD issue is really a non-issue; it is mandated by law. Penalties if violated are just too damaging to accept. Besides it doesn’t usually impact a drawdown plan if that plan follows a 4 to 5 % withdrawal rate. The MRD schedule doesn’t demand that level of drawdown until about age 78 or 79. So MRD requirements usually don’t impact investment decisions until that advanced age.
BobC is perfectly on-target when he generalizes that Monte Carlo retirement applications typically yield an allowable 4 to 5 % drawdown schedule during retirement. It was interesting that most of his clients adjusted cash flow needs downward during lean portfolio return years. His clients show considerable wisdom.
Monte Carlo simulations can be used to demonstrate that wisdom. Portfolio survival rates are dramatically improved if some flexibility in portfolio drawdown rate is practiced as a matter of policy.
For example, most Monte Carlo codes automatically increase withdrawals as a function of COLA changes. However, if a retiree is sufficiently disciplined and motivated, he can elect to sacrifice any inflation increase when his portfolio suffers a negative year. That simple tactic works wonders to enhance portfolio survival statistics. A host of other strategies can be implemented if the portfolio is exposed to a series of bad years.
Certainly, portfolio survival becomes a critical issue when current and projected future market rewards approach the planned withdrawal rates. Major surgery is required given that dire forecast. You can identify the critical tipping points for your specific portfolio by doing “what-if” scenarios using the Monte Carlo tool.
I wish you well in your retirement.

One size never always fits all. How about current age of an investor already in retirement and taking RMD?

I would not put a large chunk in Stable Value fund. They contain illiquid investments and in an environment like 2008 where they suffered losses and had to suspend redemptions. Read the disclosures of your Stable Value fund in your retirement plan. You can also google for more info.
In this case, there is no free lunch (extra yield) without extra risk.

Reply to @fundalarm: I think you plan and fundalarms advice is very good. I had a stable value fund in my 401k in the past and it was an excellence way to reduce portfolio volatility. Essentially cash with a decent return. My retirement plan eliminated that option and I miss it. Good luck to you.

Reply to @igno2:
I believe there's no symbol because this is a fund designed to be sold only to retirement plans.
For example, you can see a version of this fund offered by the Guardian Advantage annuity, designed for small to midsize company 401K plans. (Small companies often use annuities in their 401Ks, because the fees for the plans then come from the annuity wrapper, which the participants are paying for, rather than from separate fees that the company pays. This also tends to explain the somewhat high index fund ER.)
Here's a Lipper writeup of the fund. https://www.guardianretirement.com/download/FactCard.aspx?ID=594
As I wrote before, I'm guessing you're actually getting a lower ER than a lot of other companies who are paying more for the other classes. But it's really hard to tell and not worth researching.
With respect to lending securities, as Investor wrote, lots of funds do this. The questions are: how the income from the lending is split between the fund and the management company (the more the fund gets, the better); what protections are in place to ensure the securities are returned. Here's a writeup from Vanguard on Securities Lending; page 4 describes Vanguard's approach to lending securities. The fact that Vanguard uses this tool suggests that with the right management, it's not a high risk practice.

Apparently GEGAX (ER 1.39%) is available NL/NTF at Schwab, and last time I checked, AEMSX (1.28% ER) is available at Fidelity for a low minimum in retirement accounts with an initial $75TF. I have heard of one individual over at M* who was able to have Fidelity convert shares of AEMSX into the lower cost ABEMX (1.03% ER). As for buying GEGAX at TDA, it appears that a load will be imposed as I see no evidence that the load is being waved by TDA.
Kevin

Hi Guys,
I submitted the following post to the MFO discussion group in late January recommending Monte Carlo simulations as a means to scoping the huge uncertainties with the retirement decision and an acceptable drawdown rate that generates a high likelihood of portfolio survival for the entire projected retirement period.
I believe it is applicable to the current discussion so I repost it here:
Retirement decisions are surely among the most difficult and stressful that anyone but everyone must eventually address. And the most successful retirements will be achieved the sooner that that issue is confronted; the earlier the better.
Up until just 20 years ago, that vexing problem could only be insufficiently analyzed using deterministic methods that completely failed to capture the uncertainty of future portfolio returns and its volatility.
Recently, these forecasting deficiencies could be mostly relaxed using Monte Carlo simulation calculators. I say relaxed because the uncertainties of the future marketplace can never be removed. However, Monte Carlo techniques can parametrically explore the impact of these uncertainties on portfolio survival likelihoods given various withdrawal rates. With super speed, these Monte Carlo simulations will estimate retirement wealth survival for whatever scenario the simulation user elects to study. Portfolio survival probabilities are the final output.
These calculations are completed with lightening speed on numerous websites these days. Here are Links to two such sites:
http://www.moneychimp.com/articles/volatility/montecarlo.htm
http://www.flexibleretirementplanner.com/wp/
The first Link is to the MoneyChimp site. It is simplicity itself and allows for both a pre-retirement portfolio estimated return and volatility and a post-retirement projected return and volatility. It is extremely fast as it performs 1000 random simulations. Since the controlling returns are randomly selected within the machine, identically repeating the same calculation will generate a slightly different probability outcome.
The second Link is to the Flexible Retirement Planner site. It is slightly more complex than the MoneyChimp site, but it is also more detailed in its analyses. For example, it divides your portfolio into taxable, deferred tax, and tax free components. Also it permits several spending options during the drawdown phase of the retirement.
Both sites provide excellent Monte Carlo simulators. I recommend you try both of them. Do numerous “what if” scenarios to test the survivability robustness of your approaching retirement.
I am certain that these Monte Carlo analyses will better inform your savings, your retirement date, and your portfolio withdrawal rate decisions.
I resorted to Monte Carlo computations when making my retirement decisions, and believe they emboldened me and gave me some needed comfort. By way of full disclosure, I did not use the two simulators that I referenced; they were not available at my critical moment.
When dealing with uncertainty and not deterministic events, Monte Carlo methods are the proper tools to apply.
Good luck and Best Wishes.
Many other Monte Carlo simulation sites are also available on the Internet
I like and occasionally still use the Financial Engines product developed by Noble Laureate Bill Sharpe. It is mathematically a rigorous and superior Monte Carlo tool. Bill Sharpe has dedicated his work to improve the lot of us small independent investors.
One issue that I currently have with Financial Engines is that I access it through my Vanguard affiliation so when it recommends some portfolio modifications, that sponsored site tends to follow the Vanguard tradition of fewer holdings and Index-like elements. The financial linkage with Vanguard provides a potential incentive for biased recommendations and makes their proposed changes somewhat suspect. That’s just me speculating aloud without any substantial evidence of any bias.
You can gain access to the Financial Engines website by visiting Terry Savage at the following address:
http://terrysavage.com/
By clicking on the Financial Engines box you can get a free one year subscription to that planning tool.
These Monte Carlo tools surely do not remove the uncertainty of future market returns, but at least you enter the arena better armed to deal with those uncertainties. What realistic returns you guesstimate from the marketplace will forever be a potent driver to any decision.
I hope this helps.

The first thing that comes to mind is, if 2.8% is the right number now and 4% was the right number 5 years ago, who's to say another study 5 years from now won't say that the safe withdrawal rate is 6%. It's certainly guess work trying to figure out what interest rates will be throughout retirement.
I guess the only safe way to withdraw is to wait until you have enough to start on the low end, 2-3% maybe, and be willing and able to adjust with economic times. I'm still working so we don't have to dig into savings yet, but that is my goal.
Anyone else have thoughts on withdrawal rates?

Not yet being retired (and it may be a long time at this rate of withdrawal) I haven't checked, but is the 2.8% recommended rate below the required minimum IRA/401K/403B withdrawal from the IRS? Could get interesting if one has to set up a second taxed investment portfolio to survive retirement and meet the drawdown requirement.

FYI:
Regards,
Ted
http://www.investmentnews.com/article/20130207/FREE/130209947?template=printart
M* Video & Transcript: http://www.morningstar.com/cover/videocenter.aspx?id=582877

Mr. Auxier runs Auxier Focus Investor AUXFX.
Link to his latest quarterly report:
http://auxierasset.com/2012/12/31/auxier-report-year-end-2012/
Since 1999, this guy knows how to control risk and still beat the market:

Down side and draw down deviations 7.4% and 8.6%, respectively, through end of last year.
He also initiated an institutional share class last year with a bit better ER of 1.1 for $250K min versus 1.25 for investor class. Auxier AUM is currently $270M, up from $147M when David first profiled AUXFX a couple years back, now archived.
From Mr. Auxier's latest commentary:

The power of compounding is so phenomenal that a long-term investor should strive to avoid losses that interrupt the process. We did not believe the Federal Reserve would instigate an $85 billion a month bond buying campaign, dubbed “unlimited QE,” that’s focused on the unemployment level. Allocating roughly a trillion dollars at today’s record-high bond prices makes no sense. Excessive borrowing to buy wildly overpriced assets are common causes of capital destruction. Misallocation based on extremely easy credit has contributed materially to the two major market declines in the past 12 years. This past year the mindless rush for yield drove investors into the danger zone once again. “Stretching for yield” without understanding the source or true risk for yield contributed to the financial crisis in 2008. This year, across the globe, total central bank stimulus could exceed $8 trillion. This is unprecedented, can’t be ignored, and provides a powerful but artificial tailwind for equities.

Prospective investors in the Fund often ask why we steadfastly avoid such high-profile tech stocks as Apple and Facebook that dominate coverage on CNBC and other financial media. Our answer is that we prefer to own comparatively mundane businesses like Unilever and Tesco PLC that actually have benefited from technology’s inexorable march toward lower unit prices and profit margins.

And from David's original profile:

Management’s Stake in the Fund: rather more than $2,000,000. Mr. Auxier reports investing his entire personal retirement into the fund and has committed to never selling a single share while he still manages the fund. The company reports that “everymember of the Auxier team has significant percentages of their personal net worth invested in the Auxier Focus Fund.”

Reply to @bee: I tend toward skepticism of total bond funds, for the reason Teresa Kong shared - they are weighted based on how much debt you've already issued rather than on how creditworthy you are. That said, there are two funds that implement a strategy much like that. Fidelity has a Four-in-One Index fund and TIAA-CREF has, in their retirement line-up, a set of Lifecycle index funds.
For what it's worth,
David

It's been vexing me for a long while now, which is why I haven't said much.
In general, I think a long-term holding needs to minimize manager risk and to accord a fair degree of flexibility to the manager. That is, I'd be reluctant to box someone tightly in. Beyond that, it needs to be as inexpensive as possible.
Beyond that, I think that the fund would have a fair and opportunistic exposure to growth drivers; that is, the ability to expertly harness things that demographic changes favoring the emerging markets or the prospect of tens of trillions in infrastructure spending. It's tough to have broad enough expertise, though, to do more than dabble dangerously in some of those niches.
So probably a tactical allocation sort of fund (mostly stocks with the opportunity to invest elsewhere), a strategic income fund (mostly fixed-income with the opportunity to invest elsewhere) and an emerging markets balanced fund (mostly e.m. equities with the opportunity to invest elsewhere, increasingly called "multi-asset" funds).
For what interest it holds, here's what I actually own:
Northern Global Tactical Asset Allocation (BBALX) - a very low-cost fund of index funds with a tactical overlay.
FPA Crescent (FPACX) - a reasonably low-cost fund whose manager famously roams over the world's capital markets, investing (successfully) here and there, in equity, debt and alternatives.
Matthews Asia Strategic Income (MAINX) - a reasonably low-cost package of Asian fixed-income with a dash of equities, managed by one of the bright younger stars in the best Asian manager.
T. Rowe Price Spectrum Income (RPSIX) - a low-cost fund of actively managed, income-oriented funds which offers a broad basket of global fixed-income funds with a dash (up to 20%) in dividend-paying equities.
Seafarer Overseas Growth & Income (SFGIX) - an Asia-centric, equity-centric emerging markets fund that diversifies outside of Asia, outside of equities and even outside of the emerging markets.
Matthews Asian Growth & Income (MACSX) - the Asia-only version of Seafarer.
I also have owned two Artisan funds from about the day they opened (Artisan Small Cap Value, Artisan International Value) and one cash-management fund (RiverPark Short-Term High Yield).
The collection is currently about 60% stocks, 15% cash, 15% bonds, 10% other. That's my non-retirement portfolio. The allocation is a bit risky for something with an indeterminate time horizon, but the managers are - on whole - really quite risk conscious so I've been happy.
For what interest it holds,
David

Reply to @Flack: Had I been into "statistical" analysis and even more so had I been a disciple of Bogle, my retirement nest egg would be but a fraction of its present value.
As is often said on this board, it's different strokes for different folks. We are all wired differently and in this game it pays to march to the beat of a different drummer.

Reply to @andrei:
Hi Andrei,
I fully understand your frustration with an investment policy that passively seeks average performance. To most, that is unappealing because it appears like a cowardly surrender before the battle begins. The behavioral researchers would enjoy a field day with such thinking and the anxiety must be overcome on a personal level. Not easily done. Nobody wants to be labeled as just average.
I partially converted to the passive Index policy about 15 years ago after reading John Bogle’s “Common Sense on Mutual Funds” book. Since that milestone moment, I have continued my conversion incrementally; I prefer small steps, especially when investing retirement money.
The general public has matched my trickle towards index holdings, but institutional investors have increasingly flooded that trickle into a tsunami. In spite of their human and capital resources, these institutions are finally getting the message. They are so talented at what they do that they are neutralizing each other, and nobody can maintain a competitive advantage. Thus who wins and who loses (they basically distribute the market returns according to Bill Sharpe) becomes a roll of the dice. This equally matched and dedicated talent pool means that performance persistence is illusive.
Even with some giant institutions becoming major participants, Indexing is still a small fraction of daily market trades, and is likely to remain that way. That’s a good thing since the daily trading establishes the market price, keeps it fresh, and reasonably efficient.
Now let’s focus on issues surrounding the collection of merely average returns. That may seem unexciting on an annual basis, especially when contrasted against some rock-star performers. But remember, even on the short-term single year standard, Index players will outperform two-thirds of all the market participants. And if an Index strategy is consistently applied, the Indexers ranking on the rewards ladder will soar upward over time. That accumulated effect is the product of always taking an annual position that has an above average likelihood of winning over half the market participants. It is simply an exploitation of the odds strategy.
That ladder climbing is almost a certainty because year-after-year the Index policy will generate average returns while the superstars will have a few bad years slipped into their highly successful years. Make up is tough sledding; end wealth erodes quickly. It is integrated Indexing consistency that makes a champion investor destined to outperform 90 % of the market participants over the long haul. This seems to be a remake of the children’s tortoise and hare story. It is.
It is also salient to note that rock-stars all too often flash destroy, giving themselves rather than the market exaggerated credit for their success.
Ken Heebner is the poster-child for the hero turned villain turned hero again professional money manager. His annual returns volatility is breathtaking. At times his average returns are very attractive, but his clients still lose money because of poor entry-exit point tactics. To paraphrase Paul Simon, investment gurus keep slip-sliding away. Many are ephemeral players; a few do have staying power and deserve special attention.
Experience teaches that no single investment strategy works forever or under all market circumstances. Styles change.
Look, you’re a serious investor, and are totally capable of making your own investment decisions. It’s good to get other’s opinions, but in the end, you are the master of your portfolio construction, not of its performance. In the final analysis you will not “stay the course” with your portfolio unless you are comfortable with the overall choices you made and the investment policy you adopted.
The key is that you understand and fully endorse your freedom of policy design and product choice. Remember, nothing is permanent. You always retain the option to change your mind and your investments, including an overarching strategy adjustment. Also, investing is not an either/or set of decisions. You can elect to sit on the sidelines or you can move incrementally. You choose and bear full responsibility.
Best Wishes.

Reply to @andrei:
Hi Andrei,
Indeed, not all wizards in any complex field of endeavor are equal. There is always a distribution of skill, experience, resources, and luck. If you ever participated in competitive sports this becomes abundantly clear at an early age. There are always a few good men, and women too
But it is a Herculean chore to identify these talented individuals, that special market environments make into a superstar because of an amplifying convergence of market conditions and their special talents, before that transient resonance juxtaposition vanishes in a dynamic investment sea change.
That’s a mouthful to swallow. Sometimes the marketplace and the experts investment concepts just merge together to form a single entity, and profits soar. But markets precipitously change and wizards don’t easily adapt. It is not that the expert has suddenly become dumb. Just what worked so beautifully in the recent past, no longer is awarded outsized profits. Change happens.
It happened to Legg Mason’s Bill Miller. It happened to PIMCO’s Bill Gross. It has impacted mutual fund performance at the very experienced Dodge and Cox outfit. It has heaped havoc on the American family of funds performance. No person or organization is immune from such a rapid change in fortunes. Everyone is exposed to downward performance perturbations.
The industry is littered with such serious and costly mishaps. That is why the industries fund demise rate is so high. These disasters typically don’t occur in well run Index operations.
Even apparently actively managed funds with a stated divergent investment policy seem to exhibit a performance track record that is surprisingly similar. I recommend you conduct a few experiments along this line of inquiry using the Morningstar fund plotting tool, and contrasting the records of candidate funds in the same category as a function of time. These comparisons might better inform your decision making process. It makes no sense to pay extra above Index costs for nonexistent or ephemeral diversity.
Andrei, you are precisely on target with your objective to lower your overall portfolio’s risk by controlling its volatility sensitivity. However, that is probably best accomplished by investment category diversification rather than by an individual manager’s ability to do so.
In an earlier post, I quoted Julius Caesar: “Don’t be consumed by small matters”. Category diversification is the dominant player when addressing volatility control issues.
As I mentioned in previous submittals, I plan to modify my portfolio towards the more passive class. However, I do plan to retain a small percentage of actively managed mutual funds. I can not completely dismiss the excess returns challenge, and the gambling trill that accompanies it. But it will be small enough such that our retirement survival prospects are never put at risk.
Best Wishes.

FYI: Read reason #2, read it again. There are a number of people on this board who's investment strategy is at all costs avoid losing money. If you want to make money, it requires taking risk not to be confused with volatility
Regards,
Ted
http://www.marketwatch.com/Story/story/print?guid=8CBE259D-8138-4C3A-88A8-4ECDFD6E427F