WXYZ, Thanks for the reply. I get what you're saying. My question was more about whether paycheck deductions should be pre or post tax since through my employer I can do ROTH 401K deductions. This seems to make more sense to me so pay the taxes up front while I'd be in a lower tax bracket because I can only assume they will go up in the next 30-40 years. The only thing i'm unsure about is the employer match which seems will be pre tax no matter what. I don't want to miss out on more employer match money by not contributing as much since i'd be doing the ROTH 401K style. That could potentially be a lot of free money to be missed out on. Here's an article that I googled after posting and kinda of answered my question but of course I'd like your opinion as someone who has been-there-done-that kinda. https://www.betterment.com/resources/traditional-or-roth-401k-decide-with-this-401k-calculator/
I never had a 401K. BUT....if I was working now and had the option to do a ROTH 401K........and.......if I would get the same match as a regular 401K from my employer.....I would personally do the ROTH 401K. I would much rather pay a little bit more in taxes every year and get TAX FREE retirement money down the road. I just skimmed your article above and......IF....I am reading it right it looks like your own contributions would go into the ROTH 401K and you would still get the employer match, but the match money would go into a regular 401K. So the best of both worlds. Since your contributions would probably over time greatly exceed the match money contribution, you would have perhaps 60% to 75% of your money tax free in retirement. (just guesstimating on the percentages) I would invest the money the same in both the regular and ROTH 401K if it was me. ALL in the SP500 Index Fund, nothing more nothing less. BUT....that is just me. What is right for anyone else depends on their needs and thinking. I would do the ROTH since it would grow MY CONTRIBUTION to a significant amount of money.....outside of taxable income FOREVER. For a young person having 20-40 years to contribute, those contributions and gains over the years could add up to millions in tax free money in retirement. ME PERSONALLY.....I would always rather pay a little more in taxes each year for the benefit of paying little to nothing in retirement. I would ALWAYS go with either form of the 401K to get the maximum match before investing in an IRA, or a ROTH IRA, or a non retirement brokerage account. That match is valuable FREE MONEY and an instant return.
Amazon is doing GREAT at the moment. Lets hope it can continue to hang in there all day. It is the ONLY reason ALL my accounts are nicely positive today.
BUTT UGLY day today. BUT......just one of those things with the virus fear and panic sweeping the markets. AS USUAL...it is the professionals and AI trading that are jumping around.....NOT the little guy for the most part. I dont see it at all. The virus is still relatively isolated in a third world country with poor health care.....CHINA. Compared to flu and pneumonia which kill at least 50,000 people a year this is NOTHING. BUT....people have been watching too many science fiction ARMAGEDDON movies.......so this story TRUMPS everything else, earnings, impeachment, Amazon, the BOOMING ECONOMY, etc, etc, etc. It is now the DOOM&GLOOM, FEAR&PANIC story of the moment with the media. This is one of those market events that has NOTHING to do with the markets, but is going to have to run its course. As an investor....not a trader...I will just sit this one out as usual and continue to be invested for the long term as usual. As I said before, at least AMAZON is giving me a bit of a gain for the day if the numbers hold up to the close.
I've been waiting for an entry point. As of now, one of my stocks is very close. I hope it still is in a week when I return to my screens. Spread, virus. Spread!
Thanks for confirming what I was thinking WXYZ. I'm not completely sure if the employer match would go into a traditional or ROTH in my case but like you stated over the course of at least 30 years it'd still be worth it. I'll end the thread-jacking and continue following.
Some Dude I looked at a number of sites and they all said if you have a ROTH 401K that the match is the same BUT the match money goes into a regular 401K with deferred taxes while your own contribution goes into the Roth portion of the 401K.
AFTER today....I will be out of touch for a week, so no posting. I am retreating to my bunker in Northern Idaho to ride out the caronavirus. Oh wait......I forgot.....I dont have a bunker in Northern Idaho. DAMN. We will be traveling out of the country in contact with large crowds of people. NOT concerned in the slightest actually. The markets will just have to do their own thing. Perhaps by the time I get back this LITTLE fear induced.....program trading driven....dip will be over. In FACT this year, just as every year, at least 100,000 Americans will be hospitalized for FLU and 36,000 will die. In this context it seems like this little virus scare from China is pretty IDIOTIC. Stay safe. DONT let the DOOM&GLOOM and FEAR&PANIC being pushed by the media get to you. See you guys about Feb 9 or so. I WILL remain fully invested as usual during that time and far into the future. Thank goodness the power of long term investing and compounding smooths out and ELIMINATES these sorts of news driven little events.
WELL........you guys did a good job of DRIVING the markets while I was gone. Last week......in spite of Friday......was a KILLER week. For the week the SP500 was up 3.2% and the DOW was up 3%. I continue to believe, based on my reading and personal evaluation of the situation, that the scare over the Corona-virus is going to turn out in the end to be nothing more than MEDIA fear mongering and traders taking advantage of the situation, as they should. At this point we are at: SP500 year to date +3.17% DOW year to date +1.98% MY ACCOUNT year to date +4.25% SO FAR, SO GOOD, for 2020. We are playing around and dancing around DOW 30,000. Once we reach that MILESTONE......in my opinion......the way will be clear for a BIG RALLY. It might take some time......(2-6 weeks)......to get there, but we will. The markets ALWAYS have a hard time pushing through milestone levels. The Corona-virus, is just a convenient excuse. Nothing more, nothing less. EVERYTHING.......and I do mean EVERYTHING.....in the economic figures and earnings is lined up for stocks to push higher. The economy is HUMMING ALONG on all cylinders in a way that I have not seen since the Regan BOOM. In some ways it reminds me of the DOT COM BOOM.......but this time, the numbers and foundation for what is happening is REAL. As to CHINA.......no, I dont care about China. I see this Corona-virus THING as being a 1-3 month event from this point forward in terms of market impact. AND.....that impact will NOT be continuous. Like we saw last week it will pop up once in a while, BUT, will NOT be the primary market driver on many days. I am VERY encouraged by the total lack of exuberance in the markets. Many companies that are reporting very good earnings are just getting a ho-hum response in stock price appreciation as a result. Another positive sign in my opinion. Once investors are less distracted by the short term sensational news and they take the time to evaluate financials, the justification will be there for higher valuations. As usual, the focus should be on the LONG TERM.......NOT, short term events like this virus. This year, I have way more concern about the election and the potential impact on the economy compared to any other short term issue. I continue to be fully invested for the long term as usual.
On the topic of CORONAVIRUS..........as a continuation of the above. One question.....how many people have died from the virus outside of China? The answer: ONE PERSON.........in the Philippines. That is it, ONE PERSON out of a world population of 7.7 BILLION people. ACTUALLY....two questions...how many people die from FLU in the world EACH YEAR? The answer: 646,000. That is right, SIX HUNDRED AND FORTY SIX THOUSAND people. In a BAD year about ONE MILLION people. This virus is like most similar illnesses in that it has potential to kill the sick and elderly. Just like pneumonia and just like flu. It also has potential to kill those living in third world countries with poor health care, poor medical systems, poor nutrition, poor living conditions, etc, etc, etc. YES, there is every reason to monitor and be prepared for this virus. We should not underestimate it. BUT we should not turn it into a world conquering BOOGEYMAN. We are actively working on a vaccine and one will probably be available in 6-9 months. Perhaps before that if it starts to have more of an impact outside China. I say....be aware and be prepared....BUT.....lets not go CRAZY.
Looks like ANOTHER unproven opinion presented as fact by the media is going the way of the GARBAGE CAN as usual. I still see articles giving the standard line that Millenials are not buying homes. ABSOLUTELY NOT TRUE. Millennials are projected to buy the most houses this year—this is how they can prepare for it https://www.cnbc.com/2020/02/04/mil...st-houses-this-year-how-they-can-prepare.html Study: Forget renting — Millennials will do anything to own a home https://www.sfgate.com/living/article/Must-haves-and-deal-breakers-for-millennials-15014347.php MY COMMENT This young generation will follow ALL the steps of those that came before them. They will buy homes, they will move to the BURBS, they will get married, they will have kids, they will find their way into career jobs, etc, etc, etc.
NEW all time high for the NASDAQ and SP500 today. NO virus market impact today. Investors ACTUALLY tended to focus and reward good earnings today. What is the world coming to.....
WE........the good old USA......are the premium investment vehicle in the world. Our TREASURIES are sought after by foreign governments and investors for safety and an actual positive return. Our stocks and bonds from AMERICAN companies are also highly sought after.......once again for safety, quality, and trustworthiness of our financials. WE, the USA, are and should be the PREMIER investment vehicle for the world. 300 trillion reasons to be bullish on U.S. stocks: Morning Brief https://finance.yahoo.com/news/300-...ullish-us-stocks-morning-brief-110559102.html (BOLD is my opinion or what I consider important content) "U.S. stocks have become a ‘safety trade’ There’re a lot of liquid assets swirling around the world, waiting to move as the market narrative shifts. Traditionally, when things get scary out there, the typical “risk-off” trade is to dump stocks and rotate into safer assets like Treasury securities and cash. But within big asset classes like stocks, you’ll find that some stocks are “riskier” than others. For example, developed market stocks are considered more stable than emerging market stocks. Large-cap stocks are considered more liquid than small-cap stocks. And so when you think of stocks that way, “risk-off” may actually mean global equity investors are rotating into more stable stocks (like U.S. stocks) and larger cap stocks (like U.S. stocks). These characteristics define the S&P 500. “There is just not enough S&P 500 to go around,” Fundstrat’s Tom Lee said in a note to clients on Thursday. “The S&P 500 is about $25 trillion in market cap and there is $300 trillion of global household liquid assets.” View photos Trillions of dollars are looking for somewhere to go. “Thus, picture the panic as money leaves riskier regions and looks for the U.S.,” Lee said. “This causes the S&P 500 to spike.” Lee’s thesis that U.S. equities have become a “safety trade” is confirmed by global asset fund flow data. According to Jefferies’ Global Asset Fund Flows Tracker: “In the week 30 Jan-5 Feb, a resumption of strong buying of US equities (+US$14.0 billion, a 7-week high) dominated global equity fund inflows (+US$14.1 billion). However, [emerging market] equity outflows accelerated.“" MY COMMENT YES......we are the safe investment source for the world in all investment categories. The massive amount of world capital that is constantly looking for somewhere to go creates a HUGE investment opportunity for long term investors in the USA. When I have the ability to invest in the premier companies and funds in the world there is ABSOLUTELY no reason for me to look for emerging investments, or international investments. Waiting for the open today. With the FED being involved we could see the dreaded LATE DAY FADE. I hope not.......but......that is part of a normal stock market. HERE is where we appear to be headed with the FED today: "In a statement released Friday, Powell characterized 2019’s economy as having grown “moderately,” and with the labor market having “strengthened further.” Sounds like a perfect recipe for continued growth for a long time. In my opinion perhaps 2-3 more years of this golden era of investing. ASSUMING that the election does not screw things up.
On a related topic the TEN YEAR TREASURY yield is 1.578%. AMAZING with where we are in this ten year plus stock rally. I consider this one of the primary indicators for continuation of the BULL market on the positive side. It will keep the FED from doing something stupid as they usually do. On the slightly negative side of things, I believe it does reflect the bias toward deflation in the world and even in our economy that has been present since 2008/2009. For potential home buyers this is AMAZING news for great 30 year fixed mortgage rates. Young people continue to have an opportunity to enter home ownership with record low mortgage rates. For those on a fixed income that desire safety for their money, there is no end in sight for low yields.
Markets UP nicely today......but....still early in the day. One of these days we will see the DOW take a run at 30,000. With the media TIRING of the Coronavirus story and China pushing workers to go back to work it appears that this little story is over for now. ALTHOUGH, I dont trust CHINA on this issue any more than I trust them on anything. Time will tell if this is the collapse of this little market blip. With the gains today we are at: DOW year to date +3.27% SP500 year to date +4.36% Looks like a RERUN of last year so far. It would be a rare event if we can post 25-35% gains in the SP500 two years in a row. BUT, lets not get ahead of ourselves. There are many months till the end of this year. I like to BELIEVE that there is some rational basis for the recent market gains. AS USUAL the media blather about earnings is TOTALLY WRONG. Earnings are coming in MUCH stronger than expected. It is amazing to me that the professionals and investment media is CONSTANTLY WRONG on nearly everything. A DEFINITE reason to educate yourself, ignore all the blather, and invest for the long term. 10 Companies' Profits Just Sailed Past All Expectations https://www.investors.com/etfs-and-...es-profits-just-sailed-past-all-expectations/ (BOLD is my opinion or what I consider important content) "Earnings season is turning out much better than anyone thought. But investors will find most S&P 500 companies handily sailing past analysts' profit forecasts aren't necessarily good stocks to buy. More than 330 companies in the S&P 500 reported fourth-quarter earnings results. And of those companies reporting, two-thirds beat estimates. As a group, S&P 500 earnings during the quarter topped forecasts by a 9.2% margin, says S&P Global Market Intelligence. More than a third of S&P 500 companies put up double-digit earnings growth. All told, S&P 500 earnings are 1.2% higher during the quarter. So much for an earnings recession. And even during a period with so many good surprises, there are standouts. Ten S&P 500 companies like consumer discretionary General Motors (GM), information technology NortonLifeLock (NLOK) and Netflix (NFLX) topped analysts' earnings views by 50% or more for the just reported fourth quarter of 2019. Even if you called these surprises, though, they wouldn't have made you money. Seven of the 10 S&P 500 with the biggest upside earnings surprises are down this year. And that's while the value of the S&P 500 is up 3.9%. How can this be? A Look At Sector Earnings You might think technology stocks are putting up the most earnings growth. Nearly 90% of S&P 500 tech companies topped profit forecasts in the fourth quarter. Technology stocks are racing higher this year. The Technology Select Sector SPDR ETF (XLK) is up roughly 10% this year already. No other S&P 500 sector comes even close. But, tech isn't the biggest S&P 500 profit grower. The S&P 500 financials sector is the earnings growth leader in the fourth quarter of 2019. The financial sector's earnings are up 13.8%, topping the 6% growth from tech. More than 70% of financial companies topped earnings estimates. And yet, financial stocks are lagging. The Financial Select Sector SPDR ETF (XLF) is up just 1.1% this year. Sector Q4 2019 EPS ch. % vs. year ago Financials 13.8% Utilities 10.1% Communication Services 8.8% Healthcare 7.0% Information Technology 6.0% Consumer Staples 3.6% S&P 500 1.2% Real estate -3.1% Consumer discretionary -7.7% Industrials -9.4% Materials -14.1% Energy -41.4% S&P Global Market Intelligence GM: The Top Earnings Surprise Earnings surprises simply aren't the gold mine you might suspect. It's growth that matters in this market. Take struggling General Motors as an example. The automaker posted a quarterly profit of 5 cents a share during the fourth quarter. That clobbered earnings forecasts by 400% (analysts expected a profit of a penny a share). A labor strike stalled GM during the period. But here's the real problem. GM's earnings may have topped views, but they were still down dramatically from the same year-ago period. The company made $1.43 a share in the fourth-quarter of 2018. That means profit dropped 97%. No wonder GM's stock is down 9.4% the past 12 months. Shares are also down 4.3%, just this year. Given shrinking profit and a lousy stock movement, shares of GM carry a poor 55 IBD Composite Ranking. GM is the most dramatic example of a stock that fell despite an earnings surprise. But nearly all the companies that beat forecasts this year are down this year. S&P 500: Growth Tops Surprises Now, if a company can top estimates and grow, you're onto something. Consider video streamer Netflix. Yes, the company posted a fourth quarter profit of $1.30 a share. That topped views by 145%. But that's not why Netflix has a Composite Rating of 97. The company's quarterly profit jumped 333% from the same year-ago period. With such powerful growth, the third double-digit profit growth in four quarters, investors get what they're really interested in. Shares of Netflix are up 15.5% this year. Positive surprises are fine. But it's growth that really counts." MY COMMENT Are you really a "professional" if you are always wrong? I guess so, if you are in the business and earning a living. The earnings we are seeing now will DRIVE the markets over the next few months as people digest them and get out from under the very short term events like the coronavirus stories. For years now the professionals and others have been NITPICKING earnings data and punishing companies when earnings are ACTUALLY nice. Often it is the DREADED forward looking statements, being downplayed by companies, this is the reason for this. COME ON......lets make a run for DOW 30,000 over the next three days.....just for fun. BUT.....as usual my focus in on the LONG TERM. I continue to be a fully invested all the time, LONG TERM INVESTOR, regardless of the short term "stuff".
I MAY be the odd man out here......BUT.......I have NO concern for the coronavirus. Based on my reading, my understanding of the science, the current available data, etc, etc, I have no concern from a health focus or an investing focus. I see this issue as primarily impacting China. The number of cases in comparison to the population of the country is nearly.......ZERO. I am NOT concerned with the numbers jumping around. I attribute this to the ABSOLUTE FRAUD that is rampant in CHINA when it comes to reporting any data of any type. I believe the recent jump in some numbers simply reflects the reality of what has occurred over many weeks up to now. They.......the CHINESE GOVERNMENT....... are simply FINALLY getting the number out there to the media and public. I dont believe the numbers reflect a sudden jump in infections and deaths in the past one or two days. They are in turmoil in their economy and business is being impacted in CHINA. I will NEVER invest in ANY Chinese company for ANY reason.......PERIOD. EVERYTHING out of that country, especially from the government MUST be viewed as fraudulent. AND.......everything in that country must be viewed as being linked to the Chinese government. There are NO private businesses in that country. At the moment the DOW and SP500 are down respectively....less than one quarter percent (DOW) and basically flat (SP). I would not be surprised to see all the market averages POSITIVE by the end of the day. ON THE OTHER HAND, knowing the IDIOCY of investors, especially the professionals and taking into account the AI Trading operations and the ability of AI trading to SNOWBALL I would not be surprised to see losses snowball to the end of the day. In ANY EVENT, I have ABSOLUTELY ZERO concern as a long term investor. Market direction is strongly UP, UP, UP. ALL economic data is strongly positive. I say as usual ANYTHING that hurts the Chinese economy is a NET GAIN for the USA, our economy, trade negotiations, American business, etc, etc. As to the large companies that FOOLISHLY do manufacturing in China.....SHAME ON YOU. YOU are screwing your own shareholders by doing business with a country that is BLATANTLY stealing your business processes and technology to the tune of TRILLIONS OF DOLLARS in LOST SHAREHOLDER VALUE. When you have company management, boards of directors, CEO's, and Presidents KNOWINGLY allowing a foreign country to STEAL TRILLIONS OF DOLLARS in current and future shareholder value in the form of proprietary business information, secrets, and technology as well as BLATANTLY violating patents,.......THAT.......is intentional corporate management malpractice and SHOULD expose all those companies to shareholder lawsuits.
Nope, I agree with you WXYZ. China is a TOTAL FRAUD . The Big news of the day should be The US charging HUAWEI with racketeering. Happy Investing!
YES......another SURE indicator of good times ahead and PLENTY of room for the markets to continue to run UP: Stocks are near record highs, but people are still not investing https://www.cnn.com/2020/02/13/investing/underinvested-stock-market/index.html (BOLD is my opinion or what I consider important content) "The US stock market is at near record levels. So why are some investors still sitting on the sidelines? The S&P 500 (SPX) -- the broadest measure of America's stock market -- closed at another all-time high on Wednesday. The index has climbed more than 4.5% this year. The Dow (INDU) is a whisker away from 30,000 points. But volatility, geopolitical risks and political uncertainty are keeping ultra-cautious investors out of stocks, according to market participants.The global coronavirus outbreak has added to this skepticism, as the economic fallout from the disease remains to be determined. Yet there's less money in the market right now than there was during the 2007-2009 recession as measured by the value of money market assets, said Brent Schutte, chief investment strategist at Northwestern Mutual. "Money market fund levels are still just at levels of 2009, even though they spiked all of last year," said Schutte. These fund assets now stand at $3.6 trillion, the highest level in more than 10 years, but still below the $3.9 trillion peak in January 2009. Investors pulled their cash out of the market in droves during the recession caused by the financial crisis. The economy recovered, and the S&P 500 has rallied more than 250% since then. But money market asset levels show that some investors are still cautious. Irrespective of macroeconomic risks and temporary selloffs, US stocks are near record highs. The US market remains a goldilocks investment environment where everything is just right with a relatively strong economy coinciding with low inflation, Schutte said. But the more investors who get off of the sidelines and back into the market, the better it is for stocks: "There's still a lot of cash on the sidelines, which is why I think markets could still move higher," Schutte told CNN Business. This means investors shouldn't worry about the market's almost daily all-time highs and should jump on the bandwagon. In 2019, stocks were helped higher by the Federal Reserve's shift to loosen monetary policy, which outweighed concerns about the US-China trade war. The S&P 500 climbed nearly 29% last year, its best performance since 2013. Worries about trade have receded since the United States and China agreed to a 'phase one' trade deal and Congress approved the USMCA deal to replace the North American Free Trade Agreement. This has helped lift stocks, as trade was the biggest point of uncertainty last year. "Being out of the market at the moment is one of the biggest mistakes you can make," said Matt McCall, founder and president of Penn Financial Group, on CNN Business' digital live show Markets Now on Wednesday." MY COMMENT NOT much I can say to this. People can do as they wish. BUT the short to medium term is very bright for investors.
MORE support for the continuation of the BULL MARKET and dominance of the American economy and businesses: The U.S. Treasury Sold 30-Year Bonds at a Record-Low Yield https://www.breitbart.com/economy/2020/02/13/30-year-treasuries/ (BOLD is my opinion or what I consider important content) "Donald Trump may not have had much luck in getting the Fed to push down its interest rate target in recent months but investors on Thursday were happy to push down the rate the government pays to borrow. The U.S. Treasury sold $19 billion of 30-year bonds with a yield of 2.061 percent on Thursday. That is the lowest ever recorded for such a long-term bond. To put that in perspective, the Congressional Budget Office in January projected that the yield on 10-year notes would average 1.9 percent this year, 2.2 percent next year, and then march toward 3 percent by 2025. The record low yield on the 30-year bonds issued today out the idea of rising rates on shorter-term bonds very much into question. Looked at another way, the Fed’s target for overnight rates was a range of 2 percent to 2.25 percent as recently as August. In other words, just six months ago, banks were paying around the same rate to borrow overnight what the U.S. Treasury agreed to pay for a 30-year bond. The low yield also raises questions about whether textbook economics has something wrong when it comes to budget deficits and interest rates. In case it has been a while since you sat in an economics class or read a CBO report, the standard line is “greater federal borrowing is projected to put upward pressure on interest rates.” Yet earlier this week, the U.S. Treasury announced that the budget deficit for the first four months of fiscal 2020 is $389.2 billion. The CBO’s estimate of the deficit for 2020 is now $8 billion more than the agency projected in August 2019. For the next decade, the CBO’s latest projections have deficits at $160 billion higher than the August projection. Back when the CBO was making those August calculations, the 30-year Treasury was yielding about 2.5 percent. So larger deficit projections have coincided with lower interest rates. Demand for the bonds was extreme. Buyers placed $2.43 of bids for every $1 of Treasuries sold on Thursday. A big driver of the demand for the 30-year at such a low yield is the fact that some $14 trillion of debt now has negative yields. Compared with that, the rate offered by the U.S. Treasury seems like a steal. Which brings us back to President Trump: maybe he has a point when he complains that the U.S. government is over-paying to borrow." AND Germany's economy stagnated in the fourth quarter https://www.marketwatch.com/story/germanys-economy-stagnated-in-the-fourth-quarter-2020-02-14 "Germany's economy stalled in the fourth quarter, the German statistics office Destatis said Friday. The country's gross domestic product remained flat at 0.0% compared with the previous quarter, according to Destatis. This is below economists' expectations of a 0.1% expansion in The Wall Street Journal's survey. Weak manufacturing-orders and industrial-production data in December had raised fears that the economy stagnated or even contracted in 4Q. The agency, however, also revised data for the third-quarter of 2019. Following the revision, Germany's GDP increased 0.2% in the period, compared with a first estimate of a 0.1% rise. GDP grew 0.4% on year in the fourth quarter on a calendar and price-adjusted basis, Destatis said, in line with a Wall Street Journal poll of economists." MY COMMENT The rest of the world continues in a DISMAL situation that has existed for the past ten plus years. The world wide deflationary situation continues. Based on the experience of Japan over the past 20-30 years, this can last for a long long time. WE are the ONLY financial success story in the world outside of a few random countries here and there. The economic policies of the EU are a DISASTER, a lesson to the wanna-be Socialists in this country.....although that lesson is usually discounted due to economic ignorance and unawareness of the real world. There is NO inflationary pressure and the FED continues to be more concerned with deflation.
After a lifetime of investing and saving MOST people, at some point, are going to have to use those funds for retirement. As someone that retired very early at age 49 and lived off personal assets to age 70 I recognize the difficulty of managing money in retirement. A few down years at the wrong time and miscalculation of withdrawals can create very great danger. I believe that retirement is going to be the most difficult money management time for the great majority of investors. One Portfolio Risk To Rule Them All https://movement.capital/one-portfolio-risk-to-rule-them-all/ (BOLD is my opinion or what I consider important content) "Sequence risk is the risk that investment returns happen in an unlucky order. It can make or break portfolios and this post shows how to protect against it. Take three investors that start with $2 million, earn identical 7% annual returns, and withdraw $125k per year. The only difference is that they incur a 25% loss at different times: Frodo doesn’t encounter the loss until year 30. (blue) Sam experiences his loss 15 years down the road. (yellow) Gandalf immediately loses 25%. (grey) Disclosures The table below shows the compound return and sequence of those returns for hypothetical 30-year retirements starting in 1955, 1968, and 1979. The left-most column shows the safe withdrawal rate, or the initial percentage an investor could have withdrawn without running out of money. Source: Early Retirement Now The scenario with the highest 30-year return had the lowest safe withdrawal rate. This resulted in a massively different quality of life. The 1979 retiree with a $2 million portfolio and a 9.1% withdrawal rate could spend an initial $182k per year. The 1968 retiree with a 3.8% withdrawal rate could only spend an initial $76k. Younger investors aren’t immune to sequence risk. For example, you could encounter strong markets in your 20s and 30s and then lower returns when you’re older and wealthier. Take two investors that save $10k per year for thirty years. They earn identical long-term returns but in a different order: Legolas earns 5% per year for the first fifteen years then 10% per year for the rest. (blue) Gimli experiences the opposite return sequence. (grey) Disclosures There are four popular strategies to protect retirees against sequence risk. Here are the pros and cons of each: Strategy #1: Dynamic Withdrawals Flexible spending strategies decrease withdrawals after a portfolio falls in value. Two widespread methods are Guyton-Klinger’s guardrails and the Bogleheads VPW. They both “work” in the sense that they increase portfolio longevity, but they aren’t without risk. Dynamic withdrawal strategies transform sequence risk into lifestyle risk because they can call for steep reductions in retirement spending. For example, the graph below shows the inflation-adjusted withdrawals of a 1966 retiree. The orange and grey lines show that these strategies led to a 60% decrease in withdrawals: Source: Early Retirement Now Cutting expenses by 60% in retirement is not a realistic option for most people. This approach is most relevant for retirees with a significant amount of discretionary spending. It can also help if a portfolio has done well and you want to adjust withdrawals to avoid living an overly frugal retirement. Strategy #2: Cash Reserves Another option is to set aside enough cash so you don’t have to withdraw from your portfolio in a drawdown. Some also call this the “bucket strategy.” A cash reserve does two things: Reduces long-term returns since cash has historically underperformed stocks and bonds. Makes an active market timing decision since stocks make up more of a portfolio when you pull from the cash reserve. The main takeaway from a research paper on cash reserves: “The results revealed that the failure rates for the buffer zone strategies increased compared to a baseline where there was no buffer zone.” Source: Michael Kitces While a cash reserve did reduce retirement success rates when taken from the total portfolio, there was little impact if it only came from a bond allocation. Cash and bonds have similar long-term returns, so there’s less of an opportunity cost in replacing bonds with cash. The main benefit of a cash reserve is emotional, not financial. They help some investors sleep better, and if that means they’re more likely to stick to their retirement plan then there’s merit to using one. I should note that a cash reserve is not the only way to avoid selling investments when they drop. Regular rebalancing does the same thing. The example below shows how a 60/40 investor needing to withdraw $50,000 would avoid selling stocks if they fell: Strategy #3: Trend Following Downside volatility amplifies sequence risk, so one solution is to use strategies that lower the chance of a severe loss. Trend following is one option and has been shown to reduce downside risk over many decades and across multiple assets. Researchers tested the impact of trend following on retirement and concluded: “Smoothing the returns on individual assets by simple trend following techniques is a potent tool to enhance withdrawal rates.” Source: Can Sustainable Withdrawal Rates be Enhanced by Trend Following? The table below shows safe withdrawal rates for a 30-year retirement with a 50/50 portfolio of stocks and bonds. In the scenarios commonly used to stress test retirement viability (the 5th and 10th percentiles), trend following resulted in higher safe withdrawal rates. Disclosures The downside of this strategy is that managing risk can feel foolish. Nobody pays for home insurance and then regrets that their house didn’t burn down. Portfolio diversification is similar. We diversify because the downside of not doing so is unacceptable, even though we pay a small price for protection when bad things don’t happen. Strategy #4: “I’m Only Going to Spend Dividends” This sounds like a perfect solution to sequence risk. If you only withdraw dividends and never touch the principal, how could you ever run out of money? Investors following this approach make two mistakes: They assume dividend payments are stable. They don’t focus on the only return that matters – total return. A 5% yield is meaningless if the principal is a melting ice cube. Stock dividends are volatile and have experienced multi-decade drawdowns: Disclosures Limiting spending to dividends has the same risk as the dynamic strategy: long periods of lower than expected withdrawals. Summary The sequence of your portfolio returns is just as important as the level of those returns. Dynamic withdrawal strategies are most useful for retirees with a lot of discretionary spending. A cash reserve, when taken from bonds, doesn’t financially hurt and can emotionally help. Trend following reduces the chance of a deeply negative return sequence." MY COMMENT The retirement of the baby boom generation with most having no pension and funding their own retirement with IRA or 401K accounts will be a significant financial event. A HUGE financial experiment.
