Interesting Suggestion

One of my readers asked whether if I would invest in a Ray Dalio or GB portfolio as a 22 yo if I knew then what I know now. My answer is yes but you would need a clear understanding of what your goal is.

First run an accumulation simulation. If you run a 35 year career and save 45K/yr in a Dalio portfolio your range of expected returns are:

So you save 45K/yr from 25 to 60 (35 years) and have this range of likely outcomes inflation adjusted. Lets say you will retire at age 60 on an inflation adjusted 45K/yr retirement you would need to take out 108K/yr. (The 1985 dollar = 2.4 2020 dollars based on CPI for 35 years)

Next run the simulations for various market conditions (good to bad accumulations) I’ll run a 10% worse case simulation using a 35 year retirement and 108K WR

This means over the course of 70 years you made a net of 8.87M by saving 45K/yr for 35 years (in the 10% worse case market return), and then living on 108K/yr inflation adjusted for 35 years (in the 10% worse case market return). If during the course of the accumulation you don’t just max out your pretax, but take into account the last half tax consequence while saving you would have an even more robust retirement.

A $45K yearly savings at a 20% savings rate assumes a $225K/yr income. That’s likely optimistic so you would have to adjust and graduate your savings rate but none the less the point is a risk adjusted portfolio can generate a ton of money. The cost is during up years you don’t kill, but during down years you don’t get killed. The market dropped 7% over 3 days. My portfolio dropped about 2.6%. That means to get back to zero the market needs to make 14% while I only need make 5.2%.

We will only prosper if we relentlessly search for nothing but the truth, otherwise the truth will find us through volatility”

I prefer my truth to appear in the least violent way possible.

4 Replies to “Interesting Suggestion”

  1. “The cost is during up years you don’t kill, but during down years you don’t get killed.” This is the hardest concept for people who buy and hold the SP500 as their entire portfolio to grasp. You don’t have to have big gains. You need to avoid big losses. Minimizing draw downs is critical, especially in retirement draw down phase due to SORR.

    1. The SWR of the Dalio at the 10% worse case is 5.09% and the perpetual WR at 10% is 3.89. Maximum draw down for the 10% worse case scenario is UNDER 20%. If you loose 20% you still have 80%. If you weren’t a dumb ass and didn’t retire at 40, but 60 instead, you have 80% of your money to cover 20 less years (30 vs 50). FIRE is like buying time share. The rap and the weekend and the steak and champagne is sooo good, the reality of ownership is sooo bad. If you’re still working, pull in your horns and keep working. Hang up your fantasy plans and don’t let the volatility eat your lunch. It’s hard to eat a day dream. The best diversifier is a good job. Good luck out there.

      1. Do you have a favorite of the permanent portfolios that you would choose based on current interest rates? What downside protection do you currently hold in your portfolio?

        1. My portfolio is dynamic based on the business cycle. I have core holdings of stocks bonds gold cash Social Security property and BTC and they are spread across taxable accounts, TIRA and Roth and I hold tax loss harvest in case I incur capital gains. I actively trade one of my Roth accounts in a way that has a negative correlation to equities so when the volatility flares (like now) I can try to tamp down some volatility. My core has a risk of about .39 compared to the S&P 500 so if the S&P falls 10% my portfolio falls 3.9% and I can mitigate that 3.9 to slightly lower maybe 3.7 using the Roth. In good times I can use the Roth to improve my returns, and depending where we are in the cycle I may concentrate more in stocks. Over the past 1.5 years I have been selling stocks a bit at a time and turning that into bonds cash and BTC. I bought low in 2008 and forward and have been taking profits and reallocating for about 18 months. So what I do is not a buy and hold strategy but dynamic based on my needs, tax situation and my perception of the economic cycle. My portfolio is always centered on the efficient frontier, but I vary the risk according to the economic cycle, more risk when at a cycle low and less risk when at a cycle high. The way I’m positioned now is I am letting SS appreciate for another 2 years till I hit age 70 and I am Roth converting the TIRA while living on cash. I have about 5 or 6 years of cash accumulated so I don’t have to sell low (in other words I have 6 years of SORR protection while this melt down runs it’s course). By then I will have about 9 years into retirement and I will readjust my AA for ongoing withdrawal at that time. Since they passed that SECURE act I’ll Roth convert the bulk of my TIRA till I’m 72 and RMD some TIRA money that I don’t convert. If the market falls enough I may convert all of the TIRA since I will have a smaller TIRA to convert. So my deal is pretty complicated but very optimized for long term survival, tax efficiency, and SORR resistance and self insurance for end of life costs for me and my wife. I trade in and out of bond duration, Gold commodities and EM dynamically. 2 months ago I was long TIPS now I’m long EDV and ZROZ. I was long cocoa and coffee and wood now flat on all commodities but long the dollar gold and gold miners so it varies on the margin. Since it’s a Roth there is no tax consequence for trading and since it’s fidelity etf and stock trades are free so I can scale into and out of positions with no consequences. It’s a real game changer.

          I did some comparison between the golden butterfly the permanent portfolio and the dalio as well as some of my own concoctions and found the GB to be the best overall performer for the time series available to the portfolio viz monte carlo calculator. There is a lot of research on the GB so it is well studied and I think a pretty good choice for a boiler plate portfolio. My concern is as index funds become dominant and as baby boomers begin to draw down their nest egg, they will force an unrecognized increased volatility and instability in the equity market so it may be wise to drop the equity allocation a bit and spread that across the other assets or turn a bit of equity into BTC like 1.5-2%. The problem with any of these alternative portfolios are you have to set and forget except to rebalance once in a while The GB is:

          40% equities ( 20 VTI 20 VBR)
          40% bonds (20 BLV 20 BSV)
          20% gold (IAU)

          I’d watch the bonds to make sure they don’t go negative.

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