I occasionally read some other retirement forums than the few blogs I frequent. These are people often actually retired not just dreaming of retirement, people in my boat. Of course there are the experts, and the established pecking order spewing out the boilerplate, a couple retired CPA’s who like to pull rank etc but mostly retired Joe’s just trying to get by. I like to lurk and don’t post much because it threatens the CPA’s and I have better things to do than participate in pissing contests with beam counters. I did that my whole career when negotiating contracts. One of forums, given the recent market events, was about asset allocation in the face of loss. Interesting to see the rationalizations. A lot of brave soldiers standing up for 80% or 90% stock allocations, some complaining about not being able to sleep at night. Many visiting DeNial which is also a river in Egypt. Pretty much: Don’t do anything! Just stand there! and nobody giving permission to get out of the way of the buzz saw.
I was playing with the Monte Carlo calculator in portfolio visualizer and discovered an interesting thing. You can virtually guarantee portfolio success by proper portfolio risking and the calculator gives you a quantitative way to evaluate your decisions. It also frees you from the prejudice of “low cost mutual funds bla bla bla” and then shooting your wad into a BH3 fund because everybody else is doing that. So here we go!
Retirement 1 the BH3 retirement:
Here is how I set up the calculator
This is a 4% WR 30 yr standard format (inflation SORR etc all default) portfolio. I use actual tickers instead of asset classes. I chose the BH3 from the drop down
and proceeded with the calculation. Here is the result:
87% of the BH3 portfolios can expect to survive 30 years. Notice the 10% line 100% of the people who pull the 10% SORR card can expect to be broke in year 27. There’s a 90% chance you won’t pull the 10% or lower SORR so the question is: “Are ya feeling lucky punk?” Here is the failure distribution:
As early as year 9, portfolios following the 10% SORR or below BH3 portfolios start to fail. The BH3 is a 80/20 portfolio with 30% of the 80 in high risk global assets. It does not live on the efficient frontier which means you pay for your return with too much risk. This above graph shows the result of paying to much risk for your return.
Let’s change up the AA a little. Same conditions, same funds, except I jettison the Global fund and replace that 30% with bonds, a classic 50/50 2 fund.
Retirement 2, the 50/50 Efficient Frontier retirement:
The envelope please:
Notice just by jettisoning the global risk, which moves the portfolio ONTO the efficient frontier and adjusting the amount of risk you pay for return survival of 10% and below jumps to 98.43%, everybody on the 10% lines has 1.15M to leave to their kids. Here is the failure chart:
It’s not till year 19 the first hint of a failure rears it’s head. These two portfolios started with the same 1M and used the same 40K/yr WR over the course of 30 years. The only difference was properly risking the portfolio. The idea that you chose some level of “risk” for your portfolio out of thin air is stupid. The idea that you have to stand there and “take it like a man” in a downturn is stupid and this tool gives you a way to quantitatively consider your investments and not be a prisoner of some narrative.
Get ready to have your mind blown!! What would happen if you bough VTSMX BRK.B and VBMFX in a 50/50 efficient frontier portfolio? OMG Mabel he’s breaking ALL THE RULES!!! No global index fund, quantitatively risk balanced asset allocation, no guessing, an individual stock!!! Can you believe it Mabel, he owns an individual stock!!
Bonus blow your mind retirement:
Your survival is better at 98.96% and you die with an extra $225K in the bank at 30 years, or you might need that money for end of life care. Stick that in your “low cost index fund pipe” and smoke it.
Not saying anyone should do this. Full disclosure I do own BRK.B.
2 Replies to “A Tale of Two Retirements”
Very impressive side by side by side comparison.
I view brk B as an individual stock that behaves like a mutual fund with no expense ratio.
BRK.B is an “everything”. It acts as it’s own bank lending itself money from the insurance float, If Buffet or Munger doesn’t find anything to invest in at the right price they just don’t invest and sit on the cash. It’s totally tax efficient. If you look at the correlation compared to VTSMX it’s .42 so it provides pretty good diversity. It still has single stock risk however but in conjunction with VTSMX and VBMFX the single stock risk is somewhat mitigated. I own a few individual shares to get some exposure to various investment classes which kind of further diversifies BRK.B but as time goes on some of those are disappearing and are being consolidated into other classes. My main goal was to demonstrate how in retirement the goal moves from maximizing return to risk management and how much that matters.