New Here? Get the Free Newsletter

Oblivious Investor offers a free newsletter providing tips on low-maintenance investing, tax planning, and retirement planning. Join over 21,000 email subscribers:

Articles are published Monday and Friday. You can unsubscribe at any time.

Investing Blog Roundup: Taxes Made Simple, 2019

The 2019 editions of Taxes Made Simple and my book about taxes for sole proprietors are both now available. In contrast to the major changes that were necessary from 2017 to 2018 (due to the new tax law), the changes from 2018 to 2019 were relatively modest — inflation adjustments to various figures, minor improvements to wording here and there, etc.

Recommended Reading

Thanks for reading!

Simplifying a Retirement Bucket Portfolio

A reader writes in, asking:

If you were developing different “buckets” for a portfolio in retirement, what funds would you use for each bucket?

For our immediate 1-3 years, I have assigned that duty to the Vanguard Ultra Short Bond Fund. It has a duration of one year, and does not have any government bonds.

Do you think that fund is too risky – both in terms of duration and in terms of risk? Should we have at least one year in money markets?

For our 3-6 year buckets, we use a variety of short term bond funds – such as the Short Term Bond Index Fund, Short Term Investment Grade Fund, and the Short Term Corporate Bond Fund.

For 6-10 years, we use a variety of funds such as the Target Retirement Fund, and Wellesley (because the stock allocation is of extra large Value stocks). Also for this category we would consider the Life Strategy Conservative Growth Fund. Of course with this group our main investment is in the Total Bond Market Fund, with the others hopefully boosting returns over time.

For more than ten years, stock funds such as the Total Stock Market Funds, Total International Stock Market Fund, and the S&P 500, with a few exotic funds to spice things up such as the REIT. This portion is relatively small, as we will allocate our retirement duties to primarily bond funds, with a few funds such as what I mentioned before in the 6-10 year period. I look at the stocks as a really long term investment in the event more money is needed, but I will do some rebalancing of that bucket to take profits and put money in when the market falls.

What would be your suggestions? How many buckets and which funds go into each bucket?

Principle number one when it comes to crafting a portfolio is that it’s the whole portfolio that matters. This is why, for instance, it rarely makes sense to look at one account in isolation. And it is why the overall portfolio allocation is the important question here — both what allocation you want now, and how/if you want that allocation to change over time (i.e., your intended glide path).

Bucket strategies are psychological tools, not financial ones. That is, a bucket strategy can be helpful if:

  1. It helps you to arrive at an overall allocation (and glide path) that you’re happy with, or
  2. It helps you to stick with your overall allocation (and glide path).

For example, some people may find that the easiest way to settle on an allocation is to think of it in terms of buckets (e.g., “I want 3 years in short-term bonds, 7 years in intermediate term bonds, 15 years in stocks”).

And some people may find that having a bucketing strategy helps them to feel more comfortable sticking with the plan during a bear market (e.g., “I don’t have to worry about my stocks going down, because I have X years worth of spending in short-term bonds and Y years in intermediate term bonds”).

And some people may find that a bucket strategy may be the most intuitive way for them to implement a desired glide path. For instance, if you like the idea of a “rising equity” glide path (i.e., one in which your stock allocation rises over time, as suggested by Wade Pfau and Michael Kitces here), you might find that the most intuitive way to implement that glide path is via a bucket strategy in which you do not “refill” the shorter-term (bond-heavy) buckets (by selling stocks and buying bonds) as they get depleted over time.

But if you find that managing/crafting a bucket-based portfolio is harder than just focusing on the overall allocation, then it’s best to forget about the buckets.

What you’re describing sounds to me like it may be more funds and complexity than is necessary. Maybe that’s because of the buckets; maybe not.

For instance, you asked whether the Vanguard Ultra Short Bond Fund is too risky, and whether the portfolio should have at least one year in money markets. My questions there would be: how much of the portfolio is in the Ultra-Short Bond Fund? And how much would the portfolio’s overall volatility be affected by moving part of that money into a money market fund? (My guess would be “a relatively small portion” and “hardly at all.”)

And with regard to what you consider the 3-6 year bucket, what is the specific advantage (to the overall portfolio) of having three different short-term bond funds rather than just one?

Or more broadly I might ask, can you achieve the overall risk profile that you want using just a few funds (e.g., Total Stock, Total International Stock, Total Bond)? If not, why not? What specifically do you feel would be missing? (Alternatively, what do you feel that you’d have too much of?) And how could you fill that gap in as simple a way as possible?

For instance, if you like the idea of a larger helping of short-term bonds than you’d have with the Total Bond Market Fund, what about those three funds, plus a short-term bond fund? Would anything feel distinctly missing (or overweighted) then? (And if so, again, how could you correct whatever feels “off” in as simple a way as possible?)

Let’s assume for a moment that you would find those four funds to be sufficient. In that case, the portfolio could be thought of as a short-term bucket with a short-term bond fund, an intermediate-term bucket with a total bond fund, and a long-term bucket with total stock and total international stock funds. Or we could achieve the same thing by looking at it from the overall portfolio allocation perspective (e.g., 15% short-term bond, 25% total bond, 40% total stock, 20% total international stock).

If you find buckets to be helpful, great. But be sure, after creating a bucket-based plan, to step back and look at the whole thing at once.

  • How does the overall allocation look? Does it seem reasonable?
  • How will it change over time (i.e., will the equity allocation be roughly steady, increasing, or decreasing)? Do you like that?
  • Is there a way to achieve the same overall goal with fewer funds?

Investing Blog Roundup: “More Art than Science”

I’ve published ten books (not counting follow-up editions of various titles). Nine are still in publication.

Of those nine books, one of them generates 45% of the total revenue — almost as much as the other eight books combined. Prior to publishing the book in question, I would never have guessed that it would be so much more successful than the other books. And I’d bet that if you were to guess which book it is, you’d have a roughly 8/9 chance of getting it wrong.

One might say that publishing books is “more art than science.”

This week, Michael Batnick takes a look at the “more art than science” concept.

Other Recommended Reading

Thanks for reading!

“Don’t Sell Stocks During a Downturn”

A reader writes in, asking:

“I’ve read everywhere that, if retired, one should have money to live on, invested in other than equities to protect against a market downturn (to reduce sequence of return risk, and to try to avoid locking in big losses, especially in the first 10 years of retirement).

My first question is: what would you consider enough of a downturn (amount and/or duration?) that you would recommend not selling equities if possible? I’ve yet to see anyone clarify this. A market drop of 15%? More?

My second questions is this: my taxable account has an all stock allocation because that is what Vanguard says is optimal. If there is a big market downturn/crash/recession, I will be selling stocks as that’s all I have in my taxable account. This is contrary to much of what I’ve read as recommended. When I asked my Vanguard CFP about this, his response was that yes I’d be selling stocks in the taxable account but my portfolio will be rebalanced so the portfolio as a whole will be selling bonds to buy more stock. That does seem to make sense to me. Is there some flaw to this explanation?”

Firstly the one easy part: the Vanguard CFP is correct. It’s the overall allocation of the portfolio that matters, rather than the allocation of any individual account. And from an overall asset allocation standpoint, selling stocks (or anything else) in your taxable account doesn’t (usually) matter, because you can simultaneously make transactions in retirement accounts to adjust the overall allocation back to whatever you want it to be.

And he is correct that if your portfolio is rebalanced during a stock market downturn, you will not only not be selling stocks but will in fact be buying them.

For anybody attempting to use “don’t sell stocks during a downturn” as a stand-alone rule though, it’s a challenge. It’s one of those vague statements that sounds like it makes great sense — hard to argue with, even. But once you try to turn that into an actual plan of action, you start to realize that you need something more specific/concrete than that.

There’s the question you noted: how bad does a downturn have to be, before I should avoid selling stocks?

There’s also the question of how many years worth of spending you want to keep in bonds, in order to avoid selling anything other than bonds when the stock market is doing poorly. That is, exactly how long of a downturn should you plan for? (Though if you prefer a conservative allocation anyway, this generally wouldn’t be an issue in early retirement, as you already prefer to have many years of spending in bonds.)

This doesn’t mean that “not selling stocks during a downturn” is a bad strategy, but you will have to choose some answers to the above questions. And — just like any other asset allocation question — there is not one answer that everybody agrees upon. There’s no consensus as to the specifics.

About as close as you can get to a consensus for managing asset allocation in retirement is something along these lines:

  • Diversify, in the sense of “not having a large percentage invested in any one company.”
  • Diversify, in the sense of “own stocks and bonds, and own some international too.”
  • Keep costs low.
  • Make sure that your asset allocation does not make you uncomfortable — and will not make you uncomfortable even when the market is doing poorly.
  • Have a specific plan for how you will change (or not change) your allocation as you age and in various market circumstances. For example, will you rebalance into stocks when the market falls, or not? And will you rebalance out of stocks as the market rises, or not? Having a specific plan is better than making it up as you go along. (If nothing else, it helps you keep your sanity: “I’m sticking to the plan” — whatever the exact plan happens to be.)
  • Keep your spending rate low-ish if at all possible (below 4% in early retirement — ideally even below 3.5%; a higher rate is OK later in retirement).
  • If your spending rate is low-ish, then any diversified allocation should be OK. A higher stock allocation is likely to result in a larger bequest (and/or higher spending late in retirement) and a bumpier ride along the way.

Investing Blog Roundup: David Swensen vs. Target-Date Funds

Target-date funds are often characterized as the sort of thing that’s only suitable for beginner investors — knowledgable investors can surely do better.

As long-time readers know by now, I don’t agree at all. I think a simple all-in-one fund makes a great portfolio in quite a lot of cases, even for people with plenty of experience/knowledge.

And as Ben Carlson notes this week, even very knowledgable investors — famous ones, even — don’t necessarily do any better.

Other Recommended Reading

Thanks for reading!

What’s the Purpose of Socially Responsible Mutual Funds?

I’m often asked what I think about socially responsible mutual funds (or socially responsible investing in general).

To explain, let me introduce you to Jim. (Jim is hypothetical — sort of.)

  • Jim is an accountant. He has never had a super high income, but he has been consistently employed since finishing college 30-something years ago.
  • Jim has saved diligently throughout his career, and his index-fund portfolio is now sufficiently large that he expects to be able to retire within the next few years, despite having no pension.
  • In other words, Jim has accumulated a significant sum of money.
  • Every so often, Jim experiences some misgivings about having that much money. He recently read that his almost-seven-figure net worth means he has more wealth than 99% of other people in the world.
  • Jim also has some misgivings about several of the companies that are owned by his index funds.
  • Jim’s annual budget does include a non-trivial amount of charitable giving each year, but the reality is that in order to meet his goals, he has to keep most of his money.
  • Jim wants to feel better about having a lot of money. That is, he wants to continue to have a lot of money. But he doesn’t want to feel bad about it.

Jim has a need.

There are a lot of Jims.

What does the financial services industry do when it sees a lot of people with a given need/desire? It creates a product.

Socially responsible mutual funds are that product. Socially responsible mutual funds exist to let you feel better about having money (i.e., not giving it away). The fund industry usually doesn’t want you to give your money away. If you do, they don’t get to collect a percentage (in most cases).

This isn’t to say that socially responsible funds are a bad thing. From a “doing good in the world” standpoint, socially responsible funds may indeed have a beneficial effect in that they might exercise their voting rights more frequently — or more frequently in line with your views — than typical index funds.

But whether or not they actually have a positive societal effect is not generally super important from the perspective of the fund company (or, in most cases, from the perspective of an advisor recommending the fund). As long as you feel better about owning this fund as opposed to another one, mission-accomplished.

It is normal to have some misgivings about having far more wealth than almost everybody else in the world.

It is also normal to have misgivings about owning shares of companies that do things you find unethical.

And it is super clear that the most effective way to alleviate these misgivings is to give away more money — either directly to people who need it more than we do, or to charitable organizations that fight against the thing(s) we find unethical.

But, unfortunately, there’s a limit to how much we can give while still reaching our goals. With our current retirement system (in which few people have pensions and Social Security doesn’t cover everything), if you want to retire someday with a middle class level of spending or higher, you must accumulate a pile of money — and keep it for yourself.

Maybe socially responsible mutual funds can help you feel better about doing that.

Disclaimer: By using this site, you explicitly agree to its Terms of Use and agree not to hold Simple Subjects, LLC or any of its members liable in any way for damages arising from decisions you make based on the information made available on this site. I am not a financial or investment advisor, and the information on this site is for informational and entertainment purposes only and does not constitute financial advice.

Copyright 2019 Simple Subjects, LLC - All rights reserved. To be clear: This means that, aside from small quotations, the material on this site may not be republished elsewhere without my express permission. Terms of Use and Privacy Policy

My new Social Security calculator (beta): Open Social Security