A Letter to Retired Family Playing with Stocks

[Wfearful_Bgreedy]

I wanted to bring up again the need to diversify stocks across other countries besides the U.S.

It would really pain me if you lost a significant amount of your stock value set aside for retirement and I asked myself if I could have done something more.

 

The indexation / ETF / underfunded company pension plans (GM, Exon, etc..), baby boomer demographic shift, and all time low interest rates <2% phenomena

have lifted U.S. stocks to record highs. When the market hits a recession (there has been one almost every 10 years on the dot and we are almost past the 10 year mark) everyone will be rushing out the door and there will be little to no one buying e.g. it will be harder to sell or exit your position.

 

I think instead of a 100% US portfolio there are some easy ways to still achieve a decent risk/reward on the stock market. Here are some great recommendations that I can stand behind

 

NYSE: ABEV

Ambev owns the distribution rights to coca-cola in Brazil and latin america. They also have many recognized beverage brands. Brands have lasting power just like coca-cola, pepsi, crest, etc...

They are also very fairly priced.

 

OTC: FFXDF

Fairfax India is a very very great holding company. Fairfax is a well known conglomerate with management that has over 20 years of successful investment history in insurance within Canada.They provide very honest shareholder letters and follow the strategies of Warren Buffett. They are applying that same strategy in India and only buy businesses with a long history of stable and consistent earnings at a discount to their value. This stock is really a collection of extremely stable businesses in India where the demographics, interest rates, and economy have a very bright future.

 

OTC: EBKDY

Erste Bank is an excellent Austrian ran bank conglomerate with multiple banks in Eastern Europe. Eastern Europe especially Poland, Czech Republic, Hungary and others have gone through a turn-around and their respective economies, demographics, and production have all gone up. This is a stable and consistent business. Europe is expected to continue doing well in the future relative to the U.S.

 

Cash

Now is an excellent time to leave cash in your brokerage. If the market does go down and people panic you can mimic the most successful investor in the world and the world's second richest man on the planet Warren Buffett (who is sitting on 50% cash right now) and purchase stocks at a huge discount.

 

Sorry if this is annoying I just feel like your retirement savings represents countless hours working and saving. The risk / reward is so high right now in the market given we are near the end of a 10 year bull market. Why risk a 30 - 50% correction in the effort to achieve another 5-7% gain. I think the companies I listed above are very good ways to diversify outside of the U.S.

 

Well now I can say that I really tried to give you a heads up.

 

[Dynamic]

I don't know how this would be taken by its recipients.

 

Who are you to tell them and what is your record. Why would following your advice suit their investing style, tolerance or quotational losses, financial goals or temperament? Would it impair your relationship with them?

 

Certainly I'd fix a few typos - Buffett has two Ts (you misspelled it twice) and you say "(who is sitting on 50% cash right)" and presumably mean "right now".

 

You say recessions are almost every 10 years on the dot. I'd be surprised it's that predictably regular. It could be a good deal longer quite easily, and you ought to acknowledge the degree of uncertainty over timing to yourself as well as to your recipients.

 

I'd also be surprised if a recession or market crash in the US didn't also coincide with similar turmoil in most world markets, including those in Europe, so how much is it worth spreading investments geographically?

 

Likewise, you say "Europe is expected to continue doing well in the future relative to the U.S." - but by whom, over what length of time, and by what sort of margin, and why should I give credence to this opinion? I can certainly see both pluses and minuses to various aspects of business and government in both the US and Europe and would anticipate that good businesses in both parts of the world would do fine over the long term. If I was likely to spend most of my retirement money in USD I'd be happy enough to be largely denominated in USD and invested in companies largely able to raise prices alongside USD inflation, though I wouldn't weight that too strongly in my decision-making. (I'm almost entirely US invested right now, yet live in the UK and may retire there and/or in Mexico in a decade or so). Also I'm happier investing in companies I understand. If I don't know how people use banking services in Poland, say, will I be able to spot when Erste Bank has temporary difficulties versus permanently impaired business? I might understand a US bank better and be able to manage my investments better in the long run.

 

Expectations held widely would typically be reflected fairly well in the market prices, though if there's a specific popular delusion at play, those expectations may be very wrong. How sure are you that you're not cherry-picking opinions that agree with your own opinion or expectation and disregarding opinions that differ? Even if you turn out to be right this time, were you just a lucky bear or were you smarter than the average bear?

 

And returning to the second paragraph, does it matter if they suffer quotational loss for a year or two during a bear market when they're retired already and may have no need to sell or exit positions during that time?

 

One approach, once managing a portfolio in retirement, might be to aim to hold a buffer of at least 18 months' living expenses in cash (possibly a little more) on the assumption that I'd expect to receive a reasonable stream of dividends flowing into that buffer while I withdraw my living expenses from it, even if those dividends are somewhat reduced during a recession, so that in all likelihood I could ride out a recession or bear market during retirement without becoming a forced seller at the bottom of the market. I could also cut back on the more expensive luxuries and vacations for a year or two if the cash reserve was running low. If I did have to sell shares in a long bear market eventually, I'd probably only be eating about 3% to 4% of the depressed total value of my portfolio per year in either dividends or sales and selling it at perhaps 60%-70% of what I'd normally hope to sell for, so perhaps I would lose 1-2% of the intrinsic value of my portfolio per year, only after I deplete my cash buffer about 3-4 years into a pretty long bear market.

 

I'd then hope to replenish my cash buffer gradually over the course of a decade or so as markets recover and selling shares becomes less painful as they hopefully get closer to intrinsic value.

 

Holding a very large position in cash is debatable too. Some predict an imminent crash, but some admit they cannot predict the timing of crashes and believe that selling investments somewhat below their intrinsic value to switch to cash (which will lose value in real terms over the many years it might take for the crash to happen) might cause them to miss out on gains, or inflation-protection that holding companies that can raise their prices with inflation offer in the long term. It's quite tough to weigh these two competing concerns unless you have a good deal of certainty about the timing and depth of the bear market versus the potential for 5-7% compounded annual gains for a few years, which do not take many years to compensate for a potential crash of 30% or so.

 

I certainly think stock recommendations for fairly priced quality companies with a reasonable thesis are fine, and may well be kindly received as options worth looking into.

 

And I think it's fair to forewarn them that they should expect to have to ride out a bear market with at least 30-50% losses in the quoted price of their investments and somewhat reduced dividend streams every decade or two at unknown times in the future, without panicking and selling good investments or feeling that they've permanently lost money. I'd rather give them the mindset that they should be prepared to ride these things out, that investments might spend 5-10 years without showing positive returns from time to time, so keeping a buffer of at least 18 months' living expenses available in cash deposits or similar (and maybe more if you live somewhere where an uninsured medical emergency would cost you a lot of additional cash) is probably something that will give them peace of mind and allow them to meet their goals and enjoy a happy and financially secure retirement, without reducing by too much the amount they have profitably invested and earning them returns in the long run.

 

I'd just be really wary about making specific predictions about the timing of a crash. If Buffett cannot predict the timing of such things, I really would feel I'd need a very compelling thesis to go around giving predictions of when to sell so generally.

 

Buffett instead has a tendency to accumulate more cash when prices are too high for him to have many buying opportunities at attractive prices and tends to spend a lot of it when prices are low enough to give him ample buying opportunities at attractive prices.

 

I view it that he does not TIME the market, he PRICES his purchases carefully instead, insisting on a return that provides a reasonable margin of safety. And indeed he doesn't, by and large, sell his positions to raise cash in frothy markets, he just happens to have many businesses that spew out cash prolifically with few opportunities to reinvest the excess at high returns, so it builds up sometimes for many years when he has few opportunities to make suitably-priced investments. His cash building isn't so much strategic in his predicting crashes as it is merely symptomatic of sustained periods of generally high valuations, giving him few opportunities to deploy the cash sensibly.

 

I'd just think very hard before placing a detailed prescription about what to do in front of someone whose wellbeing you obviously care about.

 

In your shoes, I'd rather ask them if I could bounce some ideas off them, given that they've achieved retirement and that I'd like to plan ahead for how to manage mine. I can then present my ideas and perhaps spur some good ideas in them if they agree with me. And I wouldn't come across as a know-it-all.

[Wfearful_Bgreedy]

I chose this forum because I knew I would get good feedback and this certainly counts. I suppose more context is deserved. I obviously am not Klarman nor Buffett and would never want anyone to invest outside of their circle of competence. Also on the Europe example you brought up I completely agree if the U.S. undergoes a crash it would not necessary be isolated and that the ECB is mid way through their own QE. These are valid points and really any recommendations I provide of foreign stocks is not a guarantee of any sort and might be presumptuous of my abilities or foresight. My language was incorrect U.S. recessions don’t happen every 10 years my intent was to convey they happen within 10 years consistently and rarely go beyond 10 years since the last recession. Yes, no one can predict the exact when, what, and how at the same time. I’m saying the what is inevitable and we are more likely then not closer to the what based on history. That’s why cash is such a great option. At these low interest rates the risk adjusted cost of holding cash are actually at all time lows.

https://www.thebalance.com/the-history-of-recessions-in-the-united-states-3306011

 

My relative sold right after the GFC and was very much an emotional actor. Also this relative like many retired folks feel they need to be invested heavily in the market to get reasonable returns. It used to be that bonds were a haven for retirees and now interest rates are not nearly as attractive as you know. Retirees are not efficient market actors they are emotional actors that have a shorter time horizon than working folks. If I had to live on a fixed income, was forced to weight heavily in stocks due to the Feds, and saw my highly validated shares dropping I’m not sure telling retirees to wait it out would be my 1st line of defense. If we were all rational market allocators and held through downturns the opportunities for value investing would be far fewer.

 

Schiller PE is one way to predict the 10 year earnings of the market going forward. The current Schiller PE is 31, see Vangaurds fig 5 on expected 10 year returns going forward they are not high, 10 years is a long time for to wait for many retirees they might blink before that:

https://personal.vanguard.com/pdf/s338.pdf

 

I have a feeling, not a professional insight, that a lot of retirees see the upward slope of the S&P500 and take comfort that this means now is a good time to double down rather than the reaction that these stocks are pricey and my yields (inverse of PE) will be lower for what I’m putting in. That is certainly the reaction my relative is taking and having a close relative who is an emotional trader react this way is disheartening. The reason I recommend alternatives is because recommending safer investments like municipal bonds hasn’t worked. They enjoy being active in the market.

 

On the topic of Buffett I am aware that he is not a “market timer”, he doesn’t look at macro at all and is interested in price relative to intrinsic value. The difficulty I’m having is my relative doesn’t take valuation relative to intrinsic value into mind at all.  Buffett closed his fund in 1969 and told his limited partners this: “The results of the first ten years have absolutely no chance of being duplicated or even remotely approximated during the next decade.” That sounds a lot to me like rule 1 investing not losing your money and it sounds like market timing to me. Buffet said one thing and does another sometimes and we should question these mantras based on history. One form of market timing in my minds is day trading jumping in and out of the market incurring fees and suboptimal tax results. Buffet, Klarman, and many other value oriented investors are at all time career highs in terms of their cash positions right now waiting for value scenarios. Given my relative and my uneducated perception that most retired investors are not running screens, DCFs, or looking for margins of safety I am curious how you would recommend someone pursue value over market perceptions. I would say cloning is the best recommendation I can give without putting in the effort for this type of person.

 

Regarding leaving retiree funds in the market and waiting for the market to go back up this is certainly possible for a someone who isn’t yet retired. I would argue that many retirees are utilizing 401Ks and once they turn 70.5 they have to undergo “forced distributions” google it for more info. But they will be forced sellers at a given percent of funds every year using that tax vehicle. In other words 401ks have a step function count down clock that I wasn’t even aware of until recently. So many baby boomers can’t actually ride out any type of prolonged correction which is why it’s a shame bonds aren’t high enough for most. Also many are historically overweight in stocks see dated ref:

http://www.businessinsider.com/fidelity-says-baby-boomers-own-too-much-stock-2015-7

 

I understand your logic for adjusting draw down and forgoing luxuries in a downturn as a means of adjustment. I suspect you are currently working, have studied Buffett, and have a longer time horizon than most retirees. This letter is to my emotional and shorter time horizon relative who doesn’t choose to mimic Buffett by constantly evaluating intrinsic value and waiting for said opportunity.

 

My main response is take into consideration the position of the average retirees’ time horizon, overweight in stocks, forced distributions, and few risk free alternatives. If Buffett, Klarman, etc. can’t find bargains and are in at ~50% cash can we really expect  the majority of retirees in at a higher percentage are making better allocation decisions? I believe cash is used as tool by Buffett and shouldn’t be looked down upon as simply “timing the market”. Schroeder the author of Snowball characterizes Buffett’s use of cash as:

“he perceives cash as a call option with no expiration date or strike price”

 

What is wrong with shamelessly cloning the best? Why aren’t more forum members here questioning the all time high cash allocation of Buffett while at the same time he states:

“Measured against interest rates, stocks actually are on the cheap side compared to historic valuations”. If that were true then why can’t he find bargains on the public markets at this moment as evidenced by his percentage of cash:

https://www.valuewalk.com/2017/06/warren-buffett-berkshire-hathaway-unprecedented-100-billion-cash-heres/

 

Thanks for your comments and keep up the good responses . Even if markets go through a downturn I wouldn’t consider that proving me right as anyone can be right once in a random walk down Wall Street. I’m interested in high risk adjusted returns and my argument is that Mr. Market and a large portion of retirees, evidenced by their high % allocation, are not taking a risk adjusted look at the S&P 500 index which has outperformed the best value investors as of the last decade.

 

[Guest longinvestor]

The subject of investment during retirement is an important one but, assuming that you're new around here, let me suggest you find a different community for your message about avoiding mistakes that you bring up.

 

That said, you do bring up one important point, about turning 70-1/2. When is the best time to plan for that date? Depends on how you are doing. If your assets are doing well, you need to start early preparing for it. I did at 50, glad I did.

 

Btw, just curious, how many people have you helped with this subject? How did it work out?

[Wfearful_Bgreedy]

This is a general discussion sub-forum and I believe this is a pertinent topic as I discuss Buffett's allocations today and in the past at large.

The message here isn't about me as I surely am no expert, am not a fiduciary with your interests in mind, nor have a track record like Buffett/Klarman. In fact I believe you have been investing much much longer than me and have seen and held positions through some incredible market conditions that I wasn't alive for. I wanted to use this post as a platform to discuss what Buffett is currently doing, the incredible valuations we are witnessing, indexation taking a hold, and gather thoughts from more experienced value investors like yourself who may be preparing for retirement with a value approach in mind. I realize as a new member that I may have made a mistake in posting in the first section I thought made sense titled "General Discussion_Feel free to talk about anything and everything on this board" . Happy to move it somewhere more relevant regarding value investing, Buffett, and retirement if you can point me there. I still have some unanswered questions above and any insights or errors I made in my sources or thoughts would still be appreciated.

Cheers!

[no_free_lunch]

ABEV could be interesting.  Do you have any links to it's financials in USD?

[rukawa]

I was recently asked to give advice to a relative who wanted to know whether they should take their money out of the stock market as they feared a crash. My advice was:

 

You don't know what you are doing and neither does anyone else. I can't tell you whether a crash will come. I have no clue. My advice is to keep your money in the stock market and stop worrying. You have better things to do with your life. Over the long term you should be ok. Maybe it goes up. Maybe it goes down. Most investors have no ability whatsoever to determine what will happen.

 

But honestly I really didn't want to give him advice and if I could I would have avoided it. This is because I'm fairly confident my advice is worthless. The only reason I did is because I felt obligated since my relative has given me a lot of advice in the past...most of it was worthless too :).

[LC]

It's like you summed up every interaction I've had with people asking for investing advice....

[maybe4less]

That said, you do bring up one important point, about turning 70-1/2. When is the best time to plan for that date? Depends on how you are doing. If your assets are doing well, you need to start early preparing for it. I did at 50, glad I did.

 

What did you do to prepare? This is not an issue I've thought enough about. Any insights would be greatly appreciated.

 

Thanks

[rkbabang]

That said, you do bring up one important point, about turning 70-1/2. When is the best time to plan for that date? Depends on how you are doing. If your assets are doing well, you need to start early preparing for it. I did at 50, glad I did.

 

What did you do to prepare? This is not an issue I've thought enough about. Any insights would be greatly appreciated.

 

I'd be interested as well, having recently turned 45, 50 will be upon me sooner than I'd like.

 

[Guest longinvestor]

That said, you do bring up one important point, about turning 70-1/2. When is the best time to plan for that date? Depends on how you are doing. If your assets are doing well, you need to start early preparing for it. I did at 50, glad I did.

 

What did you do to prepare? This is not an issue I've thought enough about. Any insights would be greatly appreciated.

 

Thanks

1. Converted a chunk to ROTH.

2. Started a 72T withdrawal.

3. Scaled back 401K contributions. Added to work place ROTH.

 

The overall plan is to spend down the tax deferred monies by 70 to avoid a bump up in tax brackets. Besides, they say that however good, not fun to eat with false teeth

 

Looking about me, I don't see too many in my circles have this kind of a good problem.

[SharperDingaan]

Most folks in their 70's should not be in the stock market, period - even if you're a wizard.

Simply because both time and health are working against you, and one stroke is all it takes. So what have other 'old' people around the world traditionally done?

 

They aren't in the stock market; they own rental property, they live on the rents, and they hire in labour/management as they need. There is no clawback of state retirement income, there is something to do every day, and the property is available to mortgage against any time he/she wishes. And it is very, very effective.

 

Next time you visit the Mediterranean, look at who owns the rental properties - how old they are, and how mobile. Compare that to the same age group in your town/city, and assess who seems happier. That's the true return on investment, and it's not measured in %.

 

Good luck!

 

SD

 

 

[Guest longinvestor]

As to the idea of giving advice (which I agree is mostly useless or unlikely to be taken) which a few posters have brought up here, I would cautiously add that the folks in this community should be in a better position to guide those who are less savvy (or at least prone to making common mistakes) than some of the financial houses like Fidelity et al which the OP has used as references. That "advice" is, imo, far worse for ordinary folks.  "Insights" peddled by these FI's is not worth the paper it is printed on. The goals of these FI's are not necessarily aligned with that of the retirees'. I promptly throw them in the trash bin as received in the mail, I likely kept at least some of my money in my pocket by doing so. 

[rukawa]

Most folks in their 70's should not be in the stock market, period - even if you're a wizard.

Simply because both time and health are working against you, and one stroke is all it takes. So what have other 'old' people around the world traditionally done?

 

They aren't in the stock market; they own rental property, they live on the rents, and they hire in labour/management as they need. There is no clawback of state retirement income, there is something to do every day, and the property is available to mortgage against any time he/she wishes. And it is very, very effective.

 

Next time you visit the Mediterranean, look at who owns the rental properties - how old they are, and how mobile. Compare that to the same age group in your town/city, and assess who seems happier. That's the true return on investment, and it's not measured in %.

 

I feel like managing property is much more nerve-racking than blindly putting your money in an index fund. And far less liquid. If I were old I would never want to be a landlord....actually I wouldn't even want to be a landlord now.

 

My parents are over 70 and 100% invested. I know other 70 year olds in a similar position. Its not such a strange thing if your house is paid off, healthcare is govt/union provided and you are still saving money in retirement because you have a good pension. I suspect my parents will never end up touching their savings.

 

If you do get a stroke...look into meth as a treatment :)

[Guest longinvestor]

Most folks in their 70's should not be in the stock market, period - even if you're a wizard.

Simply because both time and health are working against you, and one stroke is all it takes. So what have other 'old' people around the world traditionally done?

 

They aren't in the stock market; they own rental property, they live on the rents, and they hire in labour/management as they need. There is no clawback of state retirement income, there is something to do every day, and the property is available to mortgage against any time he/she wishes. And it is very, very effective.

 

Next time you visit the Mediterranean, look at who owns the rental properties - how old they are, and how mobile. Compare that to the same age group in your town/city, and assess who seems happier. That's the true return on investment, and it's not measured in %.

 

I feel like managing property is much more nerve-racking than blindly putting your money in an index fund. And far less liquid. If I were old I would never want to be a landlord....actually I wouldn't even want to be a landlord now.

 

My parents are over 70 and 100% invested. I know other 70 year olds in a similar position. Its not such a strange thing if your house is paid off, healthcare is govt/union provided and you are still saving money in retirement because you have a good pension. I suspect my parents will never end up touching their savings.

 

If you do get a stroke...look into meth as a treatment :)

 

+1. I've heard this from older folks who are property owners and the ordeal of collecting rent every month, making repairs etc. may be made to work at younger age, but I've heard complaints a-plenty! One of the savvier ones who made it big time in rental property was looking for an exit strategy in his 40's. He talked to me about investing in the market as a way to diversify out, not sure if he actually did or not. He learned the importance of having this early exit strategy from his dad, who also was in the rental business but worked for too long. There's something to be said about being your own boss, setting your own schedule etc. plus all kinds of tax advantages with rental property. Word has it that you can actually pay no taxes at all, haven't we heard that somewhere ;)

 

For me, if I didn't do it in the 30's or 40's, not about to do that in my 70's. 

[bizaro86]

I quite like SD's post, but maybe I'm congenitally suited to real estate. My 2008-2009 bounce back profits all got ploughed into foreclosures shortly after, and some of them will be "keep forever" property. I'll probably estate freeze them over time so there isn't tax payable on my death (hopefully decades from now). I think a few rentals with a competent property manager still counts as retirement. I own 5 that I self manage, and I spend way more time on my stock investments.

 

Maybe that is a flaw, and I need more businesses where I can check the price once per quarter. That's roughly what I do with my RE, and it takes no time at all.

[SharperDingaan]

Just to throw out a few observations; and move on.

 

A good many of these are partnerships; to achieve the scale to afford a property manager, spread the cost of maintenance, and prosecute the deadbeats. Everything is as efficient as possible (AC/Heat, Boiler, Electric, Gas, Clad, etc), & debt financed with a standard P&I payment every month. We understand that in most cases the target for all this is around 1/3 of total rent.

 

A good many are small hotels/pensions located in major cities/tourist areas & filled via AirBnB. Business people/tourists staying for a few days, & long-term stays of a few months/years until they buy a place of their own. And as they will not be full every night, owners get a free place to stay when they come into the city (perks). Cost to purchase of 2-5 million euro, renovation is debt financed.

 

Partnership interests are typically 5% chunks, with valuation at a constant multiple of the last 5 years of average net income. It's possible to game, but partners typically know each other & partnerships are passed down through families. Everybody has been around the block, it's hard to BS, & partnerships are typically by invitation only. Very European, and community matters.

 

Even those who could do it alone (American approach), typically don't. Most would spread their risk over 2-3 partnerships across the land; french partners would typically spread their interest across Paris, Provence, & something in the Loire Valley - with different percentages in each. Arabic partners might go with something in Cairo, Morocco, and southern Spain.

 

You will not be rolling the partners either. A great many are women who have outlived their husbands, they have lots of friends in both high and low places, & more than a few have had a colourful history at some point. There isn't much that they don't know, and extremely well.

 

Perhaps not what most NA people would could consider?

But very effective!

 

SD

   

 

 

[Guest longinvestor]

That said, you do bring up one important point, about turning 70-1/2. When is the best time to plan for that date? Depends on how you are doing. If your assets are doing well, you need to start early preparing for it. I did at 50, glad I did.

 

What did you do to prepare? This is not an issue I've thought enough about. Any insights would be greatly appreciated.

 

Thanks

1. Converted a chunk to ROTH.

2. Started a 72T withdrawal.

3. Scaled back 401K contributions. Added to work place ROTH.

 

The overall plan is to spend down the tax deferred monies by 70 to avoid a bump up in tax brackets. Besides, they say that however good, not fun to eat with false teeth

 

Looking about me, I don't see too many in my circles have this kind of a good problem.

 

FWIW, here are the RMD factors that kick in at age 70. You multiply the retirement balance by this ratio to determine the forced withdrawals. IRS publishes this to age 115.

 

3.65%

3.77%

3.91%

4.05%

4.20%

4.37%

4.55%

4.72%

4.93%

5.13%

5.35%

5.59%

5.85%

6.14%

6.45%

6.76%

7.09%

7.46%

7.87%

8.33%

8.77%

9.26%

9.80%

10.42%

10.99%

11.63%

12.35%

13.16%

14.09%

14.93%

15.87%

16.95%

18.18%

19.23%

20.41%

22.22%

23.81%

25.64%

27.03%

29.41%

32.26%

34.48%

38.46%

41.67%

47.62%

52.63%