Main reason for posting: Considering portfolio diversification with bonds and/or gold to cope with SORR, and effect on withdrawl rate strategies.
Country of Residence: Netherlands (EUR currency)
International Lifestyle: No plans to live abroad in future
Age: Close to 50
Current asset allocation:
Worth mentioning: The Dutch tax system is not like most others. For those not familiar, the highlight (or lowlight) is - in summary - that we have a wealth tax that currently depends on the type of asset:
Hi all, thanks for making it this far down my post![:)]( "Smile")
As you can see from above, I am getting close to the moment I can 'pull the plug' and RE, and it's time to consider what it means for my asset allocation. Up to now it's been pretty easy: Essentially 100% stocks all the way for accumulation long term. But I know a little about glidepaths and constructs to reduce SORR, especially around the moment of RE. I am aware I probably need to act on this, but not sure how exactly yet.
My psychology is pretty risk-tolerant for the best long-term gains, so I have a little hurdle to overcome to move away from 100% stocks. I realise intellectually the last few decades have been pretty good (too good?) for stocks, even with the dips ±2000, 2008 and 2020 since they've bounced back quickly. I also realise with backtesting it's intellectually clear that diversification has worked many times in the past, but I also believe that not everything is the same as it was (for better or worse).
So the specific question I have been thinking about lately, is what is the best way to diversify in my situation: Having a comfortable and reliable cushion in about 20 years with social securty/pension means I can afford a bit more risk than some; and the Dutch tax system's particulars make investing in low-return (low-risk) assets less attractive relatively.
I have used calculators such as ERN and portfoliocharts to estimate impact of various asset allocations and nicely with ERN I can set an expense ratio of 2% to simulate our tax system.
1. One finding that has me a little puzzled, is that gold seems to be a better diversifier than bonds in many cases: higher withdrawl rates, lower risk. But people still use bonds considerably more often than gold. I guess on this forum there may be some bias towards bonds, but I feel I might be missing something. Small note: I don't really believe in the value of gold, but backtesting suggests it's worked well in the past 100+ years.
FYI, some of the backtesting suggested a 3.5% WR based on 100% worldwide stocks, increasing to 4.4% in 80/20 with gold, but only 3.8% in 80/20 with bonds. In a second calculator it seems 20% gold outperformed 20% bonds by 0.2-0.8% points WR during crisis scenarios.
Any thoughts on this? Bond performance in the home market may vary a lot I guess, and local inflation may affect things; but the gold-advantage holds when setting home market Netherlands and also when setting home market USA (note stocks are worldwide in both cases, so home market should only affect bonds and inflation).
2. I've also played with more variable withdrawl rates. I can reduce my planned expenses by about 30% for an extended time without suffering too much quality of life (just no upside for additional fun things compared to now). I also have a home that is largely paid off and an option to move to a smaller home if needed, which will likely net me a few years living expenses even in a depressed real-estate market. This gives me some confidence at least that I will be able to cover the 1-2% failure chance a fixed withdrawl rate would give (even in 100% stocks scenario). Are there any experiences here with variable withdrawls like that? Any particular things to look out for?
3. I suspect know I am being too greedy and not fearful enough of the 100% stocks, now that they are so high (CAPE). I'm sure most, if not all of you agree with that. It's not really something I need to ask. I also think that I need to change my mindset from accumulation (long term upside protection) to withdrawl (shorter term downside protection). However, are there any thoughts based on our tax system's unfavorable treatment of bonds (and gold)? I know those assets are not chosen for the returns they give, but getting robbed of 2% in addition to the risk of not even keeping up with inflation is a big hurdle to get over (note: This is not a political statement, just a fact-based and psychological one).
4. I admit I don't fully understand bond funds yet. The general mechanism of bonds I understand: if interest rates go up, existing bonds with lower rates are less attractive, so they will be priced lower to increase the yield (and vice versa). But what resource would you recommend that explains (market) pricing of bond funds a little more? Buying individual bonds may be a good way to remove that pricing fluctuation, but it means holding them to maturity which makes them less liquid (or you just get the same risk if selling early). However, bond funds continuously run, so it seems you never know what to expect as there is no 'until maturity' for the fund.
5. Related a little to the above (and perhaps for context, not really a question); the bond fund I was considering is iShares Global Aggregate Bond ESG UCITS ETF EUR Hedged (Acc) ISIN IE000APK27S2. This is an alternative I can easily get hold of, and performs nearly identical to the similar iShares Core Global Aggregate Bond UCITS ETF EUR Hedged (Acc) ISIN IE00BDBRDM35 that I've seen mentioned here on the wiki in simple non-us portfolios. (I've not picked a gold fund to consider, it seems harder to find low-cost options I have access to)
Thanks for your thoughts!
Country of Residence: Netherlands (EUR currency)
International Lifestyle: No plans to live abroad in future
Age: Close to 50
Current asset allocation:
- About 25x living expenses in stocks (index funds; worldwide, including EM and SC)
- About 3x living expenses in cash
- Home-ownership with about 20% LTV mortgage left, interest rate at 1.5% (fixed until 2030 when most of it is paid off)
- No other debt
- Social security/pension built-up to cover 100% of living expenses starting 20 years from now (this is mostly but not fully inflation protected).
Worth mentioning: The Dutch tax system is not like most others. For those not familiar, the highlight (or lowlight) is - in summary - that we have a wealth tax that currently depends on the type of asset:
- Cash in savings accounts / deposits in banks is taxed at <0.5% of the total asset value annually
- All other (non-home, non-social security) assets are taxed at ±2% of the total value annually. This includes stocks, bonds, gold, you name it.
Hi all, thanks for making it this far down my post
As you can see from above, I am getting close to the moment I can 'pull the plug' and RE, and it's time to consider what it means for my asset allocation. Up to now it's been pretty easy: Essentially 100% stocks all the way for accumulation long term. But I know a little about glidepaths and constructs to reduce SORR, especially around the moment of RE. I am aware I probably need to act on this, but not sure how exactly yet.
My psychology is pretty risk-tolerant for the best long-term gains, so I have a little hurdle to overcome to move away from 100% stocks. I realise intellectually the last few decades have been pretty good (too good?) for stocks, even with the dips ±2000, 2008 and 2020 since they've bounced back quickly. I also realise with backtesting it's intellectually clear that diversification has worked many times in the past, but I also believe that not everything is the same as it was (for better or worse).
So the specific question I have been thinking about lately, is what is the best way to diversify in my situation: Having a comfortable and reliable cushion in about 20 years with social securty/pension means I can afford a bit more risk than some; and the Dutch tax system's particulars make investing in low-return (low-risk) assets less attractive relatively.
I have used calculators such as ERN and portfoliocharts to estimate impact of various asset allocations and nicely with ERN I can set an expense ratio of 2% to simulate our tax system.
1. One finding that has me a little puzzled, is that gold seems to be a better diversifier than bonds in many cases: higher withdrawl rates, lower risk. But people still use bonds considerably more often than gold. I guess on this forum there may be some bias towards bonds, but I feel I might be missing something. Small note: I don't really believe in the value of gold, but backtesting suggests it's worked well in the past 100+ years.
FYI, some of the backtesting suggested a 3.5% WR based on 100% worldwide stocks, increasing to 4.4% in 80/20 with gold, but only 3.8% in 80/20 with bonds. In a second calculator it seems 20% gold outperformed 20% bonds by 0.2-0.8% points WR during crisis scenarios.
Any thoughts on this? Bond performance in the home market may vary a lot I guess, and local inflation may affect things; but the gold-advantage holds when setting home market Netherlands and also when setting home market USA (note stocks are worldwide in both cases, so home market should only affect bonds and inflation).
2. I've also played with more variable withdrawl rates. I can reduce my planned expenses by about 30% for an extended time without suffering too much quality of life (just no upside for additional fun things compared to now). I also have a home that is largely paid off and an option to move to a smaller home if needed, which will likely net me a few years living expenses even in a depressed real-estate market. This gives me some confidence at least that I will be able to cover the 1-2% failure chance a fixed withdrawl rate would give (even in 100% stocks scenario). Are there any experiences here with variable withdrawls like that? Any particular things to look out for?
3. I suspect know I am being too greedy and not fearful enough of the 100% stocks, now that they are so high (CAPE). I'm sure most, if not all of you agree with that. It's not really something I need to ask. I also think that I need to change my mindset from accumulation (long term upside protection) to withdrawl (shorter term downside protection). However, are there any thoughts based on our tax system's unfavorable treatment of bonds (and gold)? I know those assets are not chosen for the returns they give, but getting robbed of 2% in addition to the risk of not even keeping up with inflation is a big hurdle to get over (note: This is not a political statement, just a fact-based and psychological one).
4. I admit I don't fully understand bond funds yet. The general mechanism of bonds I understand: if interest rates go up, existing bonds with lower rates are less attractive, so they will be priced lower to increase the yield (and vice versa). But what resource would you recommend that explains (market) pricing of bond funds a little more? Buying individual bonds may be a good way to remove that pricing fluctuation, but it means holding them to maturity which makes them less liquid (or you just get the same risk if selling early). However, bond funds continuously run, so it seems you never know what to expect as there is no 'until maturity' for the fund.
5. Related a little to the above (and perhaps for context, not really a question); the bond fund I was considering is iShares Global Aggregate Bond ESG UCITS ETF EUR Hedged (Acc) ISIN IE000APK27S2. This is an alternative I can easily get hold of, and performs nearly identical to the similar iShares Core Global Aggregate Bond UCITS ETF EUR Hedged (Acc) ISIN IE00BDBRDM35 that I've seen mentioned here on the wiki in simple non-us portfolios. (I've not picked a gold fund to consider, it seems harder to find low-cost options I have access to)
Thanks for your thoughts!
Statistics: Posted by factchecker — Sat Aug 31, 2024 4:56 am — Replies 0 — Views 90