Comments on: Review: Worry-Free Investing by Zvi Bodie

By: Monevator

Monevator — Tue, 02 Feb 2010 10:13:38 +0000

The older I get, the more I’m convinced a 100% approach to any particular asset class is folly, whether it be 100% stocks, 100% bonds, 100% cash, 100% rental properties, even (especially!) 100% gold holdings held in some squirrel-eating quarters of the Internet.

By: Mike

Mike — Mon, 01 Feb 2010 21:34:41 +0000

To John:

In case I wasn’t clear in the above article, my complaint isn’t with TIPS or a TIPS-heavy portfolio. My complaint is with the way Bodie does his calculations. (And two of my three disagreements with him have nothing whatsoever to do with TIPS but rather with Social Security and life expectancies.)

I’m in agreement with Bodie that TIPS can be used to create a (relatively) “worry-free” portfolio/investment plan. I just think that he dramatically understates the rate of savings that would be required to implement such a plan. And, therefore, anyone following his strategy to the letter is in for a nasty surprise.

By: Larry

Larry — Mon, 01 Feb 2010 21:11:43 +0000

Problem is, John, that it works both ways too – with the people who think they’re “safe and sound” by putting all their money in FDIC-insured cash or under a mattress. These folks are safe from volatility risk but completely exposed to inflation risk, which is at least as great a drain on their resources (and also, like hypertension, a silent killer, whereas the effects of volatility are obvious). And these people are aided and abetted in this delusion by a pop financial guru like Soozie Orman, who wants her adoring fans to believe they are “safe and sound” by staying out of the market.

By: John D. Buerger, CFP®

John D. Buerger, CFP® — Mon, 01 Feb 2010 20:51:54 +0000

@Larry -

I appreciate your love for well-balanced and diversified portfolios. As a CFP® and RIA, I have been touting these same ideas for years. That does not mean, however, that the average American understands the risks that they are exposed to with even a very safe, widely balanced portfolio. Maybe you understand those risks, but my experience has been that most don’t – There is too much vested interest in the financial services industry to keep the products flowing, the advice coming and the fees rolling in. Meanwhile, most Americans think they can spend willy-nilly, not save out of cash flow and their butts will be saved by market returns that are CPI+6% or higher. From my perspective, that is delusional and ignorant thinking.

Is Bodie’s method the answer? Clearly not. As pointed out here, the real ROR on TIPS is 0% or even negative. Global asset allocations tuned to each investor’s situation IS the still the best way to approach investing … just let’s quit kidding ourselves that the average investor (the ones reading this blog) is aware of all the risks this relatively riskless process offers. They aren’t – and we aren’t doing them any favors by trashing discussion of some alternatives.

By: Larry

Larry — Mon, 01 Feb 2010 20:29:01 +0000

Mr. Buerger: Not to completely support Mr. Bodie’s argument, but what I think you are all missing is that people are exposed to lots of risks with traditional investment techniques – risks they are not even AWARE they are taking.

Quite the contrary, I think it entirely possible that some of are not missing the risk element at all, and that’s precisely why we would continue to invest in stocks – to expose ourselves to as much diversification among asset classes as possible, and thereby spread the risk over the entire portfolio. If TIPS underperform, or if Social Security dries up, etc., a portfolio that includes both stocks and bonds in reasonable proportion to one’s time frame and risk tolerance may reduce risk although it is never possible to eliminate it.

By: Rick Francis

Rick Francis — Mon, 01 Feb 2010 19:50:20 +0000

@John

I agree that investors should understand all the risks- returns may be lower than you predict, inflation may be higher than you predict, and you may live longer than you think, you may not be able to work as long as you plan. I really hope it is clear to investors that there are no performance guarantees with stocks.

I would rather deal with market risk while I am working because if things DON’T go as planned I have more options- save more, work longer, lower retirement expenses.

If I’m ~90 and running out of money there just aren’t that many options. I can’t get behind any plan that requires me to die early! Even if I did die early it would not be good enough- my wife is 6 years younger and women live longer than men. Once I am dead she may need 10 years or more of living expenses.

To make the 2% solution work you need to pass off the longevity risk. I can think of the following strategies:
#1 Maximize your Social Security payment- and let the government take more longevity risk by starting benefits at a later age.
#2 Get an annuity and let the insurance company take the longevity risk. That strategy isn’t perfect either as the insurer could go out of business! So you would also need to diversify across companies.

-Rick Francis

By: JoeTaxpayer

JoeTaxpayer — Mon, 01 Feb 2010 18:22:03 +0000

I wrote about this some time ago (linked to my name above).
Bodie’s advice was excellent. For about an hour. Well, to be fair, from Sept ’98 thru May of ’01. During that period, the fixed rate i.e. growth, was 3% or higher. At retirement, that’s not a bad basket to put many eggs. Unfortunately, Zvi’s book was published in 2003, and the fixed return on TIPs was down to 1.1%, which turns his math on its head.
The current rate is .1% by the way, making this strategy all but useless.

I am not anti – Bodie, to be clear, when he was writing, the ideas he presents are valid, and at the peak 3.6% could provide just what the title suggests. But that ship has sailed. Too bad.

By: John D. Buerger, CFP®

John D. Buerger, CFP® — Mon, 01 Feb 2010 18:19:08 +0000

Not to completely support Mr. Bodie’s argument, but what I think you are all missing is that people are exposed to lots of risks with traditional investment techniques – risks they are not even AWARE they are taking.

By: Rick Francis

Rick Francis — Mon, 01 Feb 2010 15:51:23 +0000

Running out of money at 90 is a very very bad thing and not a risk I would be willing to take. I’ve run the numbers I would have to work until I was almost 80 to retire with inflation + 2% and not worry about running out of money.

If I could get inflation +4% I would consider going 100% TIPs- although it would mean giving up any possibility of early retirement. The long term averages for a stock portfolio is inflation + ~6%. Even if stocks underperform the averages for the rest of my life it seems a good bet that a stock + bond portfolio should return inflation + 4%.

-Rick Francis

By: vilkri

vilkri — Mon, 01 Feb 2010 15:35:58 +0000

This idea seem to be another one of the fool-proof ideas that will allow you to retire in style. I recently heard about one that propagated that you should set up income streams that allow you to live off these income streams forever. Some examples would be rental properties and setting up businesses that throw off regular dividends. Like “Worry-free investing”, these ideas are good but the executions are entirely different games. The reality is such that most people would be very happy if they were well enough organized to retire in style or if they were able to makee enough money so that they can put some away for the golden years.