“Bank” Some Of Your Gains

Recently I read Jonathan Clements’ piece Enough Already. The basic idea was to encourage older investors who have made gains in the risk assets, typically stocks, though it would apply to high yield bonds and other non-guaranteed investments that are highly correlated with stocks. His pithy way of phrasing it is:

If I have already won the game, why would I keep playing?

His inspiration for the piece stems from a another piece by William Bernstein [at the WSJ] How to Tell if Your Retirement Nest Egg Is Big Enough. He asked a question like this (these are my words) back in early 2015, “Why keep taking risk if your performance has been good enough to let you reduce risk and live on the assets, rather than run the possibility of a fall in the market spoiling your ability to retire comfortably?”

?Photo Credit: Scoobyfoo

Decent question. If you are young enough, your time horizon is long enough that you can ignore it. But if you are older, you might want to consider it.

Here’s the problem, though. What do you reinvest in? My article How to Invest Carefully for Mom took up some of the problem — if I were reducing exposure to stocks, I would invest in high quality short and long bonds, probably weighted 50/50 to 70/30 in that range. Examples of tickers that I might consider be MINT and TLT. Trouble is, you only get a yield of 2% on the mix. The short bonds help if there is inflation, the long bonds help if there is deflation. Both remove the risk of the stock market.

I’m also happier in running with my mix of international stocks and quality US value investments versus holding the S&P 500, because foreign and value have underperformed for so long, almost feels like 1999, minus the crazed atmosphere.

Now, Clements at the end of the exercise doesn’t want to make any big changes.He still wants to play on at the ripe old age of 54. He is concerned that his nest egg isn’t big enough. Also, he thinks stocks will return 5-6%/year over the long haul (undefined), versus my model that says 2-6%/year over the next ten years.