Being Disciplined to Prepare for the Worst

Comments on “Design Your Portfolio With the Worst 2% of Times in Mind,” an interview with William Bernstein, in the August 2023 AAII Journal:

The equities data during the Weimar Republic’s hyperinflation is very interesting and somewhat reassuring. In the short term, the Federal Reserve can manage inflation but our national debt load when factoring in Medicare is north of $100 trillion and no amount of budget reductions or tax increases will be able to keep up.
—Craig B. from Wisconsin

Feelings and judging probabilistic decisions solely on the results are the reasons many people will never be successful investors. Instead of catering to illogical behavioral problems that are widespread in the population, it would be better to teach and train logical investment thinking. One should always choose the higher probability event and lump sum invest. I recommend “Thinking in Bets” by Annie Duke, which explains the logical way to view decisions under uncertainty.
—John L. from New Jersey

Editor’s Note: See Annie Duke’s interview with Charles Rotblut from the June 2018 issue, “Making Better and More Rational Decisions.”

I never keep more than three months of expenses in cash. I do that because I want close to 100% of my assets invested in equities and working for me 24/7/365. In any given year, month, week or even on any given day, the probability of a gain in stocks significantly outweighs the probability of a loss (with the magnitude of gain/loss factored in).

The discussion of burn rate is of critical importance, especially for young people who should start investing for retirement as early as possible to take advantage of compounding. The bigger your retirement nest egg, the lower your burn rate will be at a given level of expenses. The lower your burn rate, the greater your financial freedom and flexibility will be. When you get old, your options to lower your burn rate are far more limited than they are when you’re young. I consider 4% minus the actual burn rate to be a margin of safety in retirement, and I want to maintain a big margin.
—Robert A. from North Carolina

An outstanding article with excellent questions and very knowledgeable, fact-based answers. I will urge my adult children to read it. Yes, they are AAII members.
—James F. from Wisconsin

The first step to entertaining a better life is discipline; if that is your mantra, you can start investing as a continuation of that self-aware discipline trait. No earned dollar is ever achieved without an expense. In terms of investing, losing money is the expense of making money on investments.
—Don P. from U.S.

Long-duration Treasurys usually have great years when stocks have terrible years. They therefore provide better diversification to a portfolio with a large allocation to stocks. I would keep some long-term Treasurys for diversification and also have some short-term Treasurys in retirement for capital preservation.
—Thomas D. from Virginia

I lean toward James Cloonan’s “Investing at Level3.” It looks like the Level3 strategy and Bernstein’s “Four Pillars of Investing” may complement each other.

The interview mentions that one who retires at age 75 doesn’t need much in safe assets since their life expectancy isn’t long. Granted, life expectancy is 10–12 years and that “isn’t that long.” However, since the greater topic is planning for the worst 2% of times, it seems that the odds for 75-year-old healthy people to live another 20 years are far above a 2% chance. So, I’ll go with the theory that healthy 75-year-olds need to plan for another 20 to 25 years.
—David L. from Arkansas

When to Make QCDs

Comments on “Required Minimum Distributions Explained,” by Charles Rotblut, CFA, in the August 2023 AAII Journal:

I turn 73 in 2024 and will be required to satisfy my required minimum distribution (RMD) by April 1, 2025. I plan to use qualified charitable distributions (QCDs) to avoid adding my RMD to my taxable income. How early in 2024 can I begin distributing QCDs against my RMD?
—Andrew R. from Wisconsin

Charles Rotblut responds:
You can effectively start making QCDs on the first business day of the 2024 tax year. It’s preferable to do the QCDs before taking your RMDs for a given calendar year. Keep in mind that you don’t have to wait until you are 73 to start QCDs. They can start once you turn 70½. So, if you do some this year, you’ll lower your RMD amount for next year.