Juggling Dynamite

My family has followed a largely vegan diet for the past several years. We do eat a bit of organic cheese and milk; the men in the family still like a bit of organic meat once or twice a week. But we all share a commitment to eating a mostly plant based diet–even the teenagers, and we are all grateful for the radiant health benefits that result. Our favourite way to consume veggies and some fruits for breakfast is through juicing and smoothies. In this way, the produce is raw and relatively fast and easy to prepare. I know that in this simple shift to minimize processed foods and animal products, we could end the obesity epidemic that is presently gutting the physical resilience of our populace. Each month I see those that come to this revelation slowly stepping out of fat, sick and decaying bodies into the joy of health and youth once more. It is as if they waken from a self-destructive trance and come back to life. So exciting to witness.

“Six years ago New York Times food writer and columnist Mark Bittman decided to change his eating habits for good. He was 40 pounds overweight and was diagnosed with high blood sugar and high cholesterol. Bittman knew that his risk of heart disease and type 2 diabetes would increase if he continued to eat the way he had been over the last 57 years. So he came up with a new strategy to get fit and be healthy without taking drugs. He emphasized plants, whole grains and fruits instead of meat and processed foods in his diet and watched as the weight melted away.

Bittman has shared his new food mantra with the masses in his latest book “VB6: Eat Vegan Before 6:00.” It’s a simple plan that anyone can follow, he says in an interview with The Daily Ticker.

“What the science is really telling us is that we don’t eat enough plants,” he says. “We eat too much junk food. We eat too much meat. We eat too many animal products in general. The whole strategy is shifting a portion of your diet – not all of it – but a tolerable part of it to plants.”

Here is a direct video link.

The traditional meme of risk sellers financial advisers is to recommend that clients hold a higher component of their savings in stocks and stock mutual funds in order to sustain desired income withdrawals through retirement. In fact this math is not sound: in reality the price that we pay for securities purchased dictates everything about the sustainability of the capital and the long-term income it is able to yield.

A 2013 study by Morningstar reviews typical planning assumptions and concludes that the commonly recommended 4% real withdrawal rate from a balanced portfolio today has less than a 50% probability of success over a 30-year period. [Truthfully there are many who use much higher withdrawal assumptions than 4%–often in the 6-10% annual withdrawal range–but the probability of achieving these higher assumptions in real life is truly de minimis.]

There are a couple of key reasons for these findings. First real returns over time usually under-perform theoretical assumptions and especially in a low rate environment where stocks and bonds at current price levels are yielding about half of the historic average since 1900. Remember “in the long run we are all dead” so the real rates that are available over 5, 10, and 20+ years in our own lifetime, are the only ones that actually matter to mere mortals.

Secondly, plopping savings into passive equity allocations at every price on assumptions that stocks always earn more than fixed income or cash equivalents is a high risk, low probability bet. For example when stocks are as over-valued as dividend paying issues generally are today, the prospective 10-year-rate of return is in the 3% per annum range–with heart-stopping volatility–far from the 8-10% a year most financial types and their clients pencil into pro forma retirement projections.

In reality, working longer where necessary, building up savings, controlling spending and avoiding large capital declines in one’s investment portfolio each market cycle are the most crucial factors to achieving retirement goals in one’s lifetime. And yet, this is precisely the thing that most investment products and managers today fail to acknowledge or address.

The Morningstar study concludes that in a properly risk-controlled asset allocation, if a person wishes to have a 90% probability of sustaining target income withdrawals over a 30-year time horizon, their initial withdrawal rate (indexed for inflation annually thereafter) should not be more than 2.7% today. This is a number I have been talking about for the past couple of years as rates and dividend yields have moved lower on rising stock and bond prices.

Furthermore it is important to understand that even in reaching this much more sober withdrawal level, the Morningstar assumptions require that the equity side of investment accounts average 9.77% a year going forward which they note they have lowered from more traditional expectations of 11.77%! Good luck in a secular bear environment where real returns on stocks have been negative since 2000 and prices are today back near prior cycle peaks! In order to capture reasonable compensation for equity risk in this type of investment environment, one has to have some method for selling or hedging when prices near cyclical highs, avoiding downmarket losses, and having the liquidity set aside to buy when prices are near cyclical lows. It is not easy to do, but it is not impossible so long as one is committed to a discipline that moves against conventional wisdom and the madness of crowds. Here is the revelation of the Morningstar study:

“We note the probability of success for a 4% initial withdrawal rate over a 30-year period for a 40% equity portfolio to be 48.2%,or slightly less than a coin flip. This is a considerably lower probability of success than what is noted in past research, which has tended to be above 80%. This result stems from three key differences in this study versus past studies (especially those that have used purely historical data). First, we use a model that incorporates the actual yields available to retirees today (that converges towards the long run expectation, on average). Second, we reduce the expected arithmetic return on equities by 2.0% (to 9.77%) to reflect a more realistic forecast for U.S. equities. Third, we assume a fee of 1.0% as a proxy for the asset management fees that are likely to be paid by an investor.”

Read the whole study here: Low yields and safe portfolio withdrawal rates The time to sober up is before more capital losses hit.

Markets deflate ‘Abenomics’ hopes: here is a direct link to a video report.