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Shifting your investment focus to Capital Preservation

#1
For the last 30 years I have been focused for the most part on accumulating wealth and growing my portfolio.  My recent conversation with my Fidelity rep sort of shook the cobwebs from by brain. She said I have want I need to reach my goals and my portfolio with little risk will get me where I want to go. A 3% return will give me way more money than I need to travel, live off of and donate. I guess in essence I have won the game as they say. She said I shouldn't let markets take back all this hard earned wealth and that capital preservation should be something I need to consider first with growth second.

So all you financial vets out there. What are your time honored tips for capital preservation? I am not going cash, so leave that one out.  My allocation currently stands at 56/43/1   RPM of 134
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#2
Congrats Rhythmkats,

You has one answer embedded in the question itself ("tips for capital preservation") - TIPS are considered for capital/purchase-power preservation, against inflation. If 3% is your "required return" in real terms, then the actual required return is 6.5% (assuming average long-term inflation  stays below 3.5%). Also, I assume that your meant 3% return, not 3% annual withdrawal.
 
I think a well diversified and balanced portfolio (US and International) across multiple asset classes serves many purpose well including capital preservation.
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#3
I was thinking about your situation more and trying to figure out what I'd do if I were in the same position as your (i.e., existing nest egg is large enough to support retirement comfortably and effortlessly). In addition to avoiding chasing growth for excess return over total market return, and avoiding unsystematic risk (i.e., no concentration on specific companies), I'd think about the possible "risk" scenarios and make sure I have a mitigation in place. Collectively such mitigation would drive the overall asset allocation. Some example of "risk scenarios":
 
1. Scenario: Equity market downturn that takes up to 10 years to recover. Risk: Having to make portfolio withdrawals during this prolonged period of depressed portfolio value. Mitigation: Have a rolling 10-year ladder of high quality Bonds, where the aggregate redemption amount for all Bonds maturing in a year covers the annual expense. This allows for either consuming from the Bond proceeds (in case of downturn), or roll the ladder if the rest of portfolio grows well and portfolio withdrawal is fine. Any excess return from the portfolio in subsequent up years can then be used to repair the Bond ladder and restore the 10-year rolling ladder. This is an indirect form of increasing Fixed Income allocation.
 
2. Scenario: Black swan events causing unprecedented damage to portfolio (e.g. hyperinflation, economy crash, etc.). Risk: Conventional Fixed Income or Equity investment will have permanent damage. Mitigation: Have 5-10% portfolio in hard assets (e.g., precious metal bullions). Such assets should experience unprecedented appreciation too. This is an indirect form of wide diversification.
 
In other words, instead of (or in addition to) starting with a asset allocation geared towards Capital Preservation, work through these low-probability scenarios that may derail the currently projected, high-probability, smooth ride.
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#4
Long time rules were
1) stocks with growth potential that pay good dividends
2) growth stocks only when very sure the product is good (early MSFT and HD were two of ours)
3) some TIPS (bought about 2000) - not so sure about now
4) some CDs/Treasuries/Bonds (in tax advantaged accounts)
Current rule added
1) Keep Medicare B and D taxes and Obamacare 3.8% tax down and stay out of the higher tax brackets.
Most important
Do NOT let current rule that has been added cause less total gain or cause less desirable lifestyle
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#5
Some tips for preservation:
 
1. Have a balanced portfolio, around 40%-60% equities.  Do not try to beat the market. You do not need to.
 
2. Diversification, so that when one asset does poorly, others do OK.
 
3. Have a target asset allocation and re-balance to that allocation when components over- or under-perform.
 
4. Do not take more risk than you need to.
 
See also:

https://www.cbsnews.com/news/asset-alloc...-you-take/

https://www.cbsnews.com/news/asset-alloc...tolerance/
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#6
Hard to give confident advice, but in my situation, allocation 65/30/5, I like solid dividend payers with reinvested dividends, exceptions being BRKB and V (small dividends, reinvested anyway). Diversified bonds in funds - Fidelity Total Bonds, FNMIX, PONDX, SPHIX plus US bonds (E & I) purchased over the years, some paying 4% still. Equity funds; FDGRX, FBALX. Equities; RTN, SLB, CSCO, F, GLW, PG. International; OAKIX.

I figure, with a 25 year horizon, this is not too aggressive, as it should capture several cycles. Retired 13 years, living on about 2 percent of portfolio plus SS. Because of dividends, actual IRA draw-down is around 1.5 percent.
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#7
I shifted away from PONDX, now PONAX to PTIAX which is outperforming the PIMCO funds.
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#8
I've been thinking about the same thing ... In my case I'm about 50/50 equity, fixed income/cash.  I have captured some gain with a fortuitious lakehouse purchase in 2013 and a condo purchase in 2014 for my son back from Afghanistan.  I'm able to cover my living expenses with my social security and annuity stream, taking very little from my portfolio and actually could support myself nicely on my interest and dividend income stream, but now reinvest. Last year I lowered my expenses significantly with a downsize.  This year, mindful of the risk of holding individual equities, I'm converting some of my stock gains into an active beta eft and a value etf to lower the risk of holding individual stocks.  I still hold some very strong dividend payers but not as many.  I like to keep in mind that 2008/2009 could come again (with a different cause).  This is how I'm lowering some of the risk of my portfolio. 
 
I am also looking at what might be considered a bit controversial, and am not sure I will do it, but looking at converting some of my portfolio (about 10%) to a QLAC to really be considered as "long term care insurance".  I'm thinking about these monthly payments which will begin when I'm 85 (yes, I'm wondering if I will get there!) that will pretty much cover the cost of beginning assisted living, or the costs associated with paying help if needed to continue living independently.   I'm looking around at the 85 year olds that I know and giving serious thought to whether it would make sense to do this, or to just self-fund from my portfolio ... anyone who reads this, I'd appreciate your thoughts.  I do have a long term care insurance policy, but I like the flexibility of the qlac payments vs the restrictions on the ltc policy, and am sure that more will be better at that stage. 
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#9
(12-04-2018, 04:46 AM)Fishindude Wrote: I've been thinking about the same thing ... In my case I'm about 50/50 equity, fixed income/cash.  I have captured some gain with a fortuitious lakehouse purchase in 2013 and a condo purchase in 2014 for my son back from Afghanistan.  I'm able to cover my living expenses with my social security and annuity stream, taking very little from my portfolio and actually could support myself nicely on my interest and dividend income stream, but now reinvest. Last year I lowered my expenses significantly with a downsize.  This year, mindful of the risk of holding individual equities, I'm converting some of my stock gains into an active beta eft and a value etf to lower the risk of holding individual stocks.  I still hold some very strong dividend payers but not as many.  I like to keep in mind that 2008/2009 could come again (with a different cause).  This is how I'm lowering some of the risk of my portfolio. 
 
I am also looking at what might be considered a bit controversial, and am not sure I will do it, but looking at converting some of my portfolio (about 10%) to a QLAC to really be considered as "long term care insurance".  I'm thinking about these monthly payments which will begin when I'm 85 (yes, I'm wondering if I will get there!) that will pretty much cover the cost of beginning assisted living, or the costs associated with paying help if needed to continue living independently.   I'm looking around at the 85 year olds that I know and giving serious thought to whether it would make sense to do this, or to just self-fund from my portfolio ... anyone who reads this, I'd appreciate your thoughts.  I do have a long term care insurance policy, but I like the flexibility of the qlac payments vs the restrictions on the ltc policy, and am sure that more will be better at that stage. 

Really think about the "assisted living" situation.  We moved 94 year old MIL to assisted living from home when FIL passed. 1+ years later she fell broke hip and wrist.  Went to convalescent hospital 2 months.  Couldn't return to assisted living facility due to more health issues than that facility would handle.  Moved her to "group" home (6-10 elderly, frail, sickly folks ) very hands on care wise, better medical care although if anything serious we step in for hospital visits & doctor appointments.  Cost tripled from Assisted living.

Just a heads Up!
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#10
You are so right about those costs potentially escalating.
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