Author Topic: 10 year plan to FIRE - What is the most effective AA?  (Read 881 times)

Jamese20

  • Stubble
  • **
  • Posts: 144
10 year plan to FIRE - What is the most effective AA?
« on: November 06, 2018, 03:17:32 AM »
hi guys,

I had it clear in my IPS that I would aways be 100% in stocks whilst working and then move to maybe a 20% bond allocation once retired to take some of the sting out of any market declines whilst retired - also, not sure if 100% stocks returns much better results than 80%? perhaps over 40 years but i guess by that point do you really care?

however, it kind of dawned on me whilst thinking on this, that if my timeframe is 10 years to FIRE, there have been very mixed results in markets etc... which is fine but I guess if you had a sharp decline whilst in the middle of resigning your position and working your notice - this would be less than ideal if 100% in stocks at that point?

if i didnt want anything to derail my 10 year timeframe too much that would force me to work another year or 2? has anyone worked out the most effective AA? or is it just one of those catch 22 scenarios where if a market goes against you right at the beginning, then you have to re-think? just think it would be kind of a right depressing bummer if your so close to getting to your goal then it gets pulled further away from you.

just wanted to pick some bright minds on this

Andy R

  • 5 O'Clock Shadow
  • *
  • Posts: 62
Re: 10 year plan to FIRE - What is the most effective AA?
« Reply #1 on: November 06, 2018, 03:56:28 AM »
Bond tend for me, which is gliding your equities down each year for those 10 years until D-day, and then gliding it back up over the next 10 years.

As to the "most effective" allocation, a definitive answer can only be made in hindsight, but I think going down to around 50-60% equities seems reasonable.

The original article about a bond tent is much more extreme though going down to around 30%


TomTX

  • Magnum Stache
  • ******
  • Posts: 3069
  • Location: Texas
Re: 10 year plan to FIRE - What is the most effective AA?
« Reply #2 on: November 06, 2018, 05:12:20 AM »
Bond yields today are generally quite close to inflation. Less than 1% over inflation, unless you go to longer terms which have more inflation risk.  On a long-term average, stocks yield ~7% above inflation, but the year-to-year (and decade to decade!) yields vary widely.

Jamese20

  • Stubble
  • **
  • Posts: 144
Re: 10 year plan to FIRE - What is the most effective AA?
« Reply #3 on: November 06, 2018, 05:25:53 AM »
Bond yields today are generally quite close to inflation. Less than 1% over inflation, unless you go to longer terms which have more inflation risk.  On a long-term average, stocks yield ~7% above inflation, but the year-to-year (and decade to decade!) yields vary widely.

thanks - i understand that, however doesnt help me too much with my 10 year strategy and AA :)

Jamese20

  • Stubble
  • **
  • Posts: 144
Re: 10 year plan to FIRE - What is the most effective AA?
« Reply #4 on: November 06, 2018, 05:26:42 AM »
Bond tend for me, which is gliding your equities down each year for those 10 years until D-day, and then gliding it back up over the next 10 years.

As to the "most effective" allocation, a definitive answer can only be made in hindsight, but I think going down to around 50-60% equities seems reasonable.

The original article about a bond tent is much more extreme though going down to around 30%



interesting thanks for the insight - seems like a solution to the tricky issue

jacoavluha

  • Stubble
  • **
  • Posts: 173
Re: 10 year plan to FIRE - What is the most effective AA?
« Reply #5 on: November 06, 2018, 08:21:19 AM »
has anyone worked out the most effective AA?

define "effective"

MustacheAndaHalf

  • Handlebar Stache
  • *****
  • Posts: 1307
Re: 10 year plan to FIRE - What is the most effective AA?
« Reply #6 on: November 06, 2018, 09:47:30 AM »
Just to add to the "bond tent" idea, I think it's a new and not yet widely accepted idea... but I suspect it will win over a lot of people.  The critical period is right around retirement, which target date funds handle by aiming for a (typically) 40% allocation at retirement and keeping it.  The "bond tent" adds bonds a bit later, and after retirement starts to switch back to stocks.  The idea is once the critical early years of retirement are over, there's less risk in having a higher stock allocation.

So far I haven't seen any investment books mentioning the "bond tent" approach, so I'd suggest you research it online.

effigy98

  • Bristles
  • ***
  • Posts: 275
Re: 10 year plan to FIRE - What is the most effective AA?
« Reply #7 on: November 06, 2018, 12:25:32 PM »
BigErn describes it in detail if you want to geek out.
https://earlyretirementnow.com/tag/sequence-of-return-risk/

To summarize my understanding, sounds like you do stock heavy (say 100%) like VTI at year 1 to 10 (or until you hit your number), right before retirement, shift to 60 stock / 40 bonds, then ramp up stock to close to 100% again in 10 years.
« Last Edit: November 06, 2018, 12:33:17 PM by effigy98 »

Eric

  • Magnum Stache
  • ******
  • Posts: 3934
  • Location: On my bike
Re: 10 year plan to FIRE - What is the most effective AA?
« Reply #8 on: November 06, 2018, 01:52:09 PM »
hi guys,

I had it clear in my IPS that I would aways be 100% in stocks whilst working and then move to maybe a 20% bond allocation once retired to take some of the sting out of any market declines whilst retired - also, not sure if 100% stocks returns much better results than 80%? perhaps over 40 years but i guess by that point do you really care?

however, it kind of dawned on me whilst thinking on this, that if my timeframe is 10 years to FIRE, there have been very mixed results in markets etc... which is fine but I guess if you had a sharp decline whilst in the middle of resigning your position and working your notice - this would be less than ideal if 100% in stocks at that point?

if i didnt want anything to derail my 10 year timeframe too much that would force me to work another year or 2? has anyone worked out the most effective AA? or is it just one of those catch 22 scenarios where if a market goes against you right at the beginning, then you have to re-think? just think it would be kind of a right depressing bummer if your so close to getting to your goal then it gets pulled further away from you.

just wanted to pick some bright minds on this

I think you're asking the right questions.  Unfortunately, no one has the answers.  It's impossible to know what/if/how long your 10 year plan could change based on your asset allocation and market performance.  Adding more bonds would definitely give you more certainty, but given that the timeframe is still ~10 years, that's a long way away and it's hard to predict with much accuracy. 

If I were you, I would switch to 80/20 right now.  That will give you most of the returns of 100/0 while also allowing you some hedge against the next stock market decline.  Then as you get closer, say 2 or 3 years out, consider increasing the bonds more.

Personally, I was around 90/10 for most of my investing timeline, switched to 70/30 this year in preparation for retirement next year.  This worked out well (read as luck) for me because 2017 was a big market year.   It could also have worked out poorly if the market moved in the opposite direction and I lost a lot more than I would've with a 70/30 AA.  As such, there's still a lot of luck involved and there's no "correct" answer.

effigy98

  • Bristles
  • ***
  • Posts: 275
Re: 10 year plan to FIRE - What is the most effective AA?
« Reply #9 on: November 06, 2018, 04:57:57 PM »
I personally do something like the golden butterfly AA (tax sheltered) and Larry (taxable) portfolios (with a little more equity allocations in VDC) and plan on doing those for both accumulation and draw downs because I am risk adverse and they have not let me down yet as they barely move to the downside when there are corrections but they steadily march upwards.

https://portfoliocharts.com/portfolios/

Andy R

  • 5 O'Clock Shadow
  • *
  • Posts: 62
Re: 10 year plan to FIRE - What is the most effective AA?
« Reply #10 on: November 06, 2018, 05:49:10 PM »
BigErn describes it in detail if you want to geek out.
https://earlyretirementnow.com/tag/sequence-of-return-risk/

To summarize my understanding, sounds like you do stock heavy (say 100%) like VTI at year 1 to 10 (or until you hit your number), right before retirement, shift to 60 stock / 40 bonds, then ramp up stock to close to 100% again in 10 years.

For someone with a flexible/unknown retirement date that makes sense and this is my plan. But for someone with a specific point in time to retire, it's risky. If the market crashed a year before retirement and didn't come back relatively soon, they would be totally fkd.

effigy98

  • Bristles
  • ***
  • Posts: 275
Re: 10 year plan to FIRE - What is the most effective AA?
« Reply #11 on: November 07, 2018, 01:15:13 PM »
BigErn describes it in detail if you want to geek out.
https://earlyretirementnow.com/tag/sequence-of-return-risk/

To summarize my understanding, sounds like you do stock heavy (say 100%) like VTI at year 1 to 10 (or until you hit your number), right before retirement, shift to 60 stock / 40 bonds, then ramp up stock to close to 100% again in 10 years.

For someone with a flexible/unknown retirement date that makes sense and this is my plan. But for someone with a specific point in time to retire, it's risky. If the market crashed a year before retirement and didn't come back relatively soon, they would be totally fkd.

I agree and is why I do not do this because I want out of the corporate grind sooner then later and the thought of having to work longer sucks. There are a lot of people who want to yolo it at 100% stocks on the board and with advice like bigerns it looks like a reasonable strategy.