Author Topic: Market Runup Playing Tricks with Allocation  (Read 3241 times)

GoCubsGo

  • Bristles
  • ***
  • Posts: 385
Market Runup Playing Tricks with Allocation
« on: August 27, 2018, 02:51:47 PM »
I've never been a "market timer" type of investor but the last few years of gains have me questioning my stock allocation.  I'm trying to decide whether I'm being rational or irrational. Any thoughts would be appreciated as I'm trying to figure out next steps in regards to re-allocating based on FIRE date.

At the end of 2014, my net worth calculations had me being able to comfortably retire in 15 years using a conservative 7% return.  I do enjoy managing my own accounts and I do own a good portion of low expense index based assets.  However,  I purposely gambled and had a heavy stock allocation for my age (almost 95%).  I also owned a good portion of my individual stocks in tech which has had outsized gains.

Due to the compounding outsized gains, my current calculations have me being able to FIRE in under 5 years.  I know my wife and I won't retire then as we want to get the kids into college first and she's worried about healthcare expenses.  We most likely will work for 8-10 more years.

My dilemma is whether or not I should sell 30% of my stock today to get to a more reasonable 60/40 split (mostly in tax advantaged accounts).  I'm 45 but I feel like I need to look through the lens of a traditional 60 year old based on my current fire calculations.  That said, I'm leery of going so hard into bonds as I have some concerns of how well they will hold up in a downturn.  I've looked into some low volatility funds and some more traditional dividend stocks but I'm not quite sure which direction to go.  I feel like it's a bit reckless to keep such a high stock allocation.  FWIW I also own a couple rental properties that are a nice hedge and held up well during the last recession.

Any thought would be appreciated as I'm having a hard time of what to do with the "paper gains" of the past 9 years.

 

frugledoc

  • Pencil Stache
  • ****
  • Posts: 743
Re: Market Runup Playing Tricks with Allocation
« Reply #1 on: August 27, 2018, 03:11:27 PM »
Go to 60/40 and then stick to it.

Your willingness to take risk has dropped.

Just don’t change back again if stocks drop, that’s when you become a timer

robartsd

  • Magnum Stache
  • ******
  • Posts: 3342
  • Location: Sacramento, CA
Re: Market Runup Playing Tricks with Allocation
« Reply #2 on: August 27, 2018, 03:38:01 PM »
Go to 60/40 and then stick to it.

Your willingness to take risk has dropped.

Just don’t change back again if stocks drop, that’s when you become a timer
Why not write an IPS that adjusts allocation based % of FI number invested? With a market drop, you'd be further from FI so it might make sense to adjust to a more aggressive allocation again.

GoCubsGo

  • Bristles
  • ***
  • Posts: 385
Re: Market Runup Playing Tricks with Allocation
« Reply #3 on: August 27, 2018, 03:47:55 PM »
Yes, I would definitely stick with it whatever I do as I believe in having at least somewhat of a investing mission statement and sticking to it.

I guess I haven't really seen what others on this forums' thought process is regarding stock/bond allocation vs time to FIRE.   Many here plan on retiring early but I haven't read many posts on how they plan to de-risk (and what vehicles other than bonds they use to reach a "safer" allocation).  I haven't delved too deeply into bonds but from what little I've read it sounds like there could be a bit of a bubble as well. 

I've generally been a stock bull  but for some reason it hit me this week that I've gotten pretty lucky the past 5 years.  The thought of selling hundreds of thousands in equities with a few clicks has me spooked and I wondered if others have done a drastic allocation change once they ran the FIRE numbers. 

One

  • Stubble
  • **
  • Posts: 247
Re: Market Runup Playing Tricks with Allocation
« Reply #4 on: August 27, 2018, 03:58:02 PM »
I think you should do exactly what you said. Sell 30% and invest in tbills.  Buy the tbills at auction through vanguard and flip them as they mature until rates are at 4 to 5% then start buying the longer bonds, 5 to ten year. No state tax and no fee through vanguard.

GoCubsGo

  • Bristles
  • ***
  • Posts: 385
Re: Market Runup Playing Tricks with Allocation
« Reply #5 on: August 27, 2018, 04:05:46 PM »
Thanks for the replies all.   I recently starting looking into tbills and muni's (for non tax advantaged).  I need to get more comfortable with different avenues to de-risk as it's never really been my focus and has a whole new learning curve. 

Even the 60% or so I keep in equities will probably need to be allocated a little safer (which is why I've looked into low vol stocks and funds as I've read they held up better in the big downturn of 2008). 

DreamFIRE

  • Handlebar Stache
  • *****
  • Posts: 1593
Re: Market Runup Playing Tricks with Allocation
« Reply #6 on: August 27, 2018, 04:38:33 PM »
and I wondered if others have done a drastic allocation change once they ran the FIRE numbers.

It had nothing to do with running numbers, but I went from 80% to 60% stocks recently, which was a move of over $200K from equities because my timeline to FIRE dropped to less than one year, so I wanted a more conservative AA in the final run to FIRE and in early FIRE.  My retirement plan had outperformed the S&P500 and was at an all time high when I made the move.  My stash alone only needs to carry me the first 15 years of FIRE before other benefits kick in.  cFireSim gives me 100% success with a fat FIRE that is more than double my barebones.

effigy98

  • Pencil Stache
  • ****
  • Posts: 555
Re: Market Runup Playing Tricks with Allocation
« Reply #7 on: August 27, 2018, 05:00:33 PM »
I like how Tyler (https://portfoliocharts.com/portfolios/) added an Ulcer index. 60/40 is better than 100 TSM but it is still up there in ulcers. I believe more in diversification the older I get especially after two major panic selling inducing periods. Protecting your portfolio from yourself is a good strategy. Fidelity said the most successful accounts they have were dead people or those who forgot their passwords.



chasesfish

  • Magnum Stache
  • ******
  • Posts: 4376
  • Age: 41
  • Location: Florida
Re: Market Runup Playing Tricks with Allocation
« Reply #8 on: August 27, 2018, 05:38:54 PM »
I kind of agree with the others, it might be time to go more conservative. 

What you're looking to do is lower your beta, or your returns and their volatility relative to the market.   There's more than just owning a stock index/bond index.   You could consider adding some REITs or moving some of the stock allocation into an ETF like VIG, which has less volatility in exchange for lower but still equity returns.

Dances With Fire

  • Stubble
  • **
  • Posts: 223
Re: Market Runup Playing Tricks with Allocation
« Reply #9 on: August 28, 2018, 05:47:52 AM »
Go to 60/40 and then stick to it.

Your willingness to take risk has dropped.

Just don’t change back again if stocks drop, that’s when you become a timer

+1 Agree! You my friend "have won the game." Congratulations. You went from working another 15 or more years to only 5 or 10 more.

Full disclosure: DW and I are older (Mid 50's) FI but still working (For Health insurance also.) AA is set at 60/40 for the rest of the journey.

Best of Luck to you and the family...

Retire-Canada

  • Walrus Stache
  • *******
  • Posts: 8682
Re: Market Runup Playing Tricks with Allocation
« Reply #10 on: August 29, 2018, 09:21:10 AM »
Any thought would be appreciated as I'm having a hard time of what to do with the "paper gains" of the past 9 years.

I'm going to FIRE within 2 years [most likely] and I am 100% stocks. This is not to suggest you should be the same, but with a 10 year investing horizon you have to ask yourself what does going 40% bonds do for you? What actual situation do you foresee in your life would be different if you made that change?

For myself I am staying 100% stocks because there is no amount of bonds I am realistically going to hold that would mean I would decide to FIRE right into a major market crash. If I was 100% stocks or 80/20 or 70/30 doesn't matter when the market crashes 30%-50% I am not going to feel good about retiring and I'll keep working...perhaps just part-time, but I won't start living off my portfolio anyways. So moving to bonds before I FIRE seems pointless to me - especially with every central bank talking about raising interest rates.

When I am ready to make the irrevocable decision to FIRE [ie. give notice] I'll switch to some bonds/cash to get me through the early sequence of returns risk period, but I am shooting for 15%-20% at the most and I won't add more money to that asset class if I either use them to live off of or if my stocks outrun them.

Again not suggesting this ^^^ is the right plan for you OP, but I do think you need a specific plan that makes it clear why you are holding bonds, how much to hold and the pros/cons. Just moving to bonds as a reflexive "safety" move does not seem smart. Using cFIREsim you'll see a high bond allocation lowers your success rates for long retirements.

GoCubsGo

  • Bristles
  • ***
  • Posts: 385
Re: Market Runup Playing Tricks with Allocation
« Reply #11 on: August 29, 2018, 11:05:16 AM »

@retire Canada
I am in the process of re-running cFireism (haven't done it in couple years).  When I get to a spot where where Monte Carlo simulations say I have a high likelihood of success at a reduced equities exposure it would seem prudent to derisk no matter what your timeline is.  The whole point of having non-correlated assets is to avoid the 30%-50% market loss right?

Your point is well taken that I need to have a reason to go to bonds (which I kind of don't).  These gains kind of snuck up on me and hence the hesitation and need to research different paths to derisk or maybe set a point where I take some money off the table (15% correction etc).

Retire-Canada

  • Walrus Stache
  • *******
  • Posts: 8682
Re: Market Runup Playing Tricks with Allocation
« Reply #12 on: August 29, 2018, 11:39:33 AM »

@retire Canada
I am in the process of re-running cFireism (haven't done it in couple years).  When I get to a spot where where Monte Carlo simulations say I have a high likelihood of success at a reduced equities exposure it would seem prudent to derisk no matter what your timeline is.  The whole point of having non-correlated assets is to avoid the 30%-50% market loss right?

My answer to the bolded portion is "No". 

Before I FIRE I am not trying to avoid a market paper loss. I don't need the money to live off of. So a paper loss has no impact on my life. I am trying grow my portfolio though hence the high stock allocation.

When you talk about "derisk" or "safety" you need to draw a straight line between holding bonds/cash in a specific quantity and how it impacts your plans. If you can't say specifically how holding X% of bonds will allow me to do Y in the case of Z then you don't have a good reason for making the move. Holding bonds in and of itself is not "safer" or "less risky" in fact depending on what aspect of FIRE you are looking at [ie. inflation] holding a high % of bonds can increase your risk and lower your safety.

Your analysis may be different and I am not suggesting you should do what I am doing, but you should have a clear idea why you are moving to bonds, why that specific % and what specifically it does for you.

jc4

  • Stubble
  • **
  • Posts: 173
Re: Market Runup Playing Tricks with Allocation
« Reply #13 on: August 29, 2018, 02:03:53 PM »
I see BONDS as a cussion to ride through a market downturn, so that you don't have to sell equities low.

If the market crashes can you make it until it recovers without selling Equities? Since you're going to work another 10 years, your salary will cover that period. The advantage of Bonds isn't there.

Now, you might should rebalance your Equities out of Tech if you want a bit less risk, but I'd have to know the future to say for sure.

chasesfish

  • Magnum Stache
  • ******
  • Posts: 4376
  • Age: 41
  • Location: Florida
Re: Market Runup Playing Tricks with Allocation
« Reply #14 on: August 30, 2018, 07:55:24 PM »
Its interesting reading all this.  I've had two interesting situations suggested for me, since I would be a VERY early retiree needing to ride out a 50+ year (hopefully) retirement.  This creates large sequence of return risks in the beginning that I need to overcome.

Start with a bond allocation that I slowly do away...

Buy some rather large S&P put options that starting kicking in at a 10-15% downturn as insurance for the portfolio.

Convert a portion of my holdings into 2-3 doors of lower-risk residential rental property that may only pay a 6-7% net return, but is in a market where its almost always leased (think college town with development restrictions).

Lots of options, more than just bonds

GoCubsGo

  • Bristles
  • ***
  • Posts: 385
Re: Market Runup Playing Tricks with Allocation
« Reply #15 on: August 31, 2018, 08:39:53 AM »
@Chasefish

I've owned single family rental homes for 15 years and if you can find properties where the numbers work (and are willing to be a landlord) I would recommend it.  I'm currently looking for another rental to purchase but the numbers just don't work. 

My rentals held up phenomenally well during the great recession (had more tenants to choose from and was able to raise rents).  I self manage which made the returns better.  If you can find properties that work and can afford a property manager, I think that would be a solid hedge for a long term retirement.

The S&P options is another thing I will add to my research list....

PizzaSteve

  • Pencil Stache
  • ****
  • Posts: 501
Re: Market Runup Playing Tricks with Allocation
« Reply #16 on: August 31, 2018, 08:52:12 AM »
I think 60/40 might be too conservative, since you are still 5 years away (under ideal circumstances) and are also continuing to work and save.  Remember you have many years of retirement to finance and I think you are letting fears that market is over valued push you into a more conservative profile vs me hearing from you that your plan needs less risk.

Why not 80/20 for the next 5 years, then start ramping down at retirement.  Just a thought.  Real estate as a hedge is good too, since it can have better returns.  Several of the top investors I trust have been pretty neg on bonds for the next decade (that said we are retired in early 50s and about 30% ourselves).

FIRE47

  • Bristles
  • ***
  • Posts: 350
Re: Market Runup Playing Tricks with Allocation
« Reply #17 on: August 31, 2018, 08:53:30 AM »

@retire Canada
I am in the process of re-running cFireism (haven't done it in couple years).  When I get to a spot where where Monte Carlo simulations say I have a high likelihood of success at a reduced equities exposure it would seem prudent to derisk no matter what your timeline is.  The whole point of having non-correlated assets is to avoid the 30%-50% market loss right?

My answer to the bolded portion is "No". 

Before I FIRE I am not trying to avoid a market paper loss. I don't need the money to live off of. So a paper loss has no impact on my life. I am trying grow my portfolio though hence the high stock allocation.

When you talk about "derisk" or "safety" you need to draw a straight line between holding bonds/cash in a specific quantity and how it impacts your plans. If you can't say specifically how holding X% of bonds will allow me to do Y in the case of Z then you don't have a good reason for making the move. Holding bonds in and of itself is not "safer" or "less risky" in fact depending on what aspect of FIRE you are looking at [ie. inflation] holding a high % of bonds can increase your risk and lower your safety.

Your analysis may be different and I am not suggesting you should do what I am doing, but you should have a clear idea why you are moving to bonds, why that specific % and what specifically it does for you.

I see you talking about this in every thread where this comes up ignoring the standard investment industry definition of risk for personal investors in relation to the ability to deal with short-term volatility. For some there is a benefit to reducing that risk even if it is just a paper loss as you call it.

« Last Edit: August 31, 2018, 08:55:06 AM by FIRE47 »

PizzaSteve

  • Pencil Stache
  • ****
  • Posts: 501
Re: Market Runup Playing Tricks with Allocation
« Reply #18 on: August 31, 2018, 08:58:17 AM »

@retire Canada
I am in the process of re-running cFireism (haven't done it in couple years).  When I get to a spot where where Monte Carlo simulations say I have a high likelihood of success at a reduced equities exposure it would seem prudent to derisk no matter what your timeline is.  The whole point of having non-correlated assets is to avoid the 30%-50% market loss right?

My answer to the bolded portion is "No". 

Before I FIRE I am not trying to avoid a market paper loss. I don't need the money to live off of. So a paper loss has no impact on my life. I am trying grow my portfolio though hence the high stock allocation.

When you talk about "derisk" or "safety" you need to draw a straight line between holding bonds/cash in a specific quantity and how it impacts your plans. If you can't say specifically how holding X% of bonds will allow me to do Y in the case of Z then you don't have a good reason for making the move. Holding bonds in and of itself is not "safer" or "less risky" in fact depending on what aspect of FIRE you are looking at [ie. inflation] holding a high % of bonds can increase your risk and lower your safety.

Your analysis may be different and I am not suggesting you should do what I am doing, but you should have a clear idea why you are moving to bonds, why that specific % and what specifically it does for you.

I see you talking about this in every thread where this comes up ignoring the standard investment industry definition of risk for personal investors in relation to the ability to deal with short-term volatility. For some there is a benefit to reducing that risk even if it is just a paper loss as you call it.
I would add that a paper loss becomes a real loss when you need the money, and that the assumption markets always recover is just that, an assumption.  There is no guarantee future markets will behave as the past markets have.  We also have historic examples of market failures that did not recover in time for a good retirement recovery bump.

That said, I am still bullish on equities, and each person must make their own plan that they are comfortable with.  I also feel a bit cautious about advising folks that recoveries from corrections are certain, hence leverage is always good, etc.  Flat markets after a market drop are certainly possible if the economy stays flat.
« Last Edit: August 31, 2018, 09:00:40 AM by PizzaSteve »

Retire-Canada

  • Walrus Stache
  • *******
  • Posts: 8682
Re: Market Runup Playing Tricks with Allocation
« Reply #19 on: August 31, 2018, 09:02:19 AM »
I see you talking about this in every thread where this comes up ignoring the standard investment industry definition of risk for personal investors in relation to the ability to deal with short-term volatility. For some there is a benefit to reducing that risk even if it is just a paper loss as you call it.

If that ^^^ matters to you and that ^^^ is the reason for your decision because for example you feel you are likely to sell everything in a panic if you don't hold X% of bonds or cash or whatever I have no argument with that. You've made an analysis of your personal situation and decided to buy X% of bonds/cash because of Y which leads to Z.

I think the standard investment industry advice of buying bonds for safety doesn't make a lot of sense for a lot of people. Hence the fact I mention it. I don't care whether anyone specifically does or does not buy bonds. I do care that people don't do so reflexively because of some poorly understood notion of "safety".

A high bond allocation can be more risky and less safe for your FIRE plans. That's a pretty important idea and I don't think it gets considered enough.

The crux of my concern with what you are saying is that a small % of bonds doesn't mitigate the impact of a crash much so your account value gets crushed and if you are doing to panic you'll panic anyways. OTOH a high enough % of bonds to really make you feel okay during a crash and keep the account value from plummeting is going to put the long term success of your FIRE plans at risk.

So I just want people to really think about the topic and make sure they'll considered these issues. After that I don't care what people do.

Retire-Canada

  • Walrus Stache
  • *******
  • Posts: 8682
Re: Market Runup Playing Tricks with Allocation
« Reply #20 on: August 31, 2018, 09:06:15 AM »
I would add that a paper loss becomes a real loss when you need the money, and that the assumption markets always recover is just that, an assumption.  There is no guarantee future markets will behave as the past markets have.  We also have historic examples of market failures that did not recover in time for a good retirement recovery bump.

You'll note my comments in this thread have stated I am talking about pre-FIRE when I don't need the money. And I specifically addressed the issue of the impact of a crash just before I wanted to FIRE.

Personally I plan to hold some bonds/cash once I have FIRE'd for the reason you state above. At that point I absolutely need to cash in investments to live off the proceeds.

The key is that at each stage I've considered the specific role/impact holding bonds/cash has for my plans and decided accordingly. I have not just moved to bonds/cash because I am close to FIRE and they are "safer" based on some vague conventional wisdom in the investment advice industry.
« Last Edit: August 31, 2018, 09:12:22 AM by Retire-Canada »

PDXTabs

  • Walrus Stache
  • *******
  • Posts: 5160
  • Age: 40
  • Location: Vancouver, WA, USA
Re: Market Runup Playing Tricks with Allocation
« Reply #21 on: August 31, 2018, 04:00:02 PM »
When I am ready to make the irrevocable decision to FIRE [ie. give notice] I'll switch to some bonds/cash to get me through the early sequence of returns risk period, but I am shooting for 15%-20% at the most and I won't add more money to that asset class if I either use them to live off of or if my stocks outrun them.

I'm right there with you. I'm 100% equities, but I might go to 90/10 before FIRE, because that is unlikely to hurt my returns. I'm definitely in the JL Collins camp of 10~25% bonds even during retirement, but that might be a luxury for people that can go back to work if they need to.

Mr. Boh

  • Stubble
  • **
  • Posts: 149
  • Location: The Land of Pleasant Living
Re: Market Runup Playing Tricks with Allocation
« Reply #22 on: September 03, 2018, 09:02:13 AM »
OP I think that you need to include your rental properties in your calculations. If you did this then what would your AA be? Possibly 75% stocks 5% bonds 20% rentals? What you are looking for is non correlated assets and you have said yourself that your rentals preformed well when equities did not. If you take this approach you need to realize that the rentals are not liquid and plan accordingly on the fixed income side.

This is the approach that I take and it has worked great for me. The only caveat is that you have to be willing to work as a landlord.