Author Topic: Portfolio allocation - question and responding to non-MMMers  (Read 1120 times)

caracarn

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Portfolio allocation - question and responding to non-MMMers
« on: January 09, 2018, 10:25:21 AM »
So I do not know if this was addressed before.  I'm sure it has, but I could not find it.

As I get closer to retirement should I move to more conservative investments?  I believe everything I have read says no, and I feel that my research over many years even outside MMM led me to a lot of responses that said there is not a real reason (expect for discomfort) to adjust portfolio as you age.  I was at our holiday family gathering and my SIL who works for one of the big insurance and investment houses was going on about how she feels she is too heavily invested in stocks and cited the oft used % minus age indicating you should adjust down by a percent each year.  I explained the I am currently 85/15 and she immediately shook her head as if speaking to an unenlightened child "That's way too much".  I explained how unless I feel the general economic fundamentals of what makes a company successful change to a massive degree, your percent invested should not change beyond what your risk tolerance allows you to sleep at night with.  This of course drove her into "Oh you poor thing, let me educate you" mode about how risky stocks are which of course included the "stocks are overvalued, a crash is coming, now is not the time to invest" wisdom we giggle about so much here.  She did agree with me that market timing is a fool's game yet when I pointed out that calling a top is a form of timing, she once again entered "Oh you poor thing, let me educate you" mode.  This is also the same SIL who feel that whole life is a good investment and thinks my stance of term life is stupid.  We maintain my wife's small whole life policies (I believe it's like $25,000) and those of her kids because the $1,000/year it costs me is just not worth the argument.

So am I correct in saying there is no reason to move from and 85/15 (or even higher if that risk remains good for me) regardless of my age?  Has anyone found a good way to respond to these formula followers and teachers who get lower returns because  of fear and paranoia?

Travis

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Re: Portfolio allocation - question and responding to non-MMMers
« Reply #1 on: January 09, 2018, 10:39:55 AM »
I believe the 4% rule was tested against a 60/40 portfolio in the original study.  More than that there is more risk, but how much more you're willing to take is up to you.  If you get to a point where your 'stache doesn't really need to grow any more and you want to hold what you've got, then more bonds might be a good idea. 

If your SIL is going to be a market timing parrot and talk down to you, it's probably best not to engage her on the subject.
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macoconut

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Re: Portfolio allocation - question and responding to non-MMMers
« Reply #2 on: January 09, 2018, 10:41:51 AM »
Sorry, but I don't have time to answer in detail, but we are using a rising equity glide path (more bonds in early years to reduce sequence of returns risk, then increasing equities each year). Maybe that would work for you.

Here are all the MMM forum posts about it: https://www.google.com/search?q=site%3Aforum.mrmoneymustache.com+rising+equity+glide+path&rlz=1C1GCEA_enUS769US769&oq=site%3Aforum.mrmoneymustache.com+rising+equity+glide+path&aqs=chrome..69i57j69i58.18405j0j7&sourceid=chrome&ie=UTF-8

You can probably find some good talking points in some of the threads Google finds.

PDXTabs

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Re: Portfolio allocation - question and responding to non-MMMers
« Reply #3 on: January 09, 2018, 10:44:40 AM »
J L Collins covers asset allocation in The Simple Path to Wealth. I don't remember what he said about asset allocation in retirement (and I gave it back to the library). I would say that it is worth a read.

EDIT - I found his blog post here and he says that up to 25% bonds is not a bad idea.

EDIT2 - If this was me, I'd respond "J L Collins says that I don't need more than 25% of bonds in my portfolio, and maybe less."
« Last Edit: January 09, 2018, 10:50:44 AM by PDXTabs »

AnswerIs42

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Re: Portfolio allocation - question and responding to non-MMMers
« Reply #4 on: January 09, 2018, 10:58:53 AM »
My thinking is this:

- For long term money (invested over 5 years+) you're best off in equities
- As a Mustachian, most of your money will be invested for more than 5 years, so should be in equities
- The exception is the money you will be spending in the first few years of retirement

So I'd keep the first few years expenses in bonds, and the rest in equities - and then when you retire, start to spend down the bond portion. Which fits in quite well with your 85/15 ratio, and the rising equity glide path mentioned earlier.

L.A.S.

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Re: Portfolio allocation - question and responding to non-MMMers
« Reply #5 on: January 09, 2018, 11:00:23 AM »
You sound like you're doing fine.

Question: Why do you need a response at all?  What you and your wife do with your money is none of your SILs business.  In the future, if she broaches the topic, just let her say whatever she wants unchallenged, no matter how wrong it is.  Let her run out of steam and wait for the crickets to start chirping -- this is your cue to change the subject.  If it happens a few times, she'll get the hint that no one wants to discuss finances with her.

Frankies Girl

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Re: Portfolio allocation - question and responding to non-MMMers
« Reply #6 on: January 09, 2018, 11:06:33 AM »
For what its worth, I'm something like 85/15 right now and have been since I figured out how all this stuff works. I have been FIREd for going on 3 years, and no plans to change it at all. I can weather a 50% drop without changing my lifestyle hardly at all, so I think I'm good. (not that I want to see my portfolio value drop that much, but I get what to do in that scenario and understand it will eventually come back up so no panic selling in the mix).

I am by no means an expert but here's my very uneducated take.

Your SIL sounds like she's harping on the risk instead of understanding that most folks are scared of the actual volatility of the market. So she is unable to separate the two even though they are NOT the same thing.

And she is also unable to figure out that some folks are okay with a bit of a roller coaster ride since those that ride it (have a higher stock percentage - in broad market index funds, mind you) know that in the end it is just a bit of a wild ride ending up in a decent place, as they understand the way the market works.

You said it yourself: she is coming from a place of fear and paranoia; that's where most folks reside when it comes to investing.

The short term drops are scary and investing in higher percentage of stocks seems fraught with risk only if:

you are invested mostly in narrow/sector market stuff or trying to play the angles;
don't get that the market will eventually go back up; 
don't understand that no one needs 100% of their portfolio right this minute so a crash of a year or two is NOT a time to sell it all;
are unable to cut back even a dollar in the event that there was a several year crash/downturn

Honestly, I wouldn't bother talking to her at all about it any more. Anyone that gets smug and decides it is appropriate to talk down to someone about their position is pretty entrenched in the party-line, so any logical arguments are pointless. I think if she insists on bringing up the topic, I'd just tell her you're fine, thanks for asking and change the subject.

Or tell her it is so sad she says things like that, but since she's "invested" in making sure that she has job security and keeping the suckers on the line, of course she has to say that/think that way (said in a very "oh you poor thing, let me educate you" tone). :D


Jim Collins' series has some great food for thought on this type of thing tho (much better than what I wrote):

http://jlcollinsnh.com/2012/04/19/stocks-part-ii-the-market-always-goes-up/
http://jlcollinsnh.com/2012/05/09/stocks-part-v-keeping-it-simple-considerations-and-tools/
« Last Edit: January 09, 2018, 11:09:08 AM by Frankies Girl »
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BTDretire

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Re: Portfolio allocation - question and responding to non-MMMers
« Reply #7 on: January 10, 2018, 08:01:49 AM »
For what its worth, I'm something like 85/15 right now and have been since I figured out how all this stuff works. I have been FIREd for going on 3 years, and no plans to change it at all. I can weather a 50% drop without changing my lifestyle hardly at all, so I think I'm good. (not that I want to see my portfolio value drop that much, but I get what to do in that scenario and understand it will eventually come back up so no panic selling in the mix).


 Frankies Girl has it right, if you can withstand a 50% drop and still have enough income that you don't need to deplete the 50%. The big question is how many years before the market brings you back even.
  The dip in VTSAX after Nov 2000 was 40% and took 6-1/2 years to get back to even.
The dip in VTSAX after Oct, 2007 was 56% and took 5 years to get back to even.
I'm almost shocked to see VTSAX was $30.56 on Nov 2000 and it was the same $30.56 again in Nov 2011. That was 11 years where all you earned was about 1.8% dividend.
 I'm at critical mass with 70% stocks, this makes me wonder.
It is hard for me to buy bonds, knowing they are very likely to go down as interest rates rise.

CorpRaider

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Re: Portfolio allocation - question and responding to non-MMMers
« Reply #8 on: January 10, 2018, 08:13:55 AM »
Seems like that would be about 5 years of spending in bonds, assuming you spent around 4% and considering you would be getting ~2% a year in dividends from the equity portion.  You've also probably got something akin to a fixed income exposure via your social security benefit if you are American.

As a general proposition, of course, it would be preferable to think through the reasons for an allocation before you set it rather than in response to questions from other people.  Probably what you think you could hang with given a relatively routine 50% drawdown, imop.
« Last Edit: January 10, 2018, 08:17:16 AM by CorpRaider »

DrF

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Re: Portfolio allocation - question and responding to non-MMMers
« Reply #9 on: January 10, 2018, 08:58:15 AM »
Sequence of return risk. It's a big deal!! If you are a ~2 years from FIRE, you should adjust your AA to more bonds. Then use an equity glidepath. Link below are MMM forum posts on sequence of return risk.

https://www.google.com/search?q=forum.mrmoneymustache.com%3A+sequence+risk+return&oq=forum.mrmoneymustache.com%3A+sequence+risk+return&aqs=chrome..69i57.8767j0j7&sourceid=chrome&ie=UTF-8

caracarn

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Re: Portfolio allocation - question and responding to non-MMMers
« Reply #10 on: January 10, 2018, 03:08:44 PM »
Thanks for all the replies.  I'm at least 10 years away from retirement at best.  I've been at this same allocation nearly my entire life. 

I think I did a poor job explaining my engaging with SIL.  She is trained by this insurance firm to sell a product and that makes her feel she is an expert on the topics of investing and insurance.  The firm she works for has a big city in its name so you can narrow down the options to those without getting myself into trouble for slamming a specific company.  She selling to 100 minus your age goof, so she's trying to peddle I should be near 50/50 at this point when she says I'm way too heavy into equities.  I have subscribed to some advice I read in a book (cannot recall which one) back in the 90s that indicated something along the lines of "why would an allocation that worked for you before retirement suddenly not work for you after?  The world and the market did not change because you retired so why should your investment strategy?"  The author argued that people get WAY to conservative for fear of "loss" (though several of you pointed out the fallacy there, it's only a loss is you need it all right away versus continuing on for a few years to gain it back) and go to a 40/60 mix or something more drastic along the line of the 100 minus age and then have no growth at all because you are so heavy in bonds.  I'm trying to engage SIL to get her to think a bit on her own rather than parrot the party line.

The insurance line with her is the same.  You want whole life because it is an investment and can never be taken away and that way you are insured when you cannot qualify for term.  She's ignoring the entire aspect of the fact that you self fund your need for life insurance away at some point because your burial expenses and such can be paid out of your investments/assets.  My wife's $25,000 policy is to cover funeral expenses, and every time I have argued the waste it is to have she always counters with "how will you pay for my funeral?" as if that's the only way.  So part of the reason I engage with the SIL is because my wife is still a bit bought in to that mentality too.  She's trusting me, but yet not quite, as she keeps moving back to not being sure if it will all be OK.  Her mom is living in a home on a reverse mortgage now after her retirement and her husband passed and so in those circumstances when you can barely make ends meet you worry about coming up with $15,000 or so for death costs.  We've got nearly $400K in investments at this point and adding to it weekly yet she still thinks at times like she is living her parents life of barely making enough to make the house payment and having $0 invested.  So this is the impetus for me wanting to have an educated response that might sway someone in that freaked out mindset because there is still a little bit of that in my wife even after 5+ years of marriage and living a very different financial reality.