Author Topic: Revisiting asset allocation with a twist  (Read 1114 times)

MMMdude

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Revisiting asset allocation with a twist
« on: February 11, 2018, 06:41:55 PM »
I'll admit the 10% correction was abit of an eye opener for me in terms of real $ loss.  The best way proper A/A has been described is to determine your maximum tolerable loss and then work backwards from there.

So for me I have 1.2M in invested assets (well more like 1.13 after the correction). I have a 70/30 allocation.  So on a 50% equity pullback, I would suffer a real $ loss of $420,000.  Although that would royally suck; I have then asked myself, how much would that push back my retirement age range?  For me I clear about 100K per year at work so my age of retirement would go from my proposed 50 (aiming for $2Mil) to 54.  I then ask myself, can i live with that?  The answer is yes and hence how I come up with a 70/30 split.  Does this line of thinking make sense?

Now this assumes I can retain the same level of employment between ages of 50 and 54.  It also assumes that future expected returns are not impacted by the pullback.  I'm still wrapping my head around that one.  I believe the market is essentially a giant discounted cash flow mechanism so that if we get a pullback that should mean returns on the morning of that pullback should be higher over my expected lifetime then at the peak of that pullback.   I assume 5% nominal return for equities in my calculations.  If we had a massive pullback like that presumably I could use a higher expected rate of return going forward which would reduce the 4 years calculated above??
« Last Edit: February 11, 2018, 06:47:18 PM by MMMdude »

Mighty-Dollar

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Re: Revisiting asset allocation with a twist
« Reply #1 on: February 11, 2018, 07:22:57 PM »
How much are you spending per year. You've heard of the 4% rule right?

Take as much risk as is needed to reach your retirement goals but no more.

MMMdude

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Re: Revisiting asset allocation with a twist
« Reply #2 on: February 11, 2018, 07:52:03 PM »
Spend is around 25 - 30K per year but anticipate alot of travel in retirement and abit of lifestyle inflation.  For example we drive 19 and 15 year old cars respectively.

I do not want this to turn into SWR thread as there are many, but suffice to say I am targeting 2.5 to 3% SWR

Currently portoflio brings in around 33.5K in divs/interest.  Unfortunately I missed alot of the runup in the last two years as my portfolio was overweight Canadian stocks (I'm in Canada) which I'm trying to rectify at the moment

ChpBstrd

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Re: Revisiting asset allocation with a twist
« Reply #3 on: February 11, 2018, 09:55:49 PM »
I've thought about the dissonance between having a FIRE number based on a SWR, and having a perspective like Benjamin Graham that the value of stocks to you should not be related to the fluctuations and vagaries of "Mr. Market" as he throws out random bids based on mood fluctuations.

In hindsight, if you had $750k in socks in 2009, you could have retired on $40k/year. That is not the case now. But how to explain why that's the case?

Maybe what's needed is a rule of thumb about the rate of recent returns to handicap our FIRE numbers. E.g. "a correction is very likely when the stock market has risen 80% in 5 years" would have been true in January.

Brother Esau

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Re: Revisiting asset allocation with a twist
« Reply #4 on: February 12, 2018, 04:39:31 AM »

In hindsight, if you had $750k in socks in 2009, you could have retired on $40k/year.


You should diversify more.

ChpBstrd

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Re: Revisiting asset allocation with a twist
« Reply #5 on: February 12, 2018, 07:41:08 AM »

In hindsight, if you had $750k in socks in 2009, you could have retired on $40k/year.


You should diversify more.

Lesson learned. I'm wearing mismatched socks now.

alanB

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Re: Revisiting asset allocation with a twist
« Reply #6 on: February 12, 2018, 10:21:14 AM »
Now this assumes I can retain the same level of employment between ages of 50 and 54.  It also assumes that future expected returns are not impacted by the pullback.  I'm still wrapping my head around that one.  I believe the market is essentially a giant discounted cash flow mechanism so that if we get a pullback that should mean returns on the morning of that pullback should be higher over my expected lifetime then at the peak of that pullback.   I assume 5% nominal return for equities in my calculations.  If we had a massive pullback like that presumably I could use a higher expected rate of return going forward which would reduce the 4 years calculated above??

I think your assumptions are all correct.  5% nominal returns means that over 30+ years average returns will converge to 5%.  If it is lower now it should be higher in the future, otherwise it will not average to 5%!  The exact date you retire will absolutely affect your initial rate of return, which will dictate the age at which you can retire with 100% success rate (which is what is sounds like you are trying for).

You already have a conservative asset allocation and a conservative SWR.  As you have already concluded, if you are any more conservative you are going to guarantee that you have to work longer.

In hindsight, if you had $750k in socks in 2009, you could have retired on $40k/year. That is not the case now. But how to explain why that's the case?

$40K/year w/ $750K was OK something like 65% of start years... how do you know that it is not the case now??  Also, please tell me your socks are only mismatched by color and not length, otherwise your whole sanity is in question ;P

Brother Esau

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Re: Revisiting asset allocation with a twist
« Reply #7 on: February 12, 2018, 10:33:25 AM »

In hindsight, if you had $750k in socks in 2009, you could have retired on $40k/year.


You should diversify more.

Lesson learned. I'm wearing mismatched socks now.

;-)

testtest

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Re: Revisiting asset allocation with a twist
« Reply #8 on: February 14, 2018, 10:07:43 PM »
Socks. Haha I don't know if I'm just tired (I am, I'm really tired) but this really has me chuckling.

Socks.

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