Author Topic: Why not do 100% allocation, draw 4% at retirement, and yolo it?  (Read 11431 times)

Malkynn

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #150 on: May 31, 2018, 05:29:15 PM »
clearly you're not open to listening to anyone that counters your ideas

so

dont ever have debt
dont use credit cards
blindly follow 100% stocks at a 4% SWR with betterment.   

chances are you'll be fine.

on the outside chance you're not it could be devastatingly bad.

Iíve always been a little in love with you.

Now Iím a lot in love with you...

Thatís all...

DreamFIRE

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #151 on: May 31, 2018, 05:34:14 PM »
In the long term, yes, the market goes up. Iím sure Iíve read all over the place that there isnít a ten-year period where the US market wasnít up once you factor in dividends.

I know this isn't the main point, but a recent 13 year period ended with the S&P 500 having a negative real return (includes dividend reinvestment and adjusted for inflation.)  This is an example of one particular window in recent history of just over 13 years:






ysette9

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #152 on: May 31, 2018, 05:48:41 PM »
I stand corrected.

I learn so many insightful things on these forums and then can’t find where I read something, I feel like I should be keeping a notebook of references for the future or something. :)
"It'll be great!"

frugal_c

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #153 on: May 31, 2018, 05:59:12 PM »
Thanks for bringing it up DreamFIRE.  I will add that it's happened numerous times. 

Here are a couple more

Sept 1929 - Sept 1947, -.1% per year or -2% cumulative, with dividends, inflation adjusted.  18 years with negative real return.

Jan 1966 - Jan 1982,  -1.4% per year or -20% cumulative, with dividends, inflation adjusted.  16 years with negative real return.

Jan 1906 - Jan 1921, -1.9% per year or -25% cumulative, with dividends, inflation adjusted.  15 years with negative real return.

In all cases, the market exploded after the period where I ended the study so you could say I am cherry picking but still these are some long periods to not make any money.

I am heavily invested in the market but I will tell you, you need a very long time horizon to be investing in it.


Radagast

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #154 on: May 31, 2018, 07:15:32 PM »
Thanks for bringing it up DreamFIRE.  I will add that it's happened numerous times. 

Here are a couple more

Sept 1929 - Sept 1947, -.1% per year or -2% cumulative, with dividends, inflation adjusted.  18 years with negative real return.

Jan 1966 - Jan 1982,  -1.4% per year or -20% cumulative, with dividends, inflation adjusted.  16 years with negative real return.

Jan 1906 - Jan 1921, -1.9% per year or -25% cumulative, with dividends, inflation adjusted.  15 years with negative real return.

In all cases, the market exploded after the period where I ended the study so you could say I am cherry picking but still these are some long periods to not make any money.

I am heavily invested in the market but I will tell you, you need a very long time horizon to be investing in it.
Fortunately, being a regular saver shortens your duration, so you have a lot less risk if you are still working towards FI. If you are saving 50% of your salary every month you will come out ahead in just a few years in even the bleakest periods. (you can test this in the 2000+ period in portfolio visualizer)

shinn497

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #155 on: May 31, 2018, 07:53:35 PM »
I think OP is deliberately being obtuse.  If they really think this way then I agree with Border42, they are not emotionally ready for 100% stock and run a very real risk of exiting market on a downturn and doing worse than 100% cash/bonds.

Wait I agree with you. I'm completely emotionally driven.

But i also think everyone else here is too.


shinn497

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #156 on: May 31, 2018, 07:58:52 PM »
I plan on staying with them indefinitely.
I am reflecting on the number of times in my life I thought I was in for something "indefinitely" and I turned out to be wrong. You tell me you are data driven. I think you will find living will provide you with a lot of unanticipated data.

It is probably impossible to convince you this, but I see a lot of confirmation bias in your replies. The data you select, the priors you choose are designed to reenforce your existing conclusions. This is not to say that some of your conclusions or not correct, but I believe you are far less analytical and data driven than you think you are.


I wish you the best, I really do.

This is a good point.

, I'm completely open to some good arguments. This is why I have asked some people to further clarify their positions.

The issue is that every time someone wants to try to convince me of something, they also insult my intelligence. Which just makes me defensive. Anyway, the first couple of posts answered my question. I am really not sure why this thread is still going on, if only to further insult my intelligence. Which is more amusing at this point than anything.

I do want to clarify. I haven't done any proper modeling of some of my ideas about behavior. I'm curious. I'd like to, but I don't have the time. So that is more just hypothesis at this moment. I personally am fine with this. If you are not then that is fine. I'm really not one to do a masters thesis in behavioural finance to win an internet debate i didn't even want.
« Last Edit: May 31, 2018, 08:04:23 PM by shinn497 »

shinn497

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #157 on: May 31, 2018, 08:02:14 PM »
Thanks for bringing it up DreamFIRE.  I will add that it's happened numerous times. 

Here are a couple more

Sept 1929 - Sept 1947, -.1% per year or -2% cumulative, with dividends, inflation adjusted.  18 years with negative real return.

Jan 1966 - Jan 1982,  -1.4% per year or -20% cumulative, with dividends, inflation adjusted.  16 years with negative real return.

Jan 1906 - Jan 1921, -1.9% per year or -25% cumulative, with dividends, inflation adjusted.  15 years with negative real return.

In all cases, the market exploded after the period where I ended the study so you could say I am cherry picking but still these are some long periods to not make any money.

I am heavily invested in the market but I will tell you, you need a very long time horizon to be investing in it.
Fortunately, being a regular saver shortens your duration, so you have a lot less risk if you are still working towards FI. If you are saving 50% of your salary every month you will come out ahead in just a few years in even the bleakest periods. (you can test this in the 2000+ period in portfolio visualizer)

I think the issue is that once you are FI, your savings is your income. So it is more a matter of keeping some kind of buffer while also having such low monthly expenses that you can weather any downturn. I think as you go older the buffer would increase for health reasons.

frugal_c

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #158 on: May 31, 2018, 08:33:20 PM »
Fortunately, being a regular saver shortens your duration, so you have a lot less risk if you are still working towards FI. If you are saving 50% of your salary every month you will come out ahead in just a few years in even the bleakest periods. (you can test this in the 2000+ period in portfolio visualizer)

It is actually ideal for this to happen while you are saving, you are basically buying stocks on the cheap and if you then retire after the recovery you are set.  I'm worried about the other case where you save during high periods and retire after a crash.  It's not the end of the world and only so much you can do about it but for that reason I would want to hold a sizable buffer when I'm ready to retire.
« Last Edit: May 31, 2018, 08:35:06 PM by frugal_c »

MDM

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #159 on: May 31, 2018, 09:11:20 PM »
It is actually ideal for this to happen while you are saving, you are basically buying stocks on the cheap and if you then retire after the recovery you are set.  I'm worried about the other case where you save during high periods and retire after a crash.  It's not the end of the world and only so much you can do about it but for that reason I would want to hold a sizable buffer when I'm ready to retire.
Not exactly the same, but close enough and it hasn't been mentioned (that I saw) in this thread: http://awealthofcommonsense.com/2014/02/worlds-worst-market-timer/

Radagast

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #160 on: May 31, 2018, 09:23:35 PM »
I have long been well aware of the arguments for debit cards. I guess I just interprit their weight differently. In fact, the thing I find most curious about this discussion is how passionate and emotional people seem to be. I think this underscores why I am so curious about behavioural economics. We are all looking at the same information, yet we have widly different interpretations and assumptions. We often argue and exchange ideas without properly being aware of this.

Case in point. Earlier we talked about Betterment's fees. My argument is that, even over 30 years, you wouldn't have 2M lost in opportunity cost. @boarder42 then showed me a graph that supported his claim. However, his term was over the drawdown phase. All this time I've been thinking about the accumulation phase. He then insulrted me, which you know is super effective at convincing people of your opinion.

So here is what gets me. I have pretty much learned what I want to learn, I mean some of the links in the first couple of responses were very helpful. I was not so confident of the 100% withdraw rate and now I am. However, this discussion has continued for 2 pages because of a couple things about my MO that are unrelated to the topic at hand. I think this underscores something about finance. Its personal. Its irrational. We all overlay our own experiences and hopes and tell ourselves we are being objective and we are not. Not only this, but some feel it necessary to convince others that they must join their own method. And, if they don't, they are stupid/minformed/lazy etc. etc. . I find that fascinating. Especially, when we are making real decisions with real money.

I think that money has the multiplier effect on peoples' emotions, and that is something I am very curious about. Since I suspect it could possibly be one of the keys to using it to your advantage.

Then again what do I know. I'm just a stupud physicist that doesn't  credit cards and thinks actually owning the things you buy is a good idea.
...
I would also say I make decisions on expected value except I never assume perfect behavior.  On a side note I don't think of behaviour in terms of things like spending but also earning and trust. I hypothesize that having good values helps with the income side of the equation perhaps more than the spending side. This is why I suspect that giving is an important part of becoming wealthy.
...
As for mortgages. No. First I just don't like the idea of having debt and think it reduces quality of life. And two, I am quite certain that keeping and intending to keep a mortgage effects your behaviour in a negative way. Specificallly, it incentivizes you to stay in a larger house, and that is a good way of overleveraging and increasing risk too much. I mean I don't mind people making a case for larger mortgages. But any time I see an argument for them, they always have some convenient assumptions which lead me to believe that are constructed to some convenient conclusions. Which makes sense right? Of course people will mess with the math to justify a pretty house.
After thinking through my demonstration that Betterment fees add $5k/annum to retirement expenses, I want to expand my response. Consider a Boarder42 who is in the same situation and is a DIY investor and also churns credit cards. I'd say a diligent credit card churner could get back an additional 6.25% of $80,000k in annual spend. So now you are looking at a 12.5% difference in retirement expenses: 6.25% lost to Betterment and 6.25% to hypothetical cash back (or possibly better if you do the point thing and don't change your behavior to justify it). It's pretty hard to get over 12% greater expenses for the exact same lifestyle.

But there's more. We know through backtesting that paying down your mortgage has historically been worse than investing in nearly all cases. The sequence matters, and similar to the "bond tent" or reverse equity glide path discussed a few posts ago it may be possible to have similar chances of success with investing if you do pay your mortgage in a single payment taken from investments in the year or two before you retire. But on the whole, periodic stock investing has an expected return that is several percent higher than mortgage payments and is far more reliable than the market returns themselves (see my previous post). Further, you say that giving money to others makes you wealthier. Actual data says the wealthy give a smaller percentage of their wealth away than the poor. They don't say whether lack of giving caused the wealth, but I'd guess that type of thinking and behaviour did. The Millionaire Next Door (I think I got it as a free download, look around) states that "my favorite charity is myself" is a common thing for millionaires to say. Now giving away money might make you a better person, but it will probably not make you a person with more money. I'm not stopping you at all, I'm just saying that you continually try to justify your money losing positions (relatively) as money making positions.

The common theme in all of these is that the positions you are defending are the opposite of what math and data support. If you do one or two or all of them then good on you, your life, live like YOLO and just one will probably not matter much or may even work to your advantage if targeted carefully. But all of them definitely put you at a relative disadvantage. And at least three of them are simply ways of becoming wealthier simply by moving your money in different ways, they are not even life style changes. You might well be right in one or two of them, but as you add more and more the odds turn increasingly against you.

And the funny thing is on top of this how often you say "I'm a Data Scientist" (especially the capitalization) to try and justify your positions. We would more or less give you a pass if you said "I make my decisions based on my own personal perceived values and my emotions, and I perceive debt from a moral rather than mathematical perspective" but you keep trying to pass it off as something else. Also, most people here are engineers, programmers, CPA's, scientists, et cetera (PizzaSteve implies he was in the boardroom or something), and we have generally been over this ground many times already. You aren't like an Enron employee (or, based on how Eron turned out, maybe you are).

And at the end you want to follow a 100% stock allocation, which is typically only justifiable in the strictest, data driven, non-emotional sense (and often not even then, based on backtesting it increases your risk around and possibly after retirement). Which is the exact opposite of your position on pretty much every other financial topic in this thread.

Radagast

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #161 on: May 31, 2018, 09:37:29 PM »
Thanks for bringing it up DreamFIRE.  I will add that it's happened numerous times. 

Here are a couple more

Sept 1929 - Sept 1947, -.1% per year or -2% cumulative, with dividends, inflation adjusted.  18 years with negative real return.

Jan 1966 - Jan 1982,  -1.4% per year or -20% cumulative, with dividends, inflation adjusted.  16 years with negative real return.

Jan 1906 - Jan 1921, -1.9% per year or -25% cumulative, with dividends, inflation adjusted.  15 years with negative real return.

In all cases, the market exploded after the period where I ended the study so you could say I am cherry picking but still these are some long periods to not make any money.

I am heavily invested in the market but I will tell you, you need a very long time horizon to be investing in it.
Fortunately, being a regular saver shortens your duration, so you have a lot less risk if you are still working towards FI. If you are saving 50% of your salary every month you will come out ahead in just a few years in even the bleakest periods. (you can test this in the 2000+ period in portfolio visualizer)

I think the issue is that once you are FI, your savings is your income. So it is more a matter of keeping some kind of buffer while also having such low monthly expenses that you can weather any downturn. I think as you go older the buffer would increase for health reasons.
Yup. It is especially a big issue in the few years just after you retire. The data we use is coarse (only one or two backtested years often determine our actions, ignoring the other 100+) and heavily biased towards the US market history, which I'd say is one of our bigger weakness. Personally I recommend keeping at least 10% in bonds/cash for that reason.

About betterment and why you might want to bail, it is a counterparty risk. https://forum.mrmoneymustache.com/investor-alley/in-kind-transfer-from-betterment-to-vanguard-denied/. There is already an ETF and market participants between you and the companies you own. Adding Betterment is another layer of people who can screw things up. The Permanent Portfolio book is the best discussion I know of counterparty risk.

Radagast

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #162 on: May 31, 2018, 09:44:01 PM »
Fortunately, being a regular saver shortens your duration, so you have a lot less risk if you are still working towards FI. If you are saving 50% of your salary every month you will come out ahead in just a few years in even the bleakest periods. (you can test this in the 2000+ period in portfolio visualizer)

It is actually ideal for this to happen while you are saving, you are basically buying stocks on the cheap and if you then retire after the recovery you are set.  I'm worried about the other case where you save during high periods and retire after a crash.  It's not the end of the world and only so much you can do about it but for that reason I would want to hold a sizable buffer when I'm ready to retire.
Totally. Regular contributions are a win-win situation, you get more money if the market goes up and more shares if it goes down. I'm not even sure if there has ever been a 15 year period where (in retrospect) you would have been unable to quit your day job after 50% savings, regardless of market performance. Sadly regular withdrawals work in reverse.

Radagast

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #163 on: May 31, 2018, 09:57:52 PM »
An argument against debt: I am not in a position to say I know anything, but I am one of those people who is concerned about the debt piling up in the nation and world. Eventually that will turn against us, and money will flow from people with weak hands to people with strong hands (which is a poker analogy about what happens to bluffers when they put their cards on the table, not anything to do with actual hands). So... look out for debt and stocks if you are not in a strong position.

shinn497

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #164 on: May 31, 2018, 10:21:29 PM »
I have long been well aware of the arguments for debit cards. I guess I just interprit their weight differently. In fact, the thing I find most curious about this discussion is how passionate and emotional people seem to be. I think this underscores why I am so curious about behavioural economics. We are all looking at the same information, yet we have widly different interpretations and assumptions. We often argue and exchange ideas without properly being aware of this.

Case in point. Earlier we talked about Betterment's fees. My argument is that, even over 30 years, you wouldn't have 2M lost in opportunity cost. @boarder42 then showed me a graph that supported his claim. However, his term was over the drawdown phase. All this time I've been thinking about the accumulation phase. He then insulrted me, which you know is super effective at convincing people of your opinion.

So here is what gets me. I have pretty much learned what I want to learn, I mean some of the links in the first couple of responses were very helpful. I was not so confident of the 100% withdraw rate and now I am. However, this discussion has continued for 2 pages because of a couple things about my MO that are unrelated to the topic at hand. I think this underscores something about finance. Its personal. Its irrational. We all overlay our own experiences and hopes and tell ourselves we are being objective and we are not. Not only this, but some feel it necessary to convince others that they must join their own method. And, if they don't, they are stupid/minformed/lazy etc. etc. . I find that fascinating. Especially, when we are making real decisions with real money.

I think that money has the multiplier effect on peoples' emotions, and that is something I am very curious about. Since I suspect it could possibly be one of the keys to using it to your advantage.

Then again what do I know. I'm just a stupud physicist that doesn't  credit cards and thinks actually owning the things you buy is a good idea.
...
I would also say I make decisions on expected value except I never assume perfect behavior.  On a side note I don't think of behaviour in terms of things like spending but also earning and trust. I hypothesize that having good values helps with the income side of the equation perhaps more than the spending side. This is why I suspect that giving is an important part of becoming wealthy.
...
As for mortgages. No. First I just don't like the idea of having debt and think it reduces quality of life. And two, I am quite certain that keeping and intending to keep a mortgage effects your behaviour in a negative way. Specificallly, it incentivizes you to stay in a larger house, and that is a good way of overleveraging and increasing risk too much. I mean I don't mind people making a case for larger mortgages. But any time I see an argument for them, they always have some convenient assumptions which lead me to believe that are constructed to some convenient conclusions. Which makes sense right? Of course people will mess with the math to justify a pretty house.
After thinking through my demonstration that Betterment fees add $5k/annum to retirement expenses, I want to expand my response. Consider a Boarder42 who is in the same situation and is a DIY investor and also churns credit cards. I'd say a diligent credit card churner could get back an additional 6.25% of $80,000k in annual spend. So now you are looking at a 12.5% difference in retirement expenses: 6.25% lost to Betterment and 6.25% to hypothetical cash back (or possibly better if you do the point thing and don't change your behavior to justify it). It's pretty hard to get over 12% greater expenses for the exact same lifestyle.

But there's more. We know through backtesting that paying down your mortgage has historically been worse than investing in nearly all cases. The sequence matters, and similar to the "bond tent" or reverse equity glide path discussed a few posts ago it may be possible to have similar chances of success with investing if you do pay your mortgage in a single payment taken from investments in the year or two before you retire. But on the whole, periodic stock investing has an expected return that is several percent higher than mortgage payments and is far more reliable than the market returns themselves (see my previous post). Further, you say that giving money to others makes you wealthier. Actual data says the wealthy give a smaller percentage of their wealth away than the poor. They don't say whether lack of giving caused the wealth, but I'd guess that type of thinking and behaviour did. The Millionaire Next Door (I think I got it as a free download, look around) states that "my favorite charity is myself" is a common thing for millionaires to say. Now giving away money might make you a better person, but it will probably not make you a person with more money. I'm not stopping you at all, I'm just saying that you continually try to justify your money losing positions (relatively) as money making positions.

The common theme in all of these is that the positions you are defending are the opposite of what math and data support. If you do one or two or all of them then good on you, your life, live like YOLO and just one will probably not matter much or may even work to your advantage if targeted carefully. But all of them definitely put you at a relative disadvantage. And at least three of them are simply ways of becoming wealthier simply by moving your money in different ways, they are not even life style changes. You might well be right in one or two of them, but as you add more and more the odds turn increasingly against you.

And the funny thing is on top of this how often you say "I'm a Data Scientist" (especially the capitalization) to try and justify your positions. We would more or less give you a pass if you said "I make my decisions based on my own personal perceived values and my emotions, and I perceive debt from a moral rather than mathematical perspective" but you keep trying to pass it off as something else. Also, most people here are engineers, programmers, CPA's, scientists, et cetera (PizzaSteve implies he was in the boardroom or something), and we have generally been over this ground many times already. You aren't like an Enron employee (or, based on how Eron turned out, maybe you are).

And at the end you want to follow a 100% stock allocation, which is typically only justifiable in the strictest, data-driven, non-emotional sense (and often not even then, based on backtesting it increases your risk around and possibly after retirement). Which is the exact opposite of your position on pretty much every other financial topic in this thread.

Let's not talk about the mortgage and credit card stuff since I made those decisions. The way you guys seem to want me to use debt makes it seem like you are more concerned with convincing yourselves. And the only reason I could see to do this is because you deep down know those methods are very risky. The fact that you will certainly respond to this with another piece convincing me otherwise, and probably involving more insults to my intelligence, is going to prove my point.

But I want to go back to 100% stock allocation. Did you read ERN's paper on Safe Withdrawal rates? He used monte carlo tests (I will have to rereview if they were back tests) and found that the 100% equity rate was optimal in nearly all cases. Would you be against this conclusion, or is your advice against the 100% allocation behavioral? My personal thing is I have a while before I get close to retirement so I am sort of open on this one a bit.

Ok so if you want to make an argument against betterment. Outside of their whole "Its a roboadvisor its bad". Do you have anything more specific? For example, do you disagree with their use of tax loss harvesting? Do you think that automated tax loss harvesting is not worth it? Do you disagree with their portfolio (I'm still not done evaluating their portfolio since I have to go through the Black Littner model to do so).? Do you not like the company as a whole? I actually really do want to seek criticism on them.  Every time you say I will be irrational and emotional it just makes me want to stay with them more. I also honestly do buy in that TLH alone justifies their cost (actually after some thought this could use some evaluation too), especially in the accumulation phase when you can rack up harvests early on while your fee is low. And yes I understand it is a tax deferment strategy not a tax avoidance one.

As for the whole me being a data scientist thing. I don't know what to tell you buddy. Other than maybe I know enough about evaluating data to realize that doing so doesn't always result in a concrete answer. Or maybe most of the calculations most people have presented are not as compelling or well thought out as they seem.
« Last Edit: May 31, 2018, 10:28:42 PM by shinn497 »

aspiringnomad

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #165 on: May 31, 2018, 10:55:58 PM »
Out of curiosity, what do you do in your role as a data scientist?

Radagast

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #166 on: May 31, 2018, 11:14:19 PM »
Let's not talk about the mortgage and credit card stuff since I made those decisions. The way you guys seem to want me to use debt makes it seem like you are more concerned with convincing yourselves. And the only reason I could see to do this is because you deep down know those methods are very risky. The fact that you will certainly respond to this with another piece convincing me otherwise, and probably involving more insults to my intelligence, is going to prove my point.

But I want to go back to 100% stock allocation. Did you read ERN's paper on Safe Withdrawal rates? He used monte carlo tests (I will have to rereview if they were back tests) and found that the 100% equity rate was optimal in nearly all cases. Would you be against this conclusion, or is your advice against the 100% allocation behavioral? My personal thing is I have a while before I get close to retirement so I am sort of open on this one a bit.

Ok so if you want to make an argument against betterment. Outside of their whole "Its a roboadvisor its bad". Do you have anything more specific? For example, do you disagree with their use of tax loss harvesting? Do you think that automated tax loss harvesting is not worth it? Do you disagree with their portfolio (I'm still not done evaluating their portfolio since I have to go through the Black Littner model to do so).? Do you not like the company as a whole? I actually really do want to seek criticism on them.  Every time you say I will be irrational and emotional it just makes me want to stay with them more. I also honestly do buy in that TLH alone justifies their cost (actually after some thought this could use some evaluation too), especially in the accumulation phase when you can rack up harvests early on while your fee is low. And yes I understand it is a tax deferment strategy not a tax avoidance one.

As for the whole me being a data scientist thing. I don't know what to tell you buddy. Other than maybe I know enough about evaluating data to realize that doing so doesn't always result in a concrete answer. Or maybe most of the calculations most people have presented are not as compelling or well thought out as they seem.
I probably speak for most when I say we don't actually care if you avoid debt. We only argue because we know we are right and we want the satisfaction of winning a pointless internet argument.

I never said anything about bad roboadvisor. I only said I doubt the fees justify it versus DIY investing and TLH. I decided not to use robo advisors a few years ago and haven't kept up with the reasons why that is a less than optimal idea, but if you google betterment site:bogleheads.org like I suggested above you will find lots of discussion by very knowledgeable people. The chief arguments are something like TLH becomes impossible after a decade or two because of a higher cost basis and all you are left with is higher fees and no escape without massive taxes if betterment doesn't allow you to transfer in kind (or otherwise a maybe undesirable set of ETFs), also as I linked above. Also there is already a lot of doubt about whether a multiple funds strategy such as betterment uses is worth it versus a three fund portfolio at all, much less with the slightly higher fund costs, and even less with the 0.25% wrapper. And there is simply an additional party who can screw things up, also noted above (really, there are some good reading suggestions) But basically it is all about costs. Most of the argument against boils down to the 0.25% fee. Why not VT total world stock index? Do you have a reason to think VT will do worse?

And you are right that there are no concrete answers. But if you tilt enough odds slightly in your favor, a series of uncertain situations will usually work to your advantage. Things that seem inconsequential individually, done often and in several varieties, can add up.

Also, my best guess at the optimal lifetime stock/bond allocation is also above beside Maizeman's illustration. But it's hard to make predictions, especially about the future.

About black-litterman: it looks like it uses backtests of probably mostly recent data regarding returns, correlation, and volatility. Not really a novel concept, I would not have more trust in it than "factor" investing, naive 1/n allocation, valuation based investing, and even trend following. William Bernstein's old blog "the efficient frontier" and old book "The Intelligent Asset Allocator discuss aspects of it, but not black-litterman specifically. But you will get the point.
« Last Edit: May 31, 2018, 11:57:13 PM by Radagast »

bacchi

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #167 on: May 31, 2018, 11:20:26 PM »
The fact that you will certainly respond to this with another piece convincing me otherwise [...] is going to prove my point.

That's really not how discussions, arguments, or debates work.

shinn497

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #168 on: June 01, 2018, 06:17:24 AM »
Quote
We only argue because we know we are right and we want the satisfaction of winning a pointless internet argument.

And therein lies your failing. Bruh if you want satisfaction of "winning" and argument you are going to be chasing your tail endlessly. Especially since.

Quote
And you are right that there are no concrete answers.

The way I see it. I only argue to learn. LPT Most people will never be convinced of something by arguing with them, even in the face of unflinching evidence. We are too prideful to really change our minds in such a way. If you truly wish to change someone, you need to empathize with them.

shinn497

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #169 on: June 01, 2018, 06:23:46 AM »
Out of curiosity, what do you do in your role as a data scientist?

I write AI for space drones.

But really most of it is implementing discriminative models (naive bays, SVM, random forests, ensembling basically everything on kaggle) and making bayesian probabilistic models from papers i read. It is actually a bit different from some of the math used in finance, which is more centered around time series and especially stuff like stochastic differential equations, so I'm not gonna be quant like tommorow or anything, but it does make me curious enough to work through some mathematical finance papers.

Also like 50% of my work is dropping NULL rows from csvs and tweaking thresholds, as you do.

shinn497

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #170 on: June 01, 2018, 06:25:03 AM »
The fact that you will certainly respond to this with another piece convincing me otherwise [...] is going to prove my point.

That's really not how discussions, arguments, or debates work.

It works to get people to refocus a discussion with me on something I pretty much said I wasn't open to discussing. Which, if you think about it, wastes less time of both parties involved.

ditkanate

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #171 on: June 01, 2018, 07:18:05 AM »
The only benefit I see to this is you get exposure to potential rewards at the increased risk of paying credit card fees.

Just one last nitpick from me.  They aren't "potential" rewards.  They are real, quantifiable, hard dollars.  And the "risk" of paying CC fees is so easily mitigated, it is difficult to watch someone so casually wave the whole business away.  You don't even have to churn multiple cards or anything like Boarder does.  There's a citi card that give you 2% cash back.  You can make 2% on virtually all your spending just by setting up one easy automatic transfer.... It's just weird that you are so adamantly against it.  I wouldn't even call this "debt" since you aren't carrying a balance.  It is a free 2%.  But you will PAY .25% for what's been shown to be an unquantifiable benefit from Betterment's service. 

I think the juxtaposition of what you do and don't seem to care about is what's throwing people off. 

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #172 on: June 01, 2018, 07:20:22 AM »
@shinn497, if you're not open to discussion, why post on an open forum? Why don't you just ask the mods to remove your thread or even delete your whole account? You are clearly not open to feedback from others.

General note: if a person has commented on a thread that proves unfruitful, they can remove their comments and the thread will stop popping up in their recent replies. I may end up taking my own advice on this one, because I keep getting whiffs of citrus.
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boarder42

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #173 on: June 01, 2018, 07:30:29 AM »
@shinn497, if you're not open to discussion, why post on an open forum? Why don't you just ask the mods to remove your thread or even delete your whole account? You are clearly not open to feedback from others.

General note: if a person has commented on a thread that proves unfruitful, they can remove their comments and the thread will stop popping up in their recent replies. I may end up taking my own advice on this one, because I keep getting whiffs of citrus.

yeah i've considered it. - but hopeful he'll actually read something i wrote and do the math rather than scoff at it pshhhh 500k who needs that - well i'll take it if you dont want it you can pay me .25% of you money and i'll put it in VTSAX for you.
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shinn497

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #174 on: June 01, 2018, 08:14:45 AM »
@shinn497, if you're not open to discussion, why post on an open forum? Why don't you just ask the mods to remove your thread or even delete your whole account? You are clearly not open to feedback from others.

General note: if a person has commented on a thread that proves unfruitful, they can remove their comments and the thread will stop popping up in their recent replies. I may end up taking my own advice on this one, because I keep getting whiffs of citrus.

There are certain things I wanted to discuss and certain other things I didn't. People latched onto the things I didn't and rolled with it. Which tells me they care more about proving it to themselves than they do me.

ysette9

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #175 on: June 01, 2018, 08:30:31 AM »
Yes, you’ve said before you don’t want to discuss those points. It’s just that dangling an easy sub-optimization situation in front of people on a forum focused on maximal optimization of dollars is like dangling a piece of bacon in front of a dog and then expecting it not to leap. :)
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Classical_Liberal

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #176 on: June 01, 2018, 08:57:19 AM »
There are certain things I wanted to discuss and certain other things I didn't. People latched onto the things I didn't and rolled with it. Which tells me they care more about proving it to themselves than they do me.

Also remember, over the past couple of years this forum has developed into celebrity status on the interwebs.  It very much represents the frugality-FIRE mindset to anyone interested in the subject.  When you post broad generalizations like "I think debt is bad because it is misused by most", expect hard-line push back.  Its just not true for us (frugality FIRE folks).  If someone new to theses ideas reads such statements without counterpoint it really jabs those of us who have substantially contributed and learned from the information available here.  IOW, "just to win an argument", has bigger implications than winning an argument.

Classical_Liberal

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #177 on: June 01, 2018, 09:15:28 AM »
Thanks for bringing it up DreamFIRE.  I will add that it's happened numerous times. 

Here are a couple more

Sept 1929 - Sept 1947, -.1% per year or -2% cumulative, with dividends, inflation adjusted.  18 years with negative real return.

Jan 1966 - Jan 1982,  -1.4% per year or -20% cumulative, with dividends, inflation adjusted.  16 years with negative real return.

Jan 1906 - Jan 1921, -1.9% per year or -25% cumulative, with dividends, inflation adjusted.  15 years with negative real return.

In all cases, the market exploded after the period where I ended the study so you could say I am cherry picking but still these are some long periods to not make any money.

I am heavily invested in the market but I will tell you, you need a very long time horizon to be investing in it.
Fortunately, being a regular saver shortens your duration, so you have a lot less risk if you are still working towards FI. If you are saving 50% of your salary every month you will come out ahead in just a few years in even the bleakest periods. (you can test this in the 2000+ period in portfolio visualizer)

Also the reverse is true; much MORE risk if someones withdrawing from funds in extended real returns drought.  Which is why I am such a fan of noncoorlated asset classes.  Give up some of the upside of 90/10, while simultaneously reducing the number of downside scenarios (4% rule potential failures). 

I think 100% equities is a great idea early on in accumulation.  First, it gets one used of the feeling of losing thousands of dollars in market tantrums, can you tolerate that?  Secondly, it significantly decreases average time to FI (due to the reduced risk @Radagast mentions above).  However, once substantial assets are accumulated, and FIRE date becomes more of a reality than a wild dream, I think most would benefit from a more diversified portfolio of non coorleators.  This bot only reduced failure risk (in reasonable WR's), but it also reduced FIRE date risk. 

Of course, each person's situation is different.  I'd be cool with 100% or 90/10 if I had long-term relativity stable income generation equivalent to maybe halve my annual spending.  Also, as with everything related to FIRE, savings rate is important as well.  Someone with 75-80% savings rate has a different early accumulation risk/benefit profile to high equity exposure than someone with 40-50%.

The tax system makes is much easier to have the best plan early on, changing strategy towards end-game can be devastating.   Which is why @ysette9 is so wise to build the glidepath in advance.

tomsang

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #178 on: June 01, 2018, 09:17:34 AM »
But I want to go back to 100% stock allocation. Did you read ERN's paper on Safe Withdrawal rates? He used monte carlo tests (I will have to rereview if they were back tests) and found that the 100% equity rate was optimal in nearly all cases. Would you be against this conclusion, or is your advice against the 100% allocation behavioral? My personal thing is I have a while before I get close to retirement so I am sort of open on this one a bit.

Back on track.  I 100% believe that you should not do 100% stock allocation.  Based on all of your posts relating to emotions, people screwing up decisions which makes them sub-optimal, your statements relating to the fact that you have not dug in on the various other topics, etc.  I think at most you should be 50% equities. 

Based on your posts, it does not appear that you can control yourself from doing suboptimal transactions.  100% equities is for people that are very calculated, unemotional, and follow a plan.  You have flat out stated that people can't do that and that they are kidding themselves if they say that the can or will. 

100% equities is a recipe for disaster for people that are emotional and can't follow a plan. They tend to pull their money out after the market drops and put their money in after the market has had a run.  They kill themselves chasing the money with their emotions.

I believe that if you dig into the various posts and comments that people have provided that you have the potential to optimize your finances, but at this point I think at most you should invest is 50% in equities.


Good luck!

talltexan

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #179 on: June 01, 2018, 09:38:07 AM »
But I want to go back to 100% stock allocation. Did you read ERN's paper on Safe Withdrawal rates? He used monte carlo tests (I will have to rereview if they were back tests) and found that the 100% equity rate was optimal in nearly all cases. Would you be against this conclusion, or is your advice against the 100% allocation behavioral? My personal thing is I have a while before I get close to retirement so I am sort of open on this one a bit.

Back on track.  I 100% believe that you should not do 100% stock allocation.  Based on all of your posts relating to emotions, people screwing up decisions which makes them sub-optimal, your statements relating to the fact that you have not dug in on the various other topics, etc.  I think at most you should be 50% equities. 

Based on your posts, it does not appear that you can control yourself from doing suboptimal transactions.  100% equities is for people that are very calculated, unemotional, and follow a plan.  You have flat out stated that people can't do that and that they are kidding themselves if they say that the can or will. 

100% equities is a recipe for disaster for people that are emotional and can't follow a plan. They tend to pull their money out after the market drops and put their money in after the market has had a run.  They kill themselves chasing the money with their emotions.

I believe that if you dig into the various posts and comments that people have provided that you have the potential to optimize your finances, but at this point I think at most you should invest is 50% in equities.


Good luck!

OP is young. I vote for 80/20.

talltexan

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #180 on: June 01, 2018, 09:40:02 AM »
An argument against debt: I am not in a position to say I know anything, but I am one of those people who is concerned about the debt piling up in the nation and world. Eventually that will turn against us, and money will flow from people with weak hands to people with strong hands (which is a poker analogy about what happens to bluffers when they put their cards on the table, not anything to do with actual hands). So... look out for debt and stocks if you are not in a strong position.

Can you go into more detail about weak hand/strong hands here? Are you saying that having an ability to raise funds quickly will enable buying assets cheaply after the crash?

OurTown

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #181 on: June 01, 2018, 09:51:13 AM »
OP:  I wish you all the best, whatever you decide.  Asset allocation is all about your appetite for risk.  It's more of a function of your personality type than anything else.  I am 60/40 and I am perfectly happy with that.  If you are happy at 100/0 or 90/10 or whatever, that's great.  If you won't blink when you lose 2 years of contributions and gains in one day, (a "very bad day"), good for you.  I would have a really hard time swallowing that kind of loss, which is why I am at 60/40. 

I get the aversion to debt too.  The CC churning game is not for everyone.  I decided to limit it to 3 cards, each of which is designated for something I was going to spend anyway, whether CC or not.  So for example, one card gets a 4% cash back on gasoline, and all our gasoline always goes on that card.  We were going to buy gasoline anyway.  Another one gets 4% on groceries, so all our groceries go on that card.  Everything gets paid off as we go.  It's a simple system and easy for me to keep up with.  I don't go around opening new cards or getting new cards in connection with new bank accounts and avoiding fees and all that jazz just simply because I don't have the patience for that game.

I also get your desire for a mortgage-free home.  There is a post on another thread suggesting that a homeowner could sequester extra money into an investment account in an S&P 500 index fund until there is enough to pay off the mortgage in a lump sum, and then make the decision whether to pay off or continue investing.  During the time you are investing instead of paying down the mortgage, you make the spread between the stock returns and the mortgage interest rate.  You can still pull the trigger on the mortgage at the end if that is what you want, and the elapsed time will be the same as if you had been paying down all along, perhaps even less.


tomsang

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #182 on: June 01, 2018, 09:58:19 AM »
OP is young. I vote for 80/20.

My post is not an age post.  I don't think he can handle it.  I am 48 and I am at 100%.  At his age he should be 100%, but after reading his posts regarding emotions, that everyone screws their plans, that it is ok to pay a provider a management fee, that there is too much risk in using credit cards, tradelines, prepaying a low interest rate mortgage, etc.  This tells me that he has little confidence in his emotional ability to manage a 100% equity account. 

If he said he was going to set it up and that it required a notarized copy from a trusted advisor to change it, then I would recommend a 100% portfolio for him and everyone else that is capable of handling large market swings. 

My account has market swings of $40k in a day, the market brought it down $300k in one year.  I don't flinch, I also don't have much emotions regarding my plan. I just follow it.  I don't get the sense that he can stomach that and would second guess himself and pull money off the table when he should be leaving it alone. 

OurTown

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #183 on: June 01, 2018, 10:11:59 AM »
Forgot about the emergency fund.  Do whatever works for your situation.  Too little and you are fracked, too much and you have a bunch of cash sitting around on the sidelines.  I have $12k in a credit union account, with no online access (!), and no check writing privileges.  I would have to drag my fat ass to the brick and mortar credit union to make a withdrawal.  So the money just sits there, earning some pathetic little interest rate.  That's okay, if there is an emergency I will be glad it's there.  Once we are FIRE, we will just liquidate that account and spend it on something.

tomsang

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #184 on: June 01, 2018, 11:06:11 AM »
Forgot about the emergency fund.  Do whatever works for your situation.  Too little and you are fracked, too much and you have a bunch of cash sitting around on the sidelines.  I have $12k in a credit union account, with no online access (!), and no check writing privileges.  I would have to drag my fat ass to the brick and mortar credit union to make a withdrawal.  So the money just sits there, earning some pathetic little interest rate.  That's okay, if there is an emergency I will be glad it's there.  Once we are FIRE, we will just liquidate that account and spend it on something.

This seems backwards to me. When you are working and cash flowing with your salary, why do you need an emergency fund? When you are drawing down on your investments, why don't you need an emergency fund?

My emergency fund is my LOC's, Credit Cards, my excess monthly cash flow from my salary, 401k loans, liquidating a Roth, pulling money out of investments, etc.  I have a lot of excess cash each month so I can absorb a large emergency.  When I am retired, I will probably have some dollars set aside so that I am not pulling money out at the worst possible time.  Probably less than 2% of net worth, currently I have zero.

OurTown

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #185 on: June 01, 2018, 11:21:36 AM »
It's self-insurance for something unforeseen that our cash flow can't handle, or alternatively for an unexpected interruption in our cash flow.  If I was in extremis, the last thing I would want to do is take on more debt.  I do have a "taxable" brokerage account with about 50 grand in it that I could invade if, Zeus forbid, we ran through the EF.  I would be very, very reluctant to take out a HELOC.

During FIRE all income comes from the investments (or nearly all if I keep a side gig for awhile), so I don't have to self-insure against a job loss as it were.  I don't know that we will need cash on the sidelines at that point.


bacchi

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #186 on: June 01, 2018, 01:40:13 PM »
The fact that you will certainly respond to this with another piece convincing me otherwise [...] is going to prove my point.

That's really not how discussions, arguments, or debates work.

It works to get people to refocus a discussion with me on something I pretty much said I wasn't open to discussing. Which, if you think about it, wastes less time of both parties involved.

You also wrote that you weren't going to post in this thread anymore. Yet, here we are.

shinn497

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #187 on: June 01, 2018, 02:31:13 PM »
The fact that you will certainly respond to this with another piece convincing me otherwise [...] is going to prove my point.

That's really not how discussions, arguments, or debates work.

It works to get people to refocus a discussion with me on something I pretty much said I wasn't open to discussing. Which, if you think about it, wastes less time of both parties involved.

You also wrote that you weren't going to post in this thread anymore. Yet, here we are.

Indeed we are. So that is how well Shinn follows their own advice

Radagast

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #188 on: June 01, 2018, 03:08:18 PM »
Thanks for bringing it up DreamFIRE.  I will add that it's happened numerous times. 

Here are a couple more

Sept 1929 - Sept 1947, -.1% per year or -2% cumulative, with dividends, inflation adjusted.  18 years with negative real return.

Jan 1966 - Jan 1982,  -1.4% per year or -20% cumulative, with dividends, inflation adjusted.  16 years with negative real return.

Jan 1906 - Jan 1921, -1.9% per year or -25% cumulative, with dividends, inflation adjusted.  15 years with negative real return.

In all cases, the market exploded after the period where I ended the study so you could say I am cherry picking but still these are some long periods to not make any money.

I am heavily invested in the market but I will tell you, you need a very long time horizon to be investing in it.
Fortunately, being a regular saver shortens your duration, so you have a lot less risk if you are still working towards FI. If you are saving 50% of your salary every month you will come out ahead in just a few years in even the bleakest periods. (you can test this in the 2000+ period in portfolio visualizer)

Also the reverse is true; much MORE risk if someones withdrawing from funds in extended real returns drought.  Which is why I am such a fan of noncoorlated asset classes.  Give up some of the upside of 90/10, while simultaneously reducing the number of downside scenarios (4% rule potential failures). 

I think 100% equities is a great idea early on in accumulation.  First, it gets one used of the feeling of losing thousands of dollars in market tantrums, can you tolerate that?  Secondly, it significantly decreases average time to FI (due to the reduced risk @Radagast mentions above).  However, once substantial assets are accumulated, and FIRE date becomes more of a reality than a wild dream, I think most would benefit from a more diversified portfolio of non coorleators.  This bot only reduced failure risk (in reasonable WR's), but it also reduced FIRE date risk. 

Of course, each person's situation is different.  I'd be cool with 100% or 90/10 if I had long-term relativity stable income generation equivalent to maybe halve my annual spending.  Also, as with everything related to FIRE, savings rate is important as well.  Someone with 75-80% savings rate has a different early accumulation risk/benefit profile to high equity exposure than someone with 40-50%.

The tax system makes is much easier to have the best plan early on, changing strategy towards end-game can be devastating.   Which is why @ysette9 is so wise to build the glidepath in advance.
Yes, for sure. Regular savings greatly reduce the length of market drawdowns for you personally, but regular withdrawals greatly prolong them for you personally, maybe even make them permanent. I can't recommend 100% stocks approaching or while you need money for that reason, and usually I recommend either approximately 25% in bonds as a static allocation or a reverse glide path. Uncorrelated assets are useful too, they are more controversial because they have low expected returns but several of them seem to have remained uncorrelated since I first read the debate about their utility five years ago.

Radagast

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #189 on: June 01, 2018, 03:22:35 PM »
An argument against debt: I am not in a position to say I know anything, but I am one of those people who is concerned about the debt piling up in the nation and world. Eventually that will turn against us, and money will flow from people with weak hands to people with strong hands (which is a poker analogy about what happens to bluffers when they put their cards on the table, not anything to do with actual hands). So... look out for debt and stocks if you are not in a strong position.

Can you go into more detail about weak hand/strong hands here? Are you saying that having an ability to raise funds quickly will enable buying assets cheaply after the crash?
To my mind this is a stable or flexible life situation. You can either raise funds, or at least avoid the need to take money from a strongly down market. Things like have a job that is recessionproof, be a two income household with income from two very different sources, have a cashflowing rental property,  a recession proof side hustle, a place you can live for free if you need too, being able to easily relocate for a better situation, have very low monthly cashflow requirements, the usual MMM stuff. If you don't have those then you probably want a 20% safe bond allocation or a largish emergency fund (I can't really tell the difference between those two). Even though those might slow growth over the long term for the median investor, if you have a high chance of unemployment in a combined recession/stock crash the insurance value might become very worth it.

Radagast

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #190 on: June 01, 2018, 03:44:56 PM »
I know you may not want to see, but many posters seem to be picking up on a common thread in your thinking. I'm sure there are many ways of looking at it. One I notice is that you think complex explanations have more explanatory power than basic explanations. This causes you to reject the basic math which is really most relevant.
You want to study Black-Litterman (probably not the world's most interesting model but you will still learn interesting things by studying it) when actually the most useful numbers are that $37.5k is lower than $40k and 4%-0.25%=3.75%.
You want a model that explains both general human behaviour and yours specifically (good luck) but multiplying your spending by 0.98 is actually the best model.
You want to have a deep understanding of risk but really the most applicable math is that 4% with no inflation adjustment is less than both 7% in real terms while saving and 4% real while withdrawing.
But you would be correct in your basic model that ~6% real return with variations is better than 3% nominal over the long term.

There's nothing wrong with learning more about complex models and they can be very revealing, but in personal finance generally the most basic math explains virtually the entire outcome, while more sophisticated approaches add very little, nothing, and frequently even detract from the basics. Even the stuff we are arguing is almost beside the point, simply deciding to save and invest 50% of your income will determine virtually the entire outcome.

shinn497

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #191 on: June 01, 2018, 04:17:49 PM »
I know you may not want to see, but many posters seem to be picking up on a common thread in your thinking. I'm sure there are many ways of looking at it. One I notice is that you think complex explanations have more explanatory power than basic explanations. This causes you to reject the basic math which is really most relevant.
You want to study Black-Litterman (probably not the world's most interesting model but you will still learn interesting things by studying it) when actually the most useful numbers are that $37.5k is lower than $40k and 4%-0.25%=3.75%.
You want a model that explains both general human behaviour and yours specifically (good luck) but multiplying your spending by 0.98 is actually the best model.
You want to have a deep understanding of risk but really the most applicable math is that 4% with no inflation adjustment is less than both 7% in real terms while saving and 4% real while withdrawing.
But you would be correct in your basic model that ~6% real return with variations is better than 3% nominal over the long term.

There's nothing wrong with learning more about complex models and they can be very revealing, but in personal finance generally the most basic math explains virtually the entire outcome, while more sophisticated approaches add very little, nothing, and frequently even detract from the basics. Even the stuff we are arguing is almost beside the point, simply deciding to save and invest 50% of your income will determine virtually the entire outcome.

I mean my savings rate rn is 60% and I'm pretty confident my income could double soon!

I don't know if I would say that it is universally the case that simple models win over complex one. I think people can have a bias either way.  When it is more often the case that there is some middle ground that is perhaps even harder to explain. I think that a lot of what people chalk up to "experience" and "feelings" are really just very complex models. OR moderately complex models with some amount of acceptable noise (one of the reason I'm not a fan of any kind of model with no uncertainty baked in).

I mean personally have a bias against simpler models because, well they are just so boring. It is like when I tell people I used to be an experimentalist and they ask me how to do simple ballistics problems. I'd rather learn about covariance matrices and such. With that said I'd like to think I'm woke enough to separate what is really an academic interest in economics over something that will govern my exact decision making.

Also curious. What is more interesting than Black-Littner. One of the reasons I Am interested in it is that it has been extensively studied, the orignal paper haven been cited 36k times. I feel something so important I should be aware of.

tomsang

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #192 on: June 01, 2018, 05:02:08 PM »
During FIRE all income comes from the investments (or nearly all if I keep a side gig for awhile), so I don't have to self-insure against a job loss as it were.  I don't know that we will need cash on the sidelines at that point.

That is why I think it is more important to have an Emergency Fund when you are retired.  If the market drops 50% for six months or a year, then you are selling your investments at the bottom.  You don't have your salary to earn your way out. 

If you are working and have taxable assets that you could tap for an emergency, then an emergency fund is not that useful.  I have had a lot of large expenses pop up.  Rarely, do they need $'s within hours.  I also have access to around $400k in credit card lines if the emergency was very large.  That would give me 25 days to find the money. That may also cost me a 2% in CC fees, but that is a small price to pay.  Having a large chunk sitting in a savings or checking account is a huge drain on your finances when you are in the accumulation phase.

If you are a married couple that both work and make about the same and your saving rate is 50%, then by definition you would both need to lose your job to have an issue.  If you are working at different companies and don't feel like you would both lose your job, then an emergency fund is not that useful.   

ysette9

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #193 on: June 01, 2018, 08:12:41 PM »
And the same reasons are why I personally feel comfortable with the reverse glide path at retirement. Have a good chunk of bonds hat gets spent down during the first ten heads of FIRE to protect against sequence of returns risk, until you reach the safe zone when your portfolio is too big to fail. I believe The Mad Fientist, Wade Pfau, and Michael Kitces have all done analyses on this and shown it to be robust, at least in backtesting.

A side note: I’ve generally read that when modeling market returns, many people feel that previous data is more appropriate as Monte Carlo assumes events are unrelated and therefore any jumble of prévois year’s market performance is as likely as another. In fact markets are driven by human behavior, and a down market is more likely to be followed by a recovery than another downturn. Meaning, modeling the stock market crash of the 1920s followed by the Great Recession isn’t likely to happen because markets don’t behave like that.
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shinn497

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #194 on: June 01, 2018, 09:50:37 PM »
A side note: Iíve generally read that when modeling market returns, many people feel that previous data is more appropriate as Monte Carlo assumes events are unrelated and therefore any jumble of prťvois yearís market performance is as likely as another. In fact markets are driven by human behavior, and a down market is more likely to be followed by a recovery than another downturn. Meaning, modeling the stock market crash of the 1920s followed by the Great Recession isnít likely to happen because markets donít behave like that.

That is a good point. Like you could do model the motion of the market as an increasing average with Gaussian noise. Or even layer in either seasonality or some markovian assumptions to add in the effects of market cycles. But I think you would be hard-pressed to predict anomalous and irrational behavior.

I think this is why we all make conjecture and disagree about the markets. While there are some clear patterns, what causes these patterns is unexpected.

shinn497

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #195 on: June 01, 2018, 09:54:01 PM »
My account has market swings of $40k in a day, the market brought it down $300k in one year.  I don't flinch, I also don't have much emotions regarding my plan. I just follow it.

Just curious, and I'm not doubting you. Why do you believe this about yourself? Do you have low fixed costs relative to your passive income? HAve you audited or vetted your own behavior? Or do you just feel this way because of confidence?

tomsang

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #196 on: June 01, 2018, 11:38:02 PM »
My account has market swings of $40k in a day, the market brought it down $300k in one year.  I don't flinch, I also don't have much emotions regarding my plan. I just follow it.

Just curious, and I'm not doubting you. Why do you believe this about yourself? Do you have low fixed costs relative to your passive income? HAve you audited or vetted your own behavior? Or do you just feel this way because of confidence?

During the accumulation stage, the fluctuations are meaningless.  If I was retiring with a 4% SWR and the market dropped the first year, I would be concerned even if the models showed that based on the worst sequence I was still safe.  During the accumulation stage if the markets dropped 50% the year before I was going to retire, I would just work another year or even two to ensure that I was safe.  During the accumulation stage, I believe most people should be 100% equity.  If they can't handle the market swings then they need to create a portfolio that works for their emotional state.  I also think that people that are paying off their 4% fixed rate 30 year mortgages are crazy.  They are emotionally feeling better about getting rid of debt, even though it is hurting their financial well being.  If they had the facts, they would be emotionally feel safer keeping their mortgage.

I look forward to seeing you grow your knowledge over the next few years. I think your emotional state will change.

Good Luck!

powskier

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #197 on: June 02, 2018, 12:25:46 AM »

[/quote]


The issue is that every time someone wants to try to convince me of something, they also insult my intelligence. Which just makes me defensive. Anyway, the first couple of posts answered my question. I am really not sure why this thread is still going on, if only to further insult my intelligence. Which is more amusing at this point than anything.

[/quote]

It's hard to learn anything when your ego is on the line all the time. We've all been there. Some of us have also mistakenly called it our "intelligence".

Radagast

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #198 on: June 02, 2018, 12:57:04 AM »
I know you may not want to see, but many posters seem to be picking up on a common thread in your thinking. I'm sure there are many ways of looking at it. One I notice is that you think complex explanations have more explanatory power than basic explanations. This causes you to reject the basic math which is really most relevant.
You want to study Black-Litterman (probably not the world's most interesting model but you will still learn interesting things by studying it) when actually the most useful numbers are that $37.5k is lower than $40k and 4%-0.25%=3.75%.
You want a model that explains both general human behaviour and yours specifically (good luck) but multiplying your spending by 0.98 is actually the best model.
You want to have a deep understanding of risk but really the most applicable math is that 4% with no inflation adjustment is less than both 7% in real terms while saving and 4% real while withdrawing.
But you would be correct in your basic model that ~6% real return with variations is better than 3% nominal over the long term.

There's nothing wrong with learning more about complex models and they can be very revealing, but in personal finance generally the most basic math explains virtually the entire outcome, while more sophisticated approaches add very little, nothing, and frequently even detract from the basics. Even the stuff we are arguing is almost beside the point, simply deciding to save and invest 50% of your income will determine virtually the entire outcome.

I mean my savings rate rn is 60% and I'm pretty confident my income could double soon!

I don't know if I would say that it is universally the case that simple models win over complex one. I think people can have a bias either way.  When it is more often the case that there is some middle ground that is perhaps even harder to explain. I think that a lot of what people chalk up to "experience" and "feelings" are really just very complex models. OR moderately complex models with some amount of acceptable noise (one of the reason I'm not a fan of any kind of model with no uncertainty baked in).

I mean personally have a bias against simpler models because, well they are just so boring. It is like when I tell people I used to be an experimentalist and they ask me how to do simple ballistics problems. I'd rather learn about covariance matrices and such. With that said I'd like to think I'm woke enough to separate what is really an academic interest in economics over something that will govern my exact decision making.

Also curious. What is more interesting than Black-Littner. One of the reasons I Am interested in it is that it has been extensively studied, the orignal paper haven been cited 36k times. I feel something so important I should be aware of.
I definitely have the opposite problem, I love to cook up simple rules of thumb that are 80% correct and ignore the details. But   I don't generally cite experience or feelings because I generally feel I have little meaningful experience in anything and my head works in numbers and quantities more than feelings, but I can make bad decisions based on anecdotal observations.

I haven't looked at Blacklitterman in depth, only read some general information. Portfolio Visualizer says it "combines ideas from the Capital Asset Pricing Model (CAPM) and the Markowitzís mean-variance optimization model" and then lets the user adjust the results based on their own opinion. But CAPM was shown to have little explanatory value shortly after it was introduced and MVO results change drastically with small changes in input and are not very useful in practice. Opinions are as common as assholes. Also, if the Betterment people's opinions are so good, why do they even need to use Black Litterman? Basically I view it as a little box that you put numbers in and it gives you numbers back, and if you don't like them you put different numbers in until you get a result you like. What's the point?

A morningstar paper says "The Black-Litterman model enables investors to combine their unique views regarding the performance of various assets with the market equilibrium in a manner that results in intuitive, diversified portfolios...The Black-Litterman model uses a Bayesian approach to combine the subjective views of an investor regarding the expected returns of one or more assets with the market equilibrium vector of expected returns (the prior distribution) to form a new, mixed estimate of expected returns."
Now I am biased here because seeing "Bayesian" in this context gives me a similar feeling to "denotes a person who is full of shit". "Vector" also gives me that feeling, as does "subjective views of an investor." Peoples unique views are notoriously bad in investing, even experts.

From what I can tell, Betterment determines an asset allocation that seems reasonable and not too far out of line from what other people use and then uses the Black-Litterman model to justify it, and perhaps give it a few tweaks to add decimal points and percentages that look sophisticated. Also, it may allow them to make small tweaks over time that make backtesting difficult, meaning people can't readily verify their performance compared to other investments, meaning it is hard to falsify. You can't enter their portfolio into portfoliovisualizer and check it against the S&P over the past 10 or 30 years because you can't know what it would have been. It reduces transparency.

A  Betterment 100% stock allocation includes US total market, large value, mid value, small value, emerging markets, and developed markets. You probably don't like guesses, but I guess weighting each of these at 16.7% has a 50/50 chance (or better!) of being better than whatever weightings they use. But that wouldn't give the appearance of justifying 0.25% fees. It would make people just decide to do it themselves.

If you do it yourself I have less issue, but many of the same comments apply. Why use this instead of some other weighting system? If your subjective guesses are good, why bother with this extra layer of complexity to give what you already "know" to be true? Can you prove it is better than 1/n investing, or allocating according to nice round numbers, or only allocating in prime numbers? How about a valuation weighting system using CAPE10 and bond yields minus trailing 10 year inflation?

shinn497

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #199 on: June 02, 2018, 01:19:28 AM »
My account has market swings of $40k in a day, the market brought it down $300k in one year.  I don't flinch, I also don't have much emotions regarding my plan. I just follow it.

Just curious, and I'm not doubting you. Why do you believe this about yourself? Do you have low fixed costs relative to your passive income? HAve you audited or vetted your own behavior? Or do you just feel this way because of confidence?

During the accumulation stage, the fluctuations are meaningless.  If I was retiring with a 4% SWR and the market dropped the first year, I would be concerned even if the models showed that based on the worst sequence I was still safe.  During the accumulation stage if the markets dropped 50% the year before I was going to retire, I would just work another year or even two to ensure that I was safe.  During the accumulation stage, I believe most people should be 100% equity.  If they can't handle the market swings then they need to create a portfolio that works for their emotional state.  I also think that people that are paying off their 4% fixed rate 30 year mortgages are crazy.  They are emotionally feeling better about getting rid of debt, even though it is hurting their financial well being.  If they had the facts, they would be emotionally feel safer keeping their mortgage.

I look forward to seeing you grow your knowledge over the next few years. I think your emotional state will change.

Good Luck!

Can I make another note of mortgages and such. I am so not married to the idea of owning a home. It would be cool, I like going on redfin and imagining things, but I'm also not saving for a downpayment. In fact, more and more it is just seeming like it isn't worth it to do so vs keeping my money in the market. Really I would only save for a down payment if I switched jobs and negotiated a much higher salary relative to whatever cost of living I have. Or, through some other means, my income increased relative to my current housing market, OR the housing market I planned to live in.

I also would only move into a house if the cost of staying there was low. Outside of any tax advantages or equity appreciate, it would have to comparable to my current rent, which is 15% of my take home pay. I think I mentioned earlier, but I would pretty much follow DR's advice and go with less than 25% on a 15 year. I actually realized something. At this level, I could pretty much be FIRE, since the option would be available to take on room mates or airbnb to cover the rest of the cost. I'm not  saying I'd go this route necessarily but it would be comforting.

Here is the thing. Looking at the country as a whole. There are some areas where I could do this in less than decade. Places I wouldn't mind working, like austin, rahleigh, atlanta, colorodo, etc. etc. OR I could go to a HCOL area like SF or LA, negotiate a higher salary, work for a decade, and then geo arbitrage.

Now I know this is a lot of planning. But when I say I want a paid off house asap. Those are the assumptions I'm working with. What I wouldn't do is go get a house tommorow, put it on a 30 year loan, deal with house BS, pay closing, inspection, fees, insurance, and property taxes, spend time doing maintence, and then pat myself on the back for being a grown upy adult. And then justify the whole thing because I'm investing the difference. I'd rather avoid that, invest the difference anyway, live in my tiny apt (which is across from my job and gives me an incredible 5 minute walking commute), and utilize the flexibility of being a single 30 year to improve my financial decision 5,10,15, 200 years later (Why not live to 200 YOLO).

I'm not saying this path is for everyone, but those are the assumptions I'm dealing with. But they are the reason I think mortgaging a 30 year place is kind of insane relative to the alternative.

Also I'm curious. Are people really taking 4% SWRs and having that match closely with their expected costs. I actually think that is a bit pushing it. I could understand if your fixed costs were like 15k and 4% gave you 20,30, or 40k per year. But if you absolutely NEED that 4% to the extent that you'll be hosed if you don't get it, then I can understand glide paths and such. Ionno, people seem to really like the 4%, when I say it is important to give yourself some wiggle room.