Author Topic: Why not do 100% allocation, draw 4% at retirement, and yolo it?  (Read 24049 times)

Classical_Liberal

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #50 on: May 18, 2018, 02:09:57 PM »
I would just like to point out how odd it is that someone won't use rewards credit cards for fear of screwing up and accidentally getting hit with a hundred bucks in fees/interest.  Yet the same person is so risk tolerate that 50-60% (loss of potentially hundreds of thousands of dollars) decrease in stash value with 100% US equities is no problem.

Somethings got to give.  I encourage the OP to reconcile these views with her/his-self before a situation arises.

aspiringnomad

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #51 on: May 18, 2018, 06:08:12 PM »
If I followed correctly, here's the TL;DR:

"I'm gonna YOLO cuz I got the FOMO, so it's 100% stocks, except I don't trust the data or myself so I mix in a paid off house and no credit card usage."

You do you, OP.

shinn497

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #52 on: May 18, 2018, 10:32:47 PM »
The idea is to get your base expenses as minimal as possible giving you the freedom to make sensible but risky investments.

If I can at any point only need to pull out 500$ a month, what will I care if the market falls 30% on 2 million dollars.

The way I see it, we will need to accept some level of risk one way or the other. I'd rather shift the risk to "Oh no my nest egg is temporarily down" to "Oh no I'm going to get evicted out of my house".

Also I trust the data. I'm a Data Scientist. Why wouldn't I. With that said, finance is a complex subject. And I am still learning, collecting, and forming my own models. This is why I asked this question. My opinion is still developing.

With that said. The first couple of posts directing me to those blogs full of yummy monte carlo methods and analysis that actually are aware that stochasticity is a thing were amazing and I am still reviewing the blogs they link to.
« Last Edit: May 18, 2018, 11:24:30 PM by shinn497 »

privatefarmer

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #53 on: May 21, 2018, 12:59:59 AM »
That is a terrible analogy. Going to a doctor has a high probability of improving your situation, and cost should not be an issue if you have saved and have health insurance. By comparison, credit card churning has a low probability of working. Maybe the conditional probability is higher or something, but, if you are going to assume you are "One of the few" that is better than average with financial behaviour, than that is something that flies in the face of most of the facts. Most likely you are average, perhaps especially if you think you aren't.

I don't play credit games with money because it isn't worth the headache for something that has a small probability of succeeding, and has a small payout.  I think this because I do not make the assumption that I have perfect behaviour and that everything will go according to as planned. It should be noted. People, and especially Americans, have a natural tendency to overestimate how well things will occur. It is why we buy lottery tickets, take out loans to get degrees, and invest in bitcoin.

And no. I don't think being on a forum means you are good with money. That is intention not execution. Money isn't about ideas, it is about actually sticking to your guns and making those ideas reality. And that is considerably considerably more difficult.

if you're a mustachian then presumably your income >> living expenses. So it would be foolish NOT to use a cc for all expenses and reap the rewards.... if you're living paycheck to paycheck then obviously stay away from cc's until you can either increase your income or decrease you lifestyle, or both. but if you have excess cash each month it's not all that difficult to make sure you pay off your cc in full w/o paying any interest... I just pay my cards off after each paycheck, it's pretty simple really, and since I am very aggressive w/ cc churning/sign-up bonuses I probably average around 5-10% off on all my expenses...

shinn497

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #54 on: May 21, 2018, 07:23:38 AM »
Dear god can we not make this a "lets grill Shinn for not using CCs". I have my reasons, and I have heard this argument to so many times.

RookieStache

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #55 on: May 21, 2018, 08:12:56 AM »
This thread isn't going to go anywhere my friends.

Based off what I have seen, I assume the OP found Dave Ramsey first. While I appreciate What Ramsey has done (read his book, listen to a few of his podcasts), his followers believe in emotion > math. They don't believe in acquiring the most possible net wealth they can based on their situation, they simply follow exactly what Ramsey says, even if it causes you to lose tens of thousands of dollars in opportunity cost.

I am on their Facebook group and I posted my situation just to see the response. I stated that I have a $12,000 car loan with 35 months remaining on it at 0% interest. I also told them that i'm Maxing out my HSA/Roth IRA and 10% into my 401K. EVERYONE responded by stating that I should stop paying into my retirement accounts until I had the car paid off. Even after I explained to them how this would be irresponsible, they said it's about more than the math...

I also explained how, for people that are disciplined, having a credit card is an advantage. All you have to do is pay off the credit card the night that you use it and you will never be charged interest or over spend and you get FREE cash back rewards. They all told me I was wrong on this as well...

Again, I'm not bashing Ramsey as he is good for 90% of America, but his followers follow his 8BS's to a T and are not willing to expand their knowledge at all!   

Cache_Stash

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #56 on: May 21, 2018, 09:15:52 AM »
I retired last year.  100% stock allocation, 55 years young.  So I guess I'm YOLO at this point.  i do have a pension that i can draw on at 60, so that helps with the YOLO attitude.  I've been 100% stocks for the last 20 years or so (when I actually started saving).  During the 20 years, I've taken very large hits during 2000 and 2008.  Rode the storm out and came out on the other side in better condition so I've learned to deal with the emotional rollercoaster. 

I don't need a lot of money.  I have no debt, own my house and only have typical monthly bills.  If my savings take a 50% haircut, I can deal with it.

If you are going to do it, then make sure you can withstand the down periods.  Most people don't like the risk and the emotional hit.

boarder42

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #57 on: May 21, 2018, 10:20:08 AM »
That is a terrible analogy. Going to a doctor has a high probability of improving your situation, and cost should not be an issue if you have saved and have health insurance. By comparison, credit card churning has a low probability of working. Maybe the conditional probability is higher or something, but, if you are going to assume you are "One of the few" that is better than average with financial behaviour, than that is something that flies in the face of most of the facts. Most likely you are average, perhaps especially if you think you aren't.

I don't play credit games with money because it isn't worth the headache for something that has a small probability of succeeding, and has a small payout.  I think this because I do not make the assumption that I have perfect behaviour and that everything will go according to as planned. It should be noted. People, and especially Americans, have a natural tendency to overestimate how well things will occur. It is why we buy lottery tickets, take out loans to get degrees, and invest in bitcoin.

And no. I don't think being on a forum means you are good with money. That is intention not execution. Money isn't about ideas, it is about actually sticking to your guns and making those ideas reality. And that is considerably considerably more difficult.

Credit card churning or using credit cards for the return given based on rewards point have higher probabilies of working than going to a doctor.  its a simple math equation if i use a credit card that gives me 1% back i'm guaranteed that 1% back as long as i dont change my spending habits from using cash.  you say you're a data scientist and the way you're throwing around probability and success here scare me greatly.  Credit card churning on the other hand can be run with Manufactured Spending like a business to reap insane rewards - millions of frequent flyer miles. 

Personally it sounds like you have self control problems when it comes to credit and other debt so you've decided to personally not leverage these things - which is fine but to throw in words like success and probability when its a personal self control issue- these things dont play in the same arena.

The probability of a low fixed rate mortgage taken to term - based on history (which is the basis of your 4% rule) beating paying down that mortgage vs investing in 100% stocks is so overwhelmingly large - its hard to see how a data scientist cant see that probablity - we're talking great than 90% of the possible pay down windows in history the mortgage wins out when its at current mortgage rates vs paying it down or buying lump sum.

And the credit card thing drives me nuts still that you're trying to use chances of success or probability in doing better with a credit card.  if you spend money the same way with or without a credit card the credit card wins 100% of the time.  if you cant do that b/c of a self control issue thats a different story.

boarder42

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #58 on: May 21, 2018, 10:26:20 AM »
The idea is to get your base expenses as minimal as possible giving you the freedom to make sensible but risky investments.

If I can at any point only need to pull out 500$ a month, what will I care if the market falls 30% on 2 million dollars.

The way I see it, we will need to accept some level of risk one way or the other. I'd rather shift the risk to "Oh no my nest egg is temporarily down" to "Oh no I'm going to get evicted out of my house".

Also I trust the data. I'm a Data Scientist. Why wouldn't I. With that said, finance is a complex subject. And I am still learning, collecting, and forming my own models. This is why I asked this question. My opinion is still developing.

With that said. The first couple of posts directing me to those blogs full of yummy monte carlo methods and analysis that actually are aware that stochasticity is a thing were amazing and I am still reviewing the blogs they link to.

this isnt a 4% SWR on 100% Stock allocation

this is a 0.3% Withdrawal rate

as you said you have lots to learn - first and foremost you should probably forget everything dave told you and start relearning finances from the much more intelligent people around here.  He helped pull you out of the 90% of americans crowd now you're mixing with the 0.1% of americans who have in depth understanding of finances and can help you acheive your goals faster and more efficiently if you're willing to learn and blow up some of the foundational things DR has placed in your head. 

RookieStache

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #59 on: May 21, 2018, 10:31:36 AM »
I retired last year.  100% stock allocation, 55 years young.  So I guess I'm YOLO at this point.  i do have a pension that i can draw on at 60, so that helps with the YOLO attitude.  I've been 100% stocks for the last 20 years or so (when I actually started saving).  During the 20 years, I've taken very large hits during 2000 and 2008.  Rode the storm out and came out on the other side in better condition so I've learned to deal with the emotional rollercoaster. 

I don't need a lot of money.  I have no debt, own my house and only have typical monthly bills.  If my savings take a 50% haircut, I can deal with it.

If you are going to do it, then make sure you can withstand the down periods.  Most people don't like the risk and the emotional hit.

You didn't start actively saving for retirement until 35 and retired at 55? Well done!

shinn497

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #60 on: May 21, 2018, 11:03:21 AM »
This thread isn't going to go anywhere my friends.

Based off what I have seen, I assume the OP found Dave Ramsey first. While I appreciate What Ramsey has done (read his book, listen to a few of his podcasts), his followers believe in emotion > math. They don't believe in acquiring the most possible net wealth they can based on their situation, they simply follow exactly what Ramsey says, even if it causes you to lose tens of thousands of dollars in opportunity cost.

I am on their Facebook group and I posted my situation just to see the response. I stated that I have a $12,000 car loan with 35 months remaining on it at 0% interest. I also told them that i'm Maxing out my HSA/Roth IRA and 10% into my 401K. EVERYONE responded by stating that I should stop paying into my retirement accounts until I had the car paid off. Even after I explained to them how this would be irresponsible, they said it's about more than the math...

I also explained how, for people that are disciplined, having a credit card is an advantage. All you have to do is pay off the credit card the night that you use it and you will never be charged interest or over spend and you get FREE cash back rewards. They all told me I was wrong on this as well...

Again, I'm not bashing Ramsey as he is good for 90% of America, but his followers follow his 8BS's to a T and are not willing to expand their knowledge at all!

I actually found MMM first, but started the serious path to financial freedom after being motivated by Dave Ramsey.

And I see it this way. The math is great. But day in and day out I do question how much of it actually applies. Spending money is easy and sticking to a budget is hard. I peruse through my finances constantly and have always found little trip ups and deviations. In fact it is hard to know when I have made mistakes since I will often change my budget as I go or not remember what my original projections or intentions were. Even using budgeting software and excel this happens, since their classifiers are often not so great. And then, sometimes I just want to deviate from my budget. I get emotional and want to enjoy myself.

For all of these reasons, I err to not assume perfect behaviour. I am also very suspicious of people that do, especially giving mounting evidence that most people do not, including those that are financially intelligent. I actually have a theory that more financially intellgient people out there are more likely to deviate from their budget since certain assumptions change when you don't model behaviour. Part of the evidence for this is that there is a evidence that (DR's own studies, millionaire next door, etc. etc.) people that get wealthy do so without debt or paying attention to the math. Yet every blog I see that focuses on wealth building is more about math than behvaiour. Again, a discrepancy I would like to understand. 

For you I would question why you went to a DR group and asked how to deal with debt. His stances on it are pretty clear, so I don't know what you intended on expecting. And here is the thing. After listening to his show, there are people that ask him and others the same kinds of questions. And I think to some extent you just can't convince them. If you are not down with the plan, doin't expect some kind of magic revelation or truth to be unveiled that will convince you. Even if there were, people are not likely to change their thinking after seeing evidence that contradicts their world view. This is true even if the evidence is very compelling. I mean similiarly for me. I understand many of the arguments for using leverage to build wealth, but I am not comfortable using them. There is probably a bias on there on both sides and I think that is ok. 

Some final notes:

   - I really don't like the idea that "Its Math vs  behaviour". You can mathematically model behaviour if you use probability theory but it is very difficult. Really the statement should be "Its simple math vs behaviour". There is probably some more work to be done in this field since behavioural economics is somewhat new.
   - There are 6 Baby Steps
   - I wonder about the "You are posting on this forum so you are an advanced user." idea. I question this because of the role sampling bias is in play. Can you really say any kind of inference on the number of people that post here extrapolates to a general case? I say no. BUT, could you assume that the conditional probability of posting here effects any assumptions on behaviour? I say perhaps so. BUT, what about selection bias in terms of people that are on the forums or self-identify but only post successes. E.G. Are people more likely to post if they succed in behaviour vs not. And that is something I think people should be wary of.
   - I question the idea that "Dave Ramsey's investing advice is bad." Well I sort of agree. He does specifically say to go trhough mutual funds, but the baby steps do not specify how you should invest, just that you DO invest. In most cases, when people ask him to invest, he stresses that the intent to do so is greater than the method of hwo. And, when people report to him they invest differently, he praises them, as long as they are in something sensible like unleveraged securities or real estate. He has even praised someone who was in leveraged real estate. I think we should be careful to seperate dave's own preferences from the advice he gives. Even if he gives his preferences as advice. 
   - I personally prefer index funds. But there are some arguments against them. In particular, they don't value their underlying securities properly. Behaviourally they are perhaps too liquid. And some of the assumptions about their efficacy relative to active trading might be effected by traders' own biases. E.G. how many active traders are attempting to really beat the market vs invest more conservatively for older clients. Again, this doesn't mean that indexing is bad just that we should always be critical and evaluete investments on our own terms rather than doing what everyone else does. I think I've realized that investing is an individual thing, and it is hard for one person to really apply their situation to others, especailly when both parties have assumptions they aren't inherently aware of.

shinn497

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #61 on: May 21, 2018, 11:14:09 AM »
Hey so I think I've learned as much as I can on this topic. I'm just going to stop replying to this thread. If we want to have a debate on credit card churning and behavioural economics, we should od it elsewhere. I also think there is another active topic onf safe withdrawal rates that is probably better. You should look at that.

I am not responding to any further messages. But hey feel free to post on this. Please try to avoid personal attacks,however. That is just uncouth


I responded I'm terrible. Yolo
« Last Edit: May 21, 2018, 01:43:23 PM by shinn497 »

boarder42

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #62 on: May 21, 2018, 11:17:02 AM »
Hey so I think I've learned as much as I can on this topic. I'm just going to stop replying to this thread. If we want to have a debate on credit card churning and behavioural economics, we should od it elsewhere. I also think there is another active topic onf safe withdrawal rates that is probably better. You should look at that.

I am not responding to any further messages. But hey feel free to post on this. Please try to avoid personal attacks,however. That is just uncouth

not sure i've seen a personal attack at you just attacks at your ideas and how contradictory they are - when ideas are attacked people can take them personally - that however does not make it a personal attack.

RookieStache

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #63 on: May 21, 2018, 01:22:21 PM »
This thread isn't going to go anywhere my friends.

Based off what I have seen, I assume the OP found Dave Ramsey first. While I appreciate What Ramsey has done (read his book, listen to a few of his podcasts), his followers believe in emotion > math. They don't believe in acquiring the most possible net wealth they can based on their situation, they simply follow exactly what Ramsey says, even if it causes you to lose tens of thousands of dollars in opportunity cost.

I am on their Facebook group and I posted my situation just to see the response. I stated that I have a $12,000 car loan with 35 months remaining on it at 0% interest. I also told them that i'm Maxing out my HSA/Roth IRA and 10% into my 401K. EVERYONE responded by stating that I should stop paying into my retirement accounts until I had the car paid off. Even after I explained to them how this would be irresponsible, they said it's about more than the math...

I also explained how, for people that are disciplined, having a credit card is an advantage. All you have to do is pay off the credit card the night that you use it and you will never be charged interest or over spend and you get FREE cash back rewards. They all told me I was wrong on this as well...

Again, I'm not bashing Ramsey as he is good for 90% of America, but his followers follow his 8BS's to a T and are not willing to expand their knowledge at all!

I actually found MMM first, but started the serious path to financial freedom after being motivated by Dave Ramsey.

And I see it this way. The math is great. But day in and day out I do question how much of it actually applies. Spending money is easy and sticking to a budget is hard. I peruse through my finances constantly and have always found little trip ups and deviations. In fact it is hard to know when I have made mistakes since I will often change my budget as I go or not remember what my original projections or intentions were. Even using budgeting software and excel this happens, since their classifiers are often not so great. And then, sometimes I just want to deviate from my budget. I get emotional and want to enjoy myself.

For all of these reasons, I err to not assume perfect behaviour. I am also very suspicious of people that do, especially giving mounting evidence that most people do not, including those that are financially intelligent. I actually have a theory that more financially intellgient people out there are more likely to deviate from their budget since certain assumptions change when you don't model behaviour. Part of the evidence for this is that there is a evidence that (DR's own studies, millionaire next door, etc. etc.) people that get wealthy do so without debt or paying attention to the math. Yet every blog I see that focuses on wealth building is more about math than behvaiour. Again, a discrepancy I would like to understand. 

For you I would question why you went to a DR group and asked how to deal with debt. His stances on it are pretty clear, so I don't know what you intended on expecting. And here is the thing. After listening to his show, there are people that ask him and others the same kinds of questions. And I think to some extent you just can't convince them. If you are not down with the plan, doin't expect some kind of magic revelation or truth to be unveiled that will convince you. Even if there were, people are not likely to change their thinking after seeing evidence that contradicts their world view. This is true even if the evidence is very compelling. I mean similiarly for me. I understand many of the arguments for using leverage to build wealth, but I am not comfortable using them. There is probably a bias on there on both sides and I think that is ok. 

Some final notes:

   - I really don't like the idea that "Its Math vs  behaviour". You can mathematically model behaviour if you use probability theory but it is very difficult. Really the statement should be "Its simple math vs behaviour". There is probably some more work to be done in this field since behavioural economics is somewhat new.
   - There are 6 Baby Steps
   - I wonder about the "You are posting on this forum so you are an advanced user." idea. I question this because of the role sampling bias is in play. Can you really say any kind of inference on the number of people that post here extrapolates to a general case? I say no. BUT, could you assume that the conditional probability of posting here effects any assumptions on behaviour? I say perhaps so. BUT, what about selection bias in terms of people that are on the forums or self-identify but only post successes. E.G. Are people more likely to post if they succed in behaviour vs not. And that is something I think people should be wary of.
   - I question the idea that "Dave Ramsey's investing advice is bad." Well I sort of agree. He does specifically say to go trhough mutual funds, but the baby steps do not specify how you should invest, just that you DO invest. In most cases, when people ask him to invest, he stresses that the intent to do so is greater than the method of hwo. And, when people report to him they invest differently, he praises them, as long as they are in something sensible like unleveraged securities or real estate. He has even praised someone who was in leveraged real estate. I think we should be careful to seperate dave's own preferences from the advice he gives. Even if he gives his preferences as advice. 
   - I personally prefer index funds. But there are some arguments against them. In particular, they don't value their underlying securities properly. Behaviourally they are perhaps too liquid. And some of the assumptions about their efficacy relative to active trading might be effected by traders' own biases. E.G. how many active traders are attempting to really beat the market vs invest more conservatively for older clients. Again, this doesn't mean that indexing is bad just that we should always be critical and evaluete investments on our own terms rather than doing what everyone else does. I think I've realized that investing is an individual thing, and it is hard for one person to really apply their situation to others, especailly when both parties have assumptions they aren't inherently aware of.

I enjoyed this response Shinn. This helped me understand the Ramsey followers thinking. Before, they would just attack by stating that i'm wrong because that's not how Dave Ramsey would do it. You understand that the math (for those that are disciplined) doesn't add up following Ramsey's way, but you also understand that most people aren't disciplined enough to forgo paying the debt because they know they would invest every penny they can to make up that difference.

You also stated this:
Part of the evidence for this is that there is a evidence that (DR's own studies, millionaire next door, etc. etc.) people that get wealthy do so without debt or paying attention to the math. Yet every blog I see that focuses on wealth building is more about math than behvaiour. Again, a discrepancy I would like to understand.

Anyone who is smart with their money and makes a decent income can be well off. There is no denying that someone making $150,000 a year who pays off all their debts/mortgage first, and then saves for retirement, can easily become  wealthy.  But this same person is also foregoing the opportunity at earning tens/hundreds of thousands of dollars of interest by selecting the less optimal way (for those that are disciplined).

After reading quite a bit of content on both forums, the disconnect is simple...

Dave's way works for 95% of America. People who can't trust themselves with credit cards or to invest instead of spend when they have debt, should follow Dave's plan.

But for the 5% who are so far deep into personal finance that they understand and are willing to do what needs to be done to optimize net wealth, Dave's plan has some major key flaws. 
 
« Last Edit: May 21, 2018, 01:24:43 PM by RookieStache »

shinn497

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #64 on: May 21, 2018, 01:42:51 PM »
Ok your response is more sensisble. So I'll break my silence for a bit. 

Here is my thinking. I'm not confident many people can even know when they are spending properly. In my experience, human beings are unreliable narrators. We intend to take a certain course of action and then actually take another. This tends to be oberservable from the outside but isn't apparent to us. I think this is especially true in finance. This is why rewards programs exist, and make a ton of money. No one intends on going into debt or even holding a balance. But several people eventually do, including those that are good with money. Everyone thinks they are the select few that is better than the population. Now I have heard some evidence that people who truly due have high net worths and low debt to income ratios buck this trend. But, for the time being, I'm going to be healthily skeptical of anyone that claims their own spending habits are better than most people. I just don't believe anyone is really that special.

But I could be wrong. Rememebr the people that are posting here and are into FI are a tiny tiny selection of the population. Probably like less than .1 There are what like 200 FI blogs out there and 300 million americans? Suffice it to say this is a small community. So it is probably likely that whatever statistics apply here don't apply elsewhere. But that has yet to be proven.

boarder42

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #65 on: May 21, 2018, 01:54:08 PM »
Ok your response is more sensisble. So I'll break my silence for a bit. 

Here is my thinking. I'm not confident many people can even know when they are spending properly. In my experience, human beings are unreliable narrators. We intend to take a certain course of action and then actually take another. This tends to be oberservable from the outside but isn't apparent to us. I think this is especially true in finance. This is why rewards programs exist, and make a ton of money. No one intends on going into debt or even holding a balance. But several people eventually do, including those that are good with money. Everyone thinks they are the select few that is better than the population. Now I have heard some evidence that people who truly due have high net worths and low debt to income ratios buck this trend. But, for the time being, I'm going to be healthily skeptical of anyone that claims their own spending habits are better than most people. I just don't believe anyone is really that special.

But I could be wrong. Rememebr the people that are posting here and are into FI are a tiny tiny selection of the population. Probably like less than .1 There are what like 200 FI blogs out there and 300 million americans? Suffice it to say this is a small community. So it is probably likely that whatever statistics apply here don't apply elsewhere. But that has yet to be proven.

so what exactly is your point

b/c the avg american will make poor choices that you must be inclined to make them too so you shouldnt optimize for your thought that b/c most others cant do it you cant either?

we understand we're in the minority here - and somehow you found this place so stop thinking and quoting what the majority does b/c thats not the region of the internet this forum lies inside of.  And for the record many here are natural savers like MMM and dont keep budgets - budgets actually lead for many people to spend more money than just becoming self aware of how you're spending and changing your habits to rethink whats valuable to you personally.  When the average person budgets they either consistently over spend or always spend up to the max in a discresionary category b/c its ear marked for that.  but money is fungible it doesnt live in artificial buckets. and to pass up a deal on chicken at the grocery store in may b/c you're almost out of your may grocery budget is a very short sighted look at budgeting and money in general.  or to spend an exta 100 bucks next month b/c your budget shows you have 100 bucks to go out to blow on hookers even though you've found you dont enjoy them anymore doesnt really make sense either.

The point is budgetting in a general sense is not something you should strive to do - you should strive to figure out how to reprogram how you think about spending a dollar - then when you are spending that dollar you should be optimizing it - i use a 6% cash back grocery card a 3.6% cash back Gas card.  that makes both of those purchases that much cheaper in real value in my life.  i dont buy more gas b/c its on a credit card or more groceries for that matter. 

talltexan

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #66 on: May 21, 2018, 02:05:10 PM »
It's been interesting to follow along in this debate both as someone who's  practiced the math (I frequently post on Boarder42's DON'T pay off your mortgage topic" and a longtime DR listener.

It's interesting to see some groups of people characterized: people who practice the Ramsey baby steps (Dave claims it's in the single-digit-millions), people who've graduated to the types of MMM-style lifestyle optimizations, readers of this blog/forum, and everybody else (consumer-suckas).

I've honestly felt like this community was about calling out the extravagance and damage that consumption culture--mainly practiced by Consumer-suckas--was doing to our people and our planet. I feel like the ignorance and poor impulse control that group is displaying is what creates the pollution and harmful culture damaging those of us trying to be financially independent. And it's insidious. Even though I think the talltexan HH is saving north of 20% of our income--many of you save more I imagine--I still see a thousand cuts a day where this insidious consumer culture is programming members of my family. And I myself even have weak moments. I went to a birthday party for a friend of my daughter's, and came away with this dark impulse toward enlarging our house from 3,088 ft^2 to 4,200 ft^2. Just being in a house at that larger size--with a Bistro/wine room! (imagine, a whole room of a house dedicated to consumption of one type of product that is not food)--made me want one. Consumption seems to have a gravity all its own.

I've listened to enough DR that I hear the respect Dave gives to people who've made serious money (one recent caller had approximately $3 million in equity) through leveraging real estate. I also take issue with some of the expensive conspicuous items (like a BMW or a Ford Raptor) he seems to endorse implicitly, by admitting he owns them, and I have no reason to believe he cannot afford them. The chance to change consumption-culture is where we mustachians should make our stand.

We'll have little chance of convincing Ramsey-disciples to change their no-credit-card practice, but we may be able to teach them to eschew consumerism. Since many of them will be building wealth anyway, what a victory that would be!


shinn497

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #67 on: May 21, 2018, 02:49:43 PM »
100 bucks to go out to blow on hookers

Where are these 100 hookers?

Asking purely for research purposes.

shinn497

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #68 on: May 21, 2018, 03:26:06 PM »
It's been interesting to follow along in this debate both as someone who's  practiced the math (I frequently post on Boarder42's DON'T pay off your mortgage topic" and a longtime DR listener.

It's interesting to see some groups of people characterized: people who practice the Ramsey baby steps (Dave claims it's in the single-digit-millions), people who've graduated to the types of MMM-style lifestyle optimizations, readers of this blog/forum, and everybody else (consumer-suckas).

I've honestly felt like this community was about calling out the extravagance and damage that consumption culture--mainly practiced by Consumer-suckas--was doing to our people and our planet. I feel like the ignorance and poor impulse control that group is displaying is what creates the pollution and harmful culture damaging those of us trying to be financially independent. And it's insidious. Even though I think the talltexan HH is saving north of 20% of our income--many of you save more I imagine--I still see a thousand cuts a day where this insidious consumer culture is programming members of my family. And I myself even have weak moments. I went to a birthday party for a friend of my daughter's, and came away with this dark impulse toward enlarging our house from 3,088 ft^2 to 4,200 ft^2. Just being in a house at that larger size--with a Bistro/wine room! (imagine, a whole room of a house dedicated to consumption of one type of product that is not food)--made me want one. Consumption seems to have a gravity all its own.

I've listened to enough DR that I hear the respect Dave gives to people who've made serious money (one recent caller had approximately $3 million in equity) through leveraging real estate. I also take issue with some of the expensive conspicuous items (like a BMW or a Ford Raptor) he seems to endorse implicitly, by admitting he owns them, and I have no reason to believe he cannot afford them. The chance to change consumption-culture is where we mustachians should make our stand.

We'll have little chance of convincing Ramsey-disciples to change their no-credit-card practice, but we may be able to teach them to eschew consumerism. Since many of them will be building wealth anyway, what a victory that would be!

WE must have listened to that same episode, since I heard that and was astounded. My take away was that if someone earns a lot you should respect them, regardless of how they did it. It doesn't mean you shoudl change your beliefs about frugality or avoidance of debt since one person, or even a select few of people, are not enough data to change an opinion over. I sort of think of it in the purview of bayesian analysis in this sense.

So I think maybe you can understand the pull of consumer culture. And I think that DR does too. But I wonder. At what point should you become frugal enough vs live your life and find happiness. At what point is there a happy medium.

Here is the thing. I, probably more than most people here, am extremely frugal. I think there is a thread about 'living under 2000' and my budget allows me to down to 1000$ if I wanted, and 1200$ realistically. There have been portions of my life where I was even less (like 500 - 700 a month). So I understand a lack of consumerism. Do I think it grabs people and makes them irrational? Absolutely so. But would I wish an extremely frugal life on others? Not really. This is actually why I like DR. He says that you can have extravagance if you have worked for it. And I think that that is fair, and it makes sense.

To live the life I do, I have completely rejected most social engagements, sold my car, moved across from my workplace, eaten mostly fishsticks, and rented a room from a peruvian lady. Now, is this mustacian? IDK may? But it isn't a way I want to live forever. What it has done is given me perspective as to the purpose of money and work. Money should set you free and allow you to live happily. It shouldn't shackle you to a job and it shouldn't mean you spend a life in servitude of a finacnial institution. This is why I have a hybrid approach to DR and MMM's theories. I say remove as many obligations as possible. Get everything like living and car paid for, have a nest egg that covers base expenses. And literally be at the will of as few people as possible. Let everyone in the country work to make you rich, and use that freedom to take more risks to make you even richer. And, if you can accomplish that, then you can get the lambos and the cars. Or maybe you can give and be generous.

Final note. It is oft mentioned to "Not let emotions get in the way of finance." I think that is a fools errand. Think about how emotional we all are. Whether it is to be financially free, to reject consumerism, to be rid of debt. There is some level of feeling behind our financial decision making. If we didn't have emotion, we would just rent cheap af craigs list rooms, quite working once our nest eggs were like 200k or something. Live on beans and rice. Never have friends or personal connections. And do nothing until we die. Clearl we all have personal beliefs and values and our spending is a representation of that. So that is why I am all about the emotions. They are what make us human.

bacchi

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #69 on: May 21, 2018, 03:30:43 PM »
100 bucks to go out to blow on hookers

Where are these 100 hookers?

Asking purely for research purposes.

That's only the upfront cost.


Radagast

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #70 on: May 21, 2018, 11:29:39 PM »
Dear god can we not make this a "lets grill Shinn for not using CCs". I have my reasons, and I have heard this argument to so many times.
I agree, we should not pick on you for not using debt. It is a perfectly good strategy. On the flip side, half of this forum has similar credentials to you and many choose to use debt to their advantage, so believe us when we say we are not losing money. (though I would guess successful versus failed debt usage is a contributing factor to growing income wealth inequality)

The most basic and fool proof type of CC is a Fidelity 2% cash back card. After every $1000 you spend $50 appears in your investment account. Just use it the same way you would a debit card and have it set to automatic payments. Easy money. There are two other advantages: 1)  third party between you and fraudsters, I know my Fido card info has been stolen twice, but it is better than having money removed directly from your bank account, 2) of course paper cash would not have this problem, but it could be physically taken, whereas a stolen credit card would not be a major loss to you. For me, I think it makes a lot of sense to use one, and I have definitely never carried a balance.

On the flip side, even though I might never carry a balance, might I spend 3% more than I otherwise would, because I think "oh well I get 2% back"? In that case I would still would be at a loss. Unfortunately I can't say if or to what extent this is true for me.

I think it is very that "emotions" are the reason most commonly given for not being 100% stocks, but "leverage and bonds" probably gives similar results to "no bonds and no leverage."
« Last Edit: May 21, 2018, 11:42:48 PM by Radagast »

shinn497

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #71 on: May 22, 2018, 06:13:55 AM »
So if it helps, after read Early Retirement Now's paper, I will probably go 100% Equities.

sherr

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #72 on: May 22, 2018, 08:07:00 AM »
So I think maybe you can understand the pull of consumer culture. And I think that DR does too. But I wonder. At what point should you become frugal enough vs live your life and find happiness. At what point is there a happy medium.

Here is the thing. I, probably more than most people here, am extremely frugal. I think there is a thread about 'living under 2000' and my budget allows me to down to 1000$ if I wanted, and 1200$ realistically. There have been portions of my life where I was even less (like 500 - 700 a month). So I understand a lack of consumerism. Do I think it grabs people and makes them irrational? Absolutely so. But would I wish an extremely frugal life on others? Not really. This is actually why I like DR. He says that you can have extravagance if you have worked for it. And I think that that is fair, and it makes sense.

To live the life I do, I have completely rejected most social engagements, sold my car, moved across from my workplace, eaten mostly fishsticks, and rented a room from a peruvian lady. Now, is this mustacian? IDK may? But it isn't a way I want to live forever. What it has done is given me perspective as to the purpose of money and work. Money should set you free and allow you to live happily. It shouldn't shackle you to a job and it shouldn't mean you spend a life in servitude of a finacnial institution. This is why I have a hybrid approach to DR and MMM's theories.

I think it's a common misconception, but I don't think that's really what MMM's message is. MMM is all about recognizing exactly what brings you happiness and what doesn't, and eliminating the things that don't. So that lends itself to a fairly frugal lifestyle since, in his view, most spending does not actually increase happiness.

So I'd say that MMM's preaching is actually - all by itself - that you should find that happy medium (just that it might be lower than you expect). It's not just a finance blog, it's a lifestyle blog. You're thinking more Early Retirement Extreme-style frugality. Dave Ramsay is more "Boggleheads" "more is always better" with his approach to wealth.

I think your "hybrid" is actually just reinventing MMM's actual message.

boarder42

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #73 on: May 22, 2018, 09:46:35 AM »
So I think maybe you can understand the pull of consumer culture. And I think that DR does too. But I wonder. At what point should you become frugal enough vs live your life and find happiness. At what point is there a happy medium.

Here is the thing. I, probably more than most people here, am extremely frugal. I think there is a thread about 'living under 2000' and my budget allows me to down to 1000$ if I wanted, and 1200$ realistically. There have been portions of my life where I was even less (like 500 - 700 a month). So I understand a lack of consumerism. Do I think it grabs people and makes them irrational? Absolutely so. But would I wish an extremely frugal life on others? Not really. This is actually why I like DR. He says that you can have extravagance if you have worked for it. And I think that that is fair, and it makes sense.

To live the life I do, I have completely rejected most social engagements, sold my car, moved across from my workplace, eaten mostly fishsticks, and rented a room from a peruvian lady. Now, is this mustacian? IDK may? But it isn't a way I want to live forever. What it has done is given me perspective as to the purpose of money and work. Money should set you free and allow you to live happily. It shouldn't shackle you to a job and it shouldn't mean you spend a life in servitude of a finacnial institution. This is why I have a hybrid approach to DR and MMM's theories.

I think it's a common misconception, but I don't think that's really what MMM's message is. MMM is all about recognizing exactly what brings you happiness and what doesn't, and eliminating the things that don't. So that lends itself to a fairly frugal lifestyle since, in his view, most spending does not actually increase happiness.

So I'd say that MMM's preaching is actually - all by itself - that you should find that happy medium (just that it might be lower than you expect). It's not just a finance blog, it's a lifestyle blog. You're thinking more Early Retirement Extreme-style frugality. Dave Ramsay is more "Boggleheads" "more is always better" with his approach to wealth.

I think your "hybrid" is actually just reinventing MMM's actual message.

plus the do right by the environment piece.  but yes his message and why his blog does so well is more balanced than ERE and bogleheads. its a mixture of both which allows for an insane level of support and why many say this site aint what it used to be as far as the people touting why their house keeper provides value.  -

we can all choose what we want that makes us happy and if for you OP thats 0 debt ever even when you'll need to pay extra to get the protection a credit card brings to spending then so be it.  Basically you can have anything you want you just cant have everything.

talltexan

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #74 on: May 23, 2018, 09:36:38 AM »
A lot to unpack here. I think using money to buy luxury consumption items is contrary to MMM-ism.

I think using money to support situations in which you nurture relationships has a place in MMM-ism. It sounds as though you feel your frugal lifestyle has hampered relationships. We should encourage richer, more robust relationships.

jacoavluha

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #75 on: May 28, 2018, 09:54:58 PM »
- I personally prefer index funds. But there are some arguments against them.

 In particular, they don't value their underlying securities properly. Behaviourally they are perhaps too liquid. And some of the assumptions about their efficacy relative to active trading might be effected by traders' own biases. E.G. how many active traders are attempting to really beat the market vs invest more conservatively for older clients.

Again, this doesn't mean that indexing is bad just that we should always be critical and evaluete investments on our own terms rather than doing what everyone else does. I think I've realized that investing is an individual thing, and it is hard for one person to really apply their situation to others, especailly when both parties have assumptions they aren't inherently aware of.

This doesn’t make any sense. Or at least any sense that I can understand. Could you explain further, the part in the middle?

shinn497

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #76 on: May 29, 2018, 05:41:43 AM »
There are 3 things I said:

  • One of the issues with ETFs is they are too liquid, despite being a long term investment. You can enter and exit them with the click of a button. OR you can just change allocations. It is too easy to time the market, and therefore the likelihood of doing so increases. I see a lot of people scoff at this, but I honestly wonder how many actually will adhere to perfect behaviour in the future.
  • ETFs, especially broad market etfs, might not properly price their underlying securities. Eventually, as they grow in popularity, they could cause ineffeciencies in the market that others could take advantage of. This is interest since means, in order for them to work, not everyone can use them. But I also worry of what would happen in the future if another type of investment becomes popular and it becomes compelling to leave them, at which point we are at the first problem. 
  • I think some of the assumptions people make about active traders not beating the market doesn't factor in if the are actually trying. It could be the case that many are focusing on more conservative or dividend portfolios for clients that are investing later in life. So really they are not trying to beat the market. Then again, I just believe this because a certain youtuber said, I don't know if it is true or not.

So yeah just some arguments against the ETFs we all love . Personally I am for ETFs regardless, although I go with a robo advisor. I sort of see it as having a "lightweight" financial advisor, since I think the benefits are mostly behavioural. But if someone wants to go with ETFs I think it is a good idea. However, they should be wary that they aren't as perfect as they seem.

sherr

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #77 on: May 29, 2018, 07:13:08 AM »
There are 3 things I said:

  • One of the issues with ETFs is they are too liquid, despite being a long term investment. You can enter and exit them with the click of a button. OR you can just change allocations. It is too easy to time the market, and therefore the likelihood of doing so increases. I see a lot of people scoff at this, but I honestly wonder how many actually will adhere to perfect behaviour in the future.
  • ETFs, especially broad market etfs, might not properly price their underlying securities. Eventually, as they grow in popularity, they could cause ineffeciencies in the market that others could take advantage of. This is interest since means, in order for them to work, not everyone can use them. But I also worry of what would happen in the future if another type of investment becomes popular and it becomes compelling to leave them, at which point we are at the first problem. 
  • I think some of the assumptions people make about active traders not beating the market doesn't factor in if the are actually trying. It could be the case that many are focusing on more conservative or dividend portfolios for clients that are investing later in life. So really they are not trying to beat the market. Then again, I just believe this because a certain youtuber said, I don't know if it is true or not.

So yeah just some arguments against the ETFs we all love . Personally I am for ETFs regardless, although I go with a robo advisor. I sort of see it as having a "lightweight" financial advisor, since I think the benefits are mostly behavioural. But if someone wants to go with ETFs I think it is a good idea. However, they should be wary that they aren't as perfect as they seem.

You are using the word "ETF" when you actually mean "index fund".

To respond just to #2, the "if everyone did it then it wouldn't work" argument has been around ever since index funds were first invented. You're not wrong, but we don't seem to be in any danger of that happening anytime soon.

jacoavluha

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #78 on: May 29, 2018, 07:37:55 AM »
Your first bullet point “too liquid” is not specific to ETFs or mutual funds or index funds or even stocks and bonds. To combat this behavioral problem I suppose you could only deal by phone, not online, or snail mail, or through a local branch or advisor (with extra fees). But this cannot be an argument specific to index funds.

Your second bullet point I still don’t understand. Vanguards total market index has over $650,000,000 in assets. When is the “eventually” you speak of? They have pretty smart people running the index, with the assistance of computers, and they’ve been doing it really well for quite a long time.

Your third point, that some active investors aren’t trying to “beat the market” may be true if by “market” you mean 100% equities. But any fund manager or financial advisor should have a benchmark they compare to. And the overwhelming majority will not beat their benchmark over time,because of fees and taxes. That’s just the math.

shinn497

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #79 on: May 29, 2018, 08:59:10 AM »
You guys are correct about my use of the TERM ETF. Really I mean Index fund ETF. As many ETFs don't track index funds. And there are mutual funds that track indexes.

As I understand, and correct me if I am wrong, but passive low fee ETFs don't have any work or research in them to weight the underlying securities. They use a simple metric and that's it, most of the time it is related to market cap, and most of the time the weight is equal. There is no thought to given to future returns, P/E, CEOs, etc. etc. As such you really can't say those ETF's are being priced correctly. Put it this way. If only the SPY or VTSAX existed, one could easily make money by trading individual stocks relative to it. So trading in index ETFs isn't something that works for everyone. If you do it, you have to accept this.

FWIW this isn't to say I am against index ETFs. I think they are great. But I am not a fan of the mentality that they are the universal solution to everyone. And I'm not a fan of the idea that investing in them is "The best strategy". I am finding continually there really is no best strategy. As each investor is different.

jacoavluha

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #80 on: May 29, 2018, 09:28:48 AM »
To your goal of a 100% stock allocation in retirement, a low cost index ETF may not turn out to be “the best” (however you define that) but it is almost certain to be “better” than any alternative 100% stock portfolio you can come up with.

sherr

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #81 on: May 29, 2018, 09:34:45 AM »
You are using the word "ETF" when you actually mean "index fund".
As I understand, and correct me if I am wrong, but passive low fee ETFs don't have any work or research in them to weight the underlying securities.

You are still doing it.

They use a simple metric and that's it, most of the time it is related to market cap, and most of the time the weight is equal. There is no thought to given to future returns, P/E, CEOs, etc. etc.

Right, the idea is that "the market" has already taken all that into account.

To respond just to #2, the "if everyone did it then it wouldn't work" argument has been around ever since index funds were first invented. You're not wrong, but we don't seem to be in any danger of that happening anytime soon.
As such you really can't say those ETF's are being priced correctly. Put it this way. If only the SPY or VTSAX existed, one could easily make money by trading individual stocks relative to it. So trading in index ETFs isn't something that works for everyone. If you do it, you have to accept this.

But SPY / VTSAX are not the only things that exist, nor will they ever be, so this is a hypothetical that we don't have to worry about. As of an article I found from 2016, 70% of mutual fund / ETF investment was in active funds. And that doesn't even include the money invested directly in individual stocks.

The reasoning behind investing in index funds is not "index funds are a perfect representation of value and therefore it's impossible for you to do better than them." It's "you the average Joe don't have the team of experts and possibly inside information that the professionals do, so you're unlikely to outperform them directly. And even if you decide to use them, you'll come out behind where you would have been with index funds once you subtract out the fees."
« Last Edit: May 29, 2018, 02:39:53 PM by sherr »

shinn497

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #82 on: May 29, 2018, 09:48:56 AM »
I see it a bit differently. Rather, if you want to invest and attempt to beat the market, you need to accept a higher amount of risk. This risk can come from several factors, be it more volatile stocks, use of advisors with higher fees, or the inevitable amount of errors you would make in the learning stage of investing. I think this is important since time is precious and there is an opportunity cost to spending time to beat the market vs trying to earn ane extra income somewhere else.

ysette9

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #83 on: May 29, 2018, 10:07:09 AM »
But the problem I have with what you just said is it implies that beating the market is a skill that is tough to learn, but otherwise can be done with time and effort. There are thousands of people out there who try to do this for their careers and the research shows that almost every single one of them fail to beat the market in the long-term, and in fact usually lose after fees. Vanguard and others have white papers on this that are linked to a million times in all of the previous threads that have re-hashed this subject. There is a reason why Warren Buffet advises everyone to buy a low-cost passive index fund and be done with it.

jacoavluha

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #84 on: May 29, 2018, 10:22:43 AM »
It comes down to rather simple math

https://web.stanford.edu/~wfsharpe/art/active/active.htm

After (necessary) fees and taxes the average (mathematically speaking, not a subjective term) active manager absolutely can not beat the market, and as time goes on, a greater and greater percentage of the active population will tend toward the average, until virtually all of them have total returns less than the index.

tomsang

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #85 on: May 29, 2018, 12:02:49 PM »
I am a data scientist now.

If you are a data scientist and are willing to keep your mind open for facts and knowledge, then I believe that you will be a huge fan of not paying off your mortgage, using credit cards for benefits, using tradelines and many other things that Dave would say not to do.  These are all mathematically beneficial if used properly.

You talk a lot about emotions, self control, etc.  As a data scientist I think you will see that with facts, knowledge and information that your emotions will change.  You will be emotionally happy to use your credit card to buy necessities, you will forego paying off low rate fixed rate mortgage early as you will be maximizing your investment purchases, and you will be delighted to open up additional credit cards to maximize your tradelines and build your credit. 

You are going to have a lot of fun on these boards.  There is a ton of knowledge on here.  Keep an open mind, dig into the facts, knowledge, and logic and you will see your wealth increase substantially.   
« Last Edit: May 29, 2018, 10:23:18 PM by tomsang »

talltexan

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #86 on: May 29, 2018, 01:54:18 PM »
I tend to think of risk as something that requires mental load (i.e. "worry"), which is something that we all have a capacity for. It's possible to change your capacity through disiplined work, not unlike weightlifting.

You may decide you can only take the amount of worrying of a 100% stock portfolio, and not mess with these other debt instruments TomSang mentions. Or, you may decide you're able to, ahem, YOLO it and do all of that, no bonds, lots of debt, etc. Good luck!

Classical_Liberal

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #87 on: May 30, 2018, 07:52:00 AM »
I think @shinn497  has some excellent points throughout this entire thread re behavioral economics on both a micro and macro scale.   I'm glad to see some of the heavy-weights of this forum join in the discussion.

The thing with using behavioral economics is it breaks down on a micro-scale when n=1.  An individuals (or single economic unit) behavior can easily be understood or modified.  This is why the whole mortgage leverage/CC use/ease of transaction/use of "lazy" index portfolios, etc debate turns into personal choice on a micro-level.  Using them IS more efficient, IF used correctly and the behavior of the individual can be predicted or modified to ensure efficient use.

The impacts of the availability of these tools on the macroeconomic situation is another thing entirely.  Many on this forum have actually argued (and I agree with them) some of these tools may have been a contributing factor to the elevated CAPE median we have seen since their use has been incorporated into the economy.  So to say they have no macro impact is probably not correct either. To argue there may be some extra value in companies excluded from lazy indices (due to market cap, or whatever) may be valid.  To argue the increased use of CC/liberal issuance of mortgage debt has caused the average household to spend more and service more debt is also a legitimate assumption.

Bottom line, OP has some really insightful thoughts on behavioral economic from a macro-level.  However, instead of basing personal choices on heard behaviors, to avoid herd mistakes, one should use this insight to increase personal gains on the micro level. IOW, understand how these tools influence group behavior and use this to your personal advantage. 

shinn497

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #88 on: May 30, 2018, 08:34:24 AM »
I think @shinn497  has some excellent points throughout this entire thread re behavioral economics on both a micro and macro scale.   I'm glad to see some of the heavy-weights of this forum join in the discussion.

The thing with using behavioral economics is it breaks down on a micro-scale when n=1.  An individuals (or single economic unit) behavior can easily be understood or modified.  This is why the whole mortgage leverage/CC use/ease of transaction/use of "lazy" index portfolios, etc debate turns into personal choice on a micro-level.  Using them IS more efficient, IF used correctly and the behavior of the individual can be predicted or modified to ensure efficient use.

The impacts of the availability of these tools on the macroeconomic situation is another thing entirely.  Many on this forum have actually argued (and I agree with them) some of these tools may have been a contributing factor to the elevated CAPE median we have seen since their use has been incorporated into the economy.  So to say they have no macro impact is probably not correct either. To argue there may be some extra value in companies excluded from lazy indices (due to market cap, or whatever) may be valid.  To argue the increased use of CC/liberal issuance of mortgage debt has caused the average household to spend more and service more debt is also a legitimate assumption.

Bottom line, OP has some really insightful thoughts on behavioral economic from a macro-level.  However, instead of basing personal choices on heard behaviors, to avoid herd mistakes, one should use this insight to increase personal gains on the micro level. IOW, understand how these tools influence group behavior and use this to your personal advantage.

This is a good breakdown

boarder42

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #89 on: May 30, 2018, 08:42:39 AM »
I think @shinn497  has some excellent points throughout this entire thread re behavioral economics on both a micro and macro scale.   I'm glad to see some of the heavy-weights of this forum join in the discussion.

The thing with using behavioral economics is it breaks down on a micro-scale when n=1.  An individuals (or single economic unit) behavior can easily be understood or modified.  This is why the whole mortgage leverage/CC use/ease of transaction/use of "lazy" index portfolios, etc debate turns into personal choice on a micro-level.  Using them IS more efficient, IF used correctly and the behavior of the individual can be predicted or modified to ensure efficient use.

The impacts of the availability of these tools on the macroeconomic situation is another thing entirely.  Many on this forum have actually argued (and I agree with them) some of these tools may have been a contributing factor to the elevated CAPE median we have seen since their use has been incorporated into the economy.  So to say they have no macro impact is probably not correct either. To argue there may be some extra value in companies excluded from lazy indices (due to market cap, or whatever) may be valid.  To argue the increased use of CC/liberal issuance of mortgage debt has caused the average household to spend more and service more debt is also a legitimate assumption.

Bottom line, OP has some really insightful thoughts on behavioral economic from a macro-level.  However, instead of basing personal choices on heard behaviors, to avoid herd mistakes, one should use this insight to increase personal gains on the micro level. IOW, understand how these tools influence group behavior and use this to your personal advantage.

correct OP keeps pointing out that everyone is jumping off a bridge so if he drives on that bridge he'll have to jump off too.  once we understand poor behaviors we can adjust ours using data to govern our decision instead of emotion.

which you would think a data scientist would be interested in and more inclined to do.

shinn497

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #90 on: May 30, 2018, 10:18:14 AM »
I think @shinn497  has some excellent points throughout this entire thread re behavioral economics on both a micro and macro scale.   I'm glad to see some of the heavy-weights of this forum join in the discussion.

The thing with using behavioral economics is it breaks down on a micro-scale when n=1.  An individuals (or single economic unit) behavior can easily be understood or modified.  This is why the whole mortgage leverage/CC use/ease of transaction/use of "lazy" index portfolios, etc debate turns into personal choice on a micro-level.  Using them IS more efficient, IF used correctly and the behavior of the individual can be predicted or modified to ensure efficient use.

The impacts of the availability of these tools on the macroeconomic situation is another thing entirely.  Many on this forum have actually argued (and I agree with them) some of these tools may have been a contributing factor to the elevated CAPE median we have seen since their use has been incorporated into the economy.  So to say they have no macro impact is probably not correct either. To argue there may be some extra value in companies excluded from lazy indices (due to market cap, or whatever) may be valid.  To argue the increased use of CC/liberal issuance of mortgage debt has caused the average household to spend more and service more debt is also a legitimate assumption.

Bottom line, OP has some really insightful thoughts on behavioral economic from a macro-level.  However, instead of basing personal choices on heard behaviors, to avoid herd mistakes, one should use this insight to increase personal gains on the micro level. IOW, understand how these tools influence group behavior and use this to your personal advantage.

correct OP keeps pointing out that everyone is jumping off a bridge so if he drives on that bridge he'll have to jump off too.  once we understand poor behaviors we can adjust ours using data to govern our decision instead of emotion.

which you would think a data scientist would be interested in and more inclined to do.

Going to the bridge Analogy, I would start with a prior.

Lets say I highly believe that that you jump off the bridge if you go on it (there is no conditional for going on the bridge here, assumine it is marginal in the prior). Lets make this prior 70% or something.

I'd model it using bayes rule with some likelhood. The likelihood has all of the factors I suspect could involve you jumping off the bridge. The car you drive, the speed with which you jump, etc, etc, These go into some vector that is conditioned on the outcome of you jumping off (the anti outcome is you don't jump off)

Now, as a good bayesian, I can assume a prior, but I don't assume a posterior inference until I have some data. So lets say I observe some examples, model it, etc. etc.

What I would end up is a conditional on each factor. E.g, given each factor, what is the probability distribution of you jumping off. Lets assume everything is gaussian so it would be some value and uncertainty.

As a Data Scientist, this model doesn't guarantee if I make it across the bridge. I can isolate some factors, but what if my data set is too small, and my posterior has too great of uncertainty. What if I come to the conclusion that there is some bias in the dataset I am inferencing of. What if I look at other data sources and have contradicting results. etc. etc.

Notice, I would not naively calculating the probabilities and making a decision tree and saying at the end I have a perfect understanding of what will get me to live or not. I'm not assuming perfect confidence

Having the data alone, doesn't necessarily mean you can make a good model. And, even if you make a good model, that model might give you a result you disagree with. Modeling is hard, especially when talking about human behaviour.

Going back to the finance world. There are a LOT of variables here that I don't understand and I can't properly infer. This is doubly true when looking at others' situations. I know what people claim, what they project, and what they expect. And I even know a couple of results and that is good. But we are talking about financial expectations that go over decades. Given what I don't know, I can't look others'situations and extrapolate to myself with perfect, or even very good confidence. But this is more due to my own prior than anything.

So yeah. I'm all for the data. But having data doesn't mean you can make a perfect decision. So, in the face of this, I have to go back on my feelings. I mean I know they are irrational, but that is ok. If they cause me to err on the side of caution, I don't think I can do wrong.

boarder42

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #91 on: May 30, 2018, 10:26:53 AM »
my point is you dont have to model shit.  you just have to stop making choices driven by emotion and use the data in front of you and make your choices based on the data it doesnt fucking matter if 90% of people would make some choice given a particular situation if those 90% are making that choice driven by emotion and not looking at dta. 

the problem is when you think your feelings are making you safer when they arent.  ie not using credit cards or not keeping a mortgage.  both of these historically are safer to use and leverage than not use.  if my debit card number is stolen i could be F'd for a while if my CC number is stolen i call the bank and they dont pay the fraudulent charges.  with a mortgage historical data says keep the thing and leverage it investing the difference thats the data.  your feelings of being safer actually create more risk in your life but thats b/c you're not actually looking at the data and analyzing it.  i fear for the world where a data scientist talks this much about feelings.

your fundamental problem is your lack of knowledge of finances, the historical models that created the 4% "rule" and an understanding for how all of this has worked together in the past. 

If your answer is well that doesnt predict the future.  you're correct but if thats what you truly believe you'll never be able to retire relying on that concept.

ysette9

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #92 on: May 30, 2018, 10:31:34 AM »
I’m not a data scientist so I can’t speak in your language, but all the same, that strikes me as a but absurd. You can’t build a perfect model so therefore you are going to throw out imperfect data and rely on your emotions instead? Poppycock.

Of course the models aren’t going to be perfect because: human behavior. However you can look at averages and infer something meaningful. Averages say that we suck at predicting the future, and people who think they can (market timers) overwhelmingly underperform. The people with the best investment returns are those who are dead or otherwise forgot they had an investment account.

You don’t need to be perfect, you just need to be good enough. Don’t get so tripped up on optimization that you throw the baby out with the bath water and fail to enact reasonable strategies that have been shown to be successful in the majority of cases.

Scortius

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #93 on: May 30, 2018, 11:33:15 AM »
Yeah, this is a bit ridiculous. You don't need a model with extended data points to have confidence that you can use a rewards credit card and pay it off every month. You don't need a model to know yourself enough to know that you won't panic and sell off all your assets during a market downturn.

And, if we do want to go back to the Bayesian modeling analogy at an individual level, you have to accept that all of these separate data points you claim to be using to fit your model are all incredibly correlated due to the fact that you're modeling the behavior of one person: yourself. This completely violates the assumption that your data are all IID, which means you can't simply use a Naive Bayes method to fit a model of simple behavior and likelihood. The benefit is that it becomes a much simpler problem since all you have to do is understand your own behavior at a basic level (which despite its challenges, isn't actually all that hard to do at the coarse level required to make long-term financial plans).
« Last Edit: May 30, 2018, 01:36:02 PM by Scortius »

tomsang

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #94 on: May 30, 2018, 01:23:33 PM »
What blows me away is a person that appears to be very emotional and who is perceived risk adverse asking about a 100% stock allocation and a 4% draw down. Typically, when you see someone like this they are storing all of their money in an FDIC insured savings accounts earning 1.5% as they perceive their long term retirement savings to be safer.

I still go with once he digs into the knowledge of the 4% rule, inflation risk, stock market expectations and how they all impact when you can retire, etc.  That he will run the models, create his own models, and he will see that he is safer keeping the mortgage, safer getting credit card rewards, and safer doing many other things that he is currently repulsed by because of emotions that are not based on reality, facts, logic, etc. 

Classical_Liberal

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #95 on: May 30, 2018, 01:49:47 PM »
I don't personally agree with OP's position because I tend to make decisions based on expected value (EV).  So credit card bonuses, indexing, leveraged real estate (which I do not presently own) are definitely positive EV decisions.  However, I get his point, and it's valid.  Even with EV-based decision making it can be hard to determine the V in real life.  Not everything is a logical accounting decision.  The value of something isn't always measured in monetary gain.  There is value (even economic value not defined in dollars) in happiness, friendships, fulfillment of desires, etc.

Devils advocate on OP's side of the argument.  Humans are not logical.  Behavioral economics is the attempt to understand the in aggregate.  Even if we, at some time in the future, do understand the macroeconomic movements based on behavior, we can't accurately predict this individually (n=1).  We (me included) like to think we understand our behavior and act logically, but this isn't always the case.  Ever been in love? 

The amount of resources being expended on the physiological and behavioral warfare we call advertising is immense.  There is a reason most people are "spend all we earn" consumers.  Some of it is even based genetic/biological conditioning related to social signaling, etc.  This is extremely powerful stuff! Add to that social pressures and human emotions, random events, and behavioral conditioning.  Hell, some studies like this one show we make decisions before we even know we have made them.

The potential for mistakes exist even in the most logical person. To ignore that risk is rather foolish; I think this is the big take away for an average forum member from OP's contributions. The OP's decisions are like taking out an insurance policy to reduce that risk.  The policy pays in peace of mind and helps to prevent the psychological and emotional mistakes, but it's rather expensive.  I have decided the cost of that policy is too high, but at least I'm recognizing the risk being taking.

shinn497

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #96 on: May 30, 2018, 02:42:40 PM »
I don't personally agree with OP's position because I tend to make decisions based on expected value (EV).  So credit card bonuses, indexing, leveraged real estate (which I do not presently own) are definitely positive EV decisions.  However, I get his point, and it's valid.  Even with EV-based decision making it can be hard to determine the V in real life.  Not everything is a logical accounting decision.  The value of something isn't always measured in monetary gain.  There is value (even economic value not defined in dollars) in happiness, friendships, fulfillment of desires, etc.

Devils advocate on OP's side of the argument.  Humans are not logical.  Behavioral economics is the attempt to understand the in aggregate.  Even if we, at some time in the future, do understand the macroeconomic movements based on behavior, we can't accurately predict this individually (n=1).  We (me included) like to think we understand our behavior and act logically, but this isn't always the case.  Ever been in love? 

The amount of resources being expended on the physiological and behavioral warfare we call advertising is immense.  There is a reason most people are "spend all we earn" consumers.  Some of it is even based genetic/biological conditioning related to social signaling, etc.  This is extremely powerful stuff! Add to that social pressures and human emotions, random events, and behavioral conditioning.  Hell, some studies like this one show we make decisions before we even know we have made them.

The potential for mistakes exist even in the most logical person. To ignore that risk is rather foolish; I think this is the big take away for an average forum member from OP's contributions. The OP's decisions are like taking out an insurance policy to reduce that risk.  The policy pays in peace of mind and helps to prevent the psychological and emotional mistakes, but it's rather expensive.  I have decided the cost of that policy is too high, but at least I'm recognizing the risk being taking.

You seem to be closer in line to my type of thinking.

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.

sherr

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #97 on: May 30, 2018, 03:28:20 PM »
You seem to be closer in line to my type of thinking.

I would also say I make decisions on expected value except I never assume perfect behavior.

Except you aren't "not assuming perfect behavior," you are "assuming random behavior."

But go ahead, do what you've already decided to do. And in the process invalidate your whole point.

shinn497

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #98 on: May 30, 2018, 03:59:43 PM »
So just going back to basics.

Do we all agree that the 100% in equities isn't a bad idea? Outside of behaviour. From a returns standpoint only?

ysette9

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #99 on: May 30, 2018, 04:28:53 PM »
In accumulation phase, especially well in your career I think 100% equities is great. We are around 90% right now. Go Curry Cracker has a blog post on the path they took to get to 100% equities that you can look up. I believe they had a bond/annuity-like personal mortgage they were being paid that provided some diversification. They also can employ geo arbitrage to reduce their expenses significantly if needed in a way that most of us probably can’t, do all of that gets factored into the risk analysis.

Personally I resonate with the Kitces’ reverse equity glide path approach to reduce sequence-of-returns risk right before FI and for the first 10 years of FI. I am pretty close to pulling the trigger on scaling bonds up to 40% for that reason as we are a few years from reaching out number and the downside risk of equities weighs more heavily now that we have more to “lose”, and it would materially push out our FIRE date if a downturn happened right now. To each their own though.