Author Topic: Why would I be in anything other than 100% stocks?  (Read 28644 times)

Mr. Green

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Why would I be in anything other than 100% stocks?
« on: February 02, 2015, 03:07:22 PM »
If the cFIREsim calculator shows my financial position surviving every scenario based on a 100% allocation in stocks for the entirety of my life, is there any logical reason that I would move to a more conservative position after FIRE? I understand the perception of safety but the 100% stock allocation also allows my stash to continue pulling in the best ROR over the long term. This would also be with the understanding that I could reduce my spending by ~20% in the biggest down years. It seems like a no-brainer to stay with 100% stocks in principle but I don't see the consensus saying the same so it's self-evident that I'm new enough to all this to be missing something.
« Last Edit: February 02, 2015, 03:14:29 PM by wdanner »
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AlexK

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Re: Why would I be in anything other than 100% stocks?
« Reply #1 on: February 02, 2015, 03:12:50 PM »
I'm with you wdanner, but I can understand why people have bonds, etc too. Some people will make the argument that it allows rebalancing, however cfiresim takes that into account. The real reason is it's devastating emotionally when stocks take a dive for a decade. You trade returns for safety. Kind of like insurance.

Aphalite

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Re: Why would I be in anything other than 100% stocks?
« Reply #2 on: February 02, 2015, 03:16:41 PM »
Because deflation (and to a lesser extent, population stagnation)

See Japan or European stock market
« Last Edit: February 02, 2015, 03:18:26 PM by aphalite »

nereo

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Re: Why would I be in anything other than 100% stocks?
« Reply #3 on: February 02, 2015, 03:20:22 PM »
If the cFIREsim calculator shows my financial position surviving every scenario based on a 100% allocation in stocks for the entirety of my life, is there any logical reason that I would move to a more conservative position after FIRE? I understand the perception of safety but the 100% stock allocation also allows my stash to continue pulling in the best ROR over the long term. This would also be with the understanding that I could reduce my spending by ~20% in the biggest down years.
As I understand it, as long as the past and future are similar, you'll be best served being 100% in stocks vs being in a 'rigid' mixture of stocks and bonds.  Many choose more stability over volatility, and stocks can help with that, and systematic rebalancing of a mixed portfolio can force you to buy low, sell high - something humans seem hardwired to do just the opposite (panic when everyone else is panicking, and buy when everything has already gone up).

Personally, I'm planning on keeping ~2 years in bonds that i will use if stocks take a dive soon after ER.  Then I won't have to touch my equities portion when prices are low.  It's my own plan of rebalancing, but instead of holding to a fixed % it will be based on market performance.

curious what others think here....
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Mr. Green

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Re: Why would I be in anything other than 100% stocks?
« Reply #4 on: February 02, 2015, 03:30:36 PM »
Because deflation (and to a lesser extent, population stagnation)

See Japan or European stock market
My theory on this is it won't happen here because of demographics. White people will become a minority by 2060 and there will be 3 Hispanic people for every 4 White people. I believe White people as the driver of growth in the US have stagnated. But Hispanic people by and large are coming here to pursue better opportunities, which generally includes buying more stuff. Ultimately I think the US will not face stagnation like Japan because another wave of immigration will fuel the fires of growth. That's my crude analysis. I'll keep the diversified allocation in mind though for stagnating growth and read up on that.

http://www.pewresearch.org/next-america/
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Mr. Green

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Aphalite

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Re: Why would I be in anything other than 100% stocks?
« Reply #6 on: February 02, 2015, 04:13:46 PM »
Because deflation (and to a lesser extent, population stagnation)

See Japan or European stock market
My theory on this is it won't happen here because of demographics. White people will become a minority by 2060 and there will be 3 Hispanic people for every 4 White people. I believe White people as the driver of growth in the US have stagnated. But Hispanic people by and large are coming here to pursue better opportunities, which generally includes buying more stuff. Ultimately I think the US will not face stagnation like Japan because another wave of immigration will fuel the fires of growth. That's my crude analysis. I'll keep the diversified allocation in mind though for stagnating growth and read up on that.

http://www.pewresearch.org/next-america/

Yes on population stagnation, less likely to occur than deflation. But we came *THIS* close to deflation in 08. Never underestimate the greediness/lust for stupid risk of people. Already starting to happen again with packaged subprime auto loans. But to answer your question, that's why you hold some bonds - the risk of deflation
« Last Edit: February 02, 2015, 04:24:26 PM by aphalite »

Ozstache

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Re: Why would I be in anything other than 100% stocks?
« Reply #7 on: February 02, 2015, 04:49:01 PM »
I don't know about others, but running the changed asset allocation investigation feature on FIRECALC for my circumstances shows that I get 100% success between 50% and 75% stock holdings, after which the success rate falls off to about 98% at 100% share holdings. A higher share holding than 75% produces both a higher probability of failure and a more volatile balance along the way, so why would I bother?

Edit: Just ran the same scenario on cFIRESim and it gives me 100% success from 60% shares allocation all the way up to 100%. Although this one doesn't dip in success rate at the end, again I ask why I would take any more risk and volatility than the 100% success rate 60% shares allocation provides?
« Last Edit: February 02, 2015, 04:56:36 PM by Ozstache »

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Re: Why would I be in anything other than 100% stocks?
« Reply #8 on: February 02, 2015, 04:56:39 PM »
If the cFIREsim calculator shows my financial position surviving every scenario based on a 100% allocation in stocks for the entirety of my life, is there any logical reason that I would move to a more conservative position after FIRE?

The reason to be more conservative is because your emotions almost certainly play a bigger part in your decision-making than they do for cFIREsim. Most people underestimate their likelihood of panic-selling during a stock-market crash, particularly if they have never experienced one (and given your age, you almost surely have not). If you sell during a crash, your actual wealth line will look incredibly worse than cFIREsim's robotically-created line. The main point of a bond allocation is to give you emotional comfort during the inevitable stock-market crashes, to prevent you from bailing out at the worst time.

If you can be absolutely sure that you will behave as robotically and unerringly as cFIREsim over the next 70 years of your life, then sure, 100% stocks is probably ok. Almost no one can behave like that though, and that's why 100% stocks is generally not recommended.

Dodge

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Re: Why would I be in anything other than 100% stocks?
« Reply #9 on: February 02, 2015, 05:11:06 PM »
If the cFIREsim calculator shows my financial position surviving every scenario based on a 100% allocation in stocks for the entirety of my life, is there any logical reason that I would move to a more conservative position after FIRE? I understand the perception of safety but the 100% stock allocation also allows my stash to continue pulling in the best ROR over the long term. This would also be with the understanding that I could reduce my spending by ~20% in the biggest down years. It seems like a no-brainer to stay with 100% stocks in principle but I don't see the consensus saying the same so it's self-evident that I'm new enough to all this to be missing something.

You might shave a few months off your FI date, but you're risking adding years if things don't go your way with 100% stocks.

To highlight this, let's model a family saving $2,333 a month, with a FIRE goal of $800,000.  Based on Vanguard's portfolio allocation model, they can expect to receive 10.2% with 100% stocks, and 9.6% with 80/20 stocks/bonds.



After 12 years of investing, what's the difference?
  • 100% Stocks - $666,000
  • 80/20 stocks/bonds - $638,000

Things are looking good!  Now let's put some real market data in there, and let's assume their income drops and they are unable to add anything else to their portfolio.  It doesn't matter why, job loss/starting a business/getting a less stressful job since they are so close to FIRE...whatever.  Let's see what this would look like if this family were unlucky enough to be at this stage in the years 1999 -2015, where the total bond market has outperformed the stock market:



Blue line is the total stock market, orange line is the total bond market, and the green line is intermediate bonds.  I included those for Mr. Bogle, as he prefers those to the total bond market (that's another topic).

Looking at the numbers, the 100% stock portfolio hits the $800,000 number in 2012:



While the 80/20 portfolio hits it in 2007:



That's a 5 year difference.  I can already hear the complaints, "But why didn't they add anything to the portfolio?  That will never happen to me!  If that happened to me I would've added 20% bonds to my portfolio immediately..etc."  The reason I didn't show what it looks like when they keep contributing $2,333 a month...is because there's no difference.  If you're still interested, this is what it looks like:



This is what it looks like for every starting point, usually it looks like a month or two difference from reaching the $800,000 goal.  You might shave a few months off your FI date, but you're risking adding years if things don't go your way with 100% stocks.  Note, this example only covers the accumulation phase, the consequences are much worse if you're trying to stay 100% stocks after retiring.  Click the "Monte Carlo" button on the right on CFiresim and you'll see 100% stocks can look pretty bad:



This can be devastating and may well be the difference between the poor house and some degree of comfort. Do you really want to trade that in exchange for "more money if stocks do well", a situation in which you're already in good shape?
« Last Edit: February 02, 2015, 05:12:40 PM by Dodge »
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Re: Why would I be in anything other than 100% stocks?
« Reply #10 on: February 02, 2015, 05:28:05 PM »
To me, it's all about the income. Never sell stocks, just live off the dividends. There are enough "bond proxy" stocks out there that pay more in income, at a lower tax rate, than bonds.

Dodge

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Re: Why would I be in anything other than 100% stocks?
« Reply #11 on: February 02, 2015, 05:52:49 PM »
To me, it's all about the income. Never sell stocks, just live off the dividends. There are enough "bond proxy" stocks out there that pay more in income, at a lower tax rate, than bonds.

Let's keep this on topic.  There are many threads debunking this as a horrible idea:

http://forum.mrmoneymustache.com/investor-alley/anyone-else-only-buying-dividend-stocks/
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brooklynguy

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Re: Why would I be in anything other than 100% stocks?
« Reply #12 on: February 02, 2015, 07:12:34 PM »
Dodge and I have been through this before (as anyone interested can read about ad nauseam in the threads linked to above), but in my view the fallacy in the example he laid out is the idea that during the accumulation phase you are investing for the goal of reaching your "FIRE number," which, for frugal aspiring early retirees, can happen in less than a decade.  Of course 100% stocks doesn't make sense if your investing time horizon is less than a decade!  But in reality, when you invest during the accumulation phase, your investment time horizon is the entirety of the remainder of your life (i.e., multiple decades) (because you are not going to be accessing those funds immediately upon retirement--you are going to be slowly drawing them down over the rest of your life).

The historical data show that the optimal asset allocation for multi-decade periods was always 100% stocks (or, depending on the precise settings for variables such as your investment expense ratio, near 100% stocks)--this allocation produced both the highest portfolio values and the highest success rates in every historical period covered by cfiresim.  So, if you assume that the future will be no worse than the past, then 100% stocks is (beyond argument) the best allocation.

Dodge, your example does not really show how a 100% stock allocation can delay retirement; instead, it shows how it can delay you from reaching the magic number that you have mentally established as your trigger for commencing retirement.  Instead of comparing how quickly the two different investors attain their goal of $800k, you should be comparing how each of their portfolios would have fared for 30 years (or your multi-decade period of choice) once they were forced to stop making additional contributions.  Cfiresim will tell you that the 100% stock investor with his $666k portfolio will have a better success rate and a higher ending portfolio value than the 80/20 investor with his $638k portfolio.

In my view, there are only three reasons to hold anything less than a 100% stocks when you have a sufficiently long investment horizon:

1.  As others have said above, to have an emotional security blanket to cling to to prevent you from sabotaging your own investment plan and panic-selling during a market crash (this is the best reason, in my opinion).

2.  If you believe the future may be worse than any of the worst investment periods in the past.

3.  If your portfolio is so large that lower-performing assets are beyond any reasonable doubt sufficient to support your expenses (i.e., "you can stop playing, because you've already won the game").

Or if you believe you may have unexpected expenses that force you to draw down more than your intended withdrawal rate, but that's really doubting the assumption about the length of the investment time horizon rather than arguing for a different investment allocation once a sufficiently long time horizon has been assumed.

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Re: Why would I be in anything other than 100% stocks?
« Reply #13 on: February 02, 2015, 07:14:59 PM »
The recent frequency of threads like these here and on other retail investor forums is itself evidence that you may want to reconsider being 100% in stocks. I'm not saying stocks won't happen to have a higher expected return. I myself am all in stocks. But it's not just a free roll.
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Dodge

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Why would I be in anything other than 100% stocks?
« Reply #14 on: February 02, 2015, 09:07:49 PM »
Cfiresim will tell you that the 100% stock investor with his $666k portfolio will have a better success rate and a higher ending portfolio value than the 80/20 investor with his $638k portfolio.

¯\_(ツ)_/¯ Using my numbers, 90/10 is the best from a historical standpoint, with 70/30, 80/20, and 100/0 all tied:



Considering the horrible Monte Carlo results with 100% stocks, all the research I've done, and all the books I've read, I'm comfortable with 80/20.  There is no way of knowing which asset class will outperform over your specific investment horizon.  Putting 100% of a portfolio into a single asset class, based on past performance, seems a bit naive to me.  One of the most important rules of investing, is to control your risk.  Yet newbies continually look at graphs, find the one that went up the most over 30-50 years, and say, "Why not put ALL MY MONEY there???"  No disrespect towards you, as you're not a newbie, but it's clearly a newbie question that comes up whenever the stock market is high.

We should be teaching these newbies about risk, not encouraging them.  Show them the possible consequences.  Then if they still choose that route, they will go into it eyes-wide-open.

While CFiresim is an amazingly fantastic tool, I'm afraid it might be leading some people towards a bad allocation.  CFiresim uses the Shiller GS10 (10 year government treasuries) data to calculate bond returns, which I understand is the only option as we don't have long term data for much else.  This data, unfortunately, greatly understates bond returns when comparing to a portfolio anyone here might have.

Here is a 100% bond chart in CFireSim, from 1995-2014:



Ending value is $20,092

Let's compare that to Vanguard's Total Bond Index fund, and I'll throw in Vanguard's Intermediate Bond Index Fund, since that's what Mr. Bogle recommends (that's another topic).  And to try and match the GS10 fund, I've added Vanguard's Intermediate Treasury fund, and the Intermediate Government fund:



Vanguard Total Bond Index Fund: $32,398
Vanguard Intermediate Bond Index Fund: $37,670
Vanguard Intermediate Treasury Fund: $34,042
Intermediate Government Fund: $27,065

Considering my CFiresim numbers are already showing 100% stocks aren't ideal, something tells me things would tilt a lot more in that direction if CFiresim could use a more standard measurement for bond returns.
« Last Edit: February 02, 2015, 11:53:04 PM by Dodge »
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Re: Why would I be in anything other than 100% stocks?
« Reply #15 on: February 02, 2015, 09:23:20 PM »
If the cFIREsim calculator shows my financial position surviving every scenario based on a 100% allocation in stocks for the entirety of my life, is there any logical reason that I would move to a more conservative position after FIRE?

The reason to be more conservative is because your emotions almost certainly play a bigger part in your decision-making than they do for cFIREsim. Most people underestimate their likelihood of panic-selling during a stock-market crash, particularly if they have never experienced one (and given your age, you almost surely have not). If you sell during a crash, your actual wealth line will look incredibly worse than cFIREsim's robotically-created line. The main point of a bond allocation is to give you emotional comfort during the inevitable stock-market crashes, to prevent you from bailing out at the worst time.

If you can be absolutely sure that you will behave as robotically and unerringly as cFIREsim over the next 70 years of your life, then sure, 100% stocks is probably ok. Almost no one can behave like that though, and that's why 100% stocks is generally not recommended.
+1 . Most people have to learn this lesson themselves though, the hard way.

FFA

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Re: Why would I be in anything other than 100% stocks?
« Reply #16 on: February 02, 2015, 09:42:19 PM »
In my view, there are only three reasons to hold anything less than a 100% stocks when you have a sufficiently long investment horizon:

1.  As others have said above, to have an emotional security blanket to cling to to prevent you from sabotaging your own investment plan and panic-selling during a market crash (this is the best reason, in my opinion).

2.  If you believe the future may be worse than any of the worst investment periods in the past.

3.  If your portfolio is so large that lower-performing assets are beyond any reasonable doubt sufficient to support your expenses (i.e., "you can stop playing, because you've already won the game").

Or if you believe you may have unexpected expenses that force you to draw down more than your intended withdrawal rate, but that's really doubting the assumption about the length of the investment time horizon rather than arguing for a different investment allocation once a sufficiently long time horizon has been assumed.
+1. very well summarized ! When I was young and starting out I used to think exactly the same way as OP. Whenever I saw a risk/return graph plotting different portfolios and showing the 100% share portfolio as the highest risk and highest return option, I always thought to myself why would any rational long-term investor make any other choice. Over the years I figured out the answers, as listed above. You really need to be self aware and understand your risk tolerance (genuinely) to make sure you can stick with your chosen plan. 

rmendpara

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Re: Why would I be in anything other than 100% stocks?
« Reply #17 on: February 02, 2015, 10:08:55 PM »
New investors focus on total return, while experienced investors focus all their efforts on managing risk.
Bulls make money. Bears make money. Pigs get slaughtered.

RapmasterD

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Re: Why would I be in anything other than 100% stocks?
« Reply #18 on: February 02, 2015, 10:09:35 PM »
Cfiresim will tell you that the 100% stock investor with his $666k portfolio will have a better success rate and a higher ending portfolio value than the 80/20 investor with his $638k portfolio.

¯\_(ツ)_/¯ Using my numbers, 90/10 is the best from a historical standpoint:



Considering the horrible Monte Carlo results with 100% stocks, all the research I've done, and all the books I've read, I'm comfortable with 80/20.  There is no way of knowing which asset class will outperform over your specific investment horizon.  Putting 100% of a portfolio into a single asset class, based on past performance, seems a bit naive to me.  One of the most important rules of investing, is to control your risk.  Yet newbies continually look at graphs, find the one that went up the most over 30-50 years, and say, "Why not put ALL MY MONEY there???"  No disrespect towards you, as you're not a newbie, but it's clearly a newbie question that comes up whenever the stock market is high.

We should be teaching these newbies about risk, not encouraging them.  Show them the possible consequences.  Then if they still choose that route, they will go into it eyes-wide-open.

While CFiresim is an amazingly fantastic tool, I'm afraid it might be leading some people towards a bad allocation.  CFiresim uses the Shiller GS10 (10 year government treasuries) data to calculate bond returns, which I understand is the only option as we don't have long term data for much else.  This data, unfortunately, greatly understates bond returns when comparing to a portfolio anyone here might have.

Here is a 100% bond chart in CFireSim, from 1995-2014:



Ending value is $20,092

Let's compare that to Vanguard's Total Bond Index fund, and I'll throw in Vanguard's Intermediate Bond Index Fund, since that's what Mr. Bogle recommends (that's another topic).  And to try and match the GS10 fund, I've added Vanguard's Intermediate Treasury fund, and the Intermediate Government fund:



Vanguard Total Bond Index Fund: $32,398
Vanguard Intermediate Bond Index Fund: $37,670
Vanguard Intermediate Treasury Fund: $34,042
Intermediate Government Fund: $27,065

Considering my CFiresim numbers are already showing 100% stocks aren't ideal, something tells me things would tilt a lot more in that direction if CFiresim could use a more standard measurement for bond returns.

Your 80/20 is my 75/20 -- with 5 for cash. Thank you for all your analysis here, BTW.
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Riff

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Re: Why would I be in anything other than 100% stocks?
« Reply #19 on: February 02, 2015, 11:23:36 PM »
Dodge, I really enjoy all of your graph laden replies.  Seriously, awesome.

innerscorecard

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Re: Why would I be in anything other than 100% stocks?
« Reply #20 on: February 02, 2015, 11:29:21 PM »
Yet newbies continually look at graphs, find the one that went up the most over 30-50 years, and say, "Why not put ALL MY MONEY there???"

Well said. That's exactly the problem. It's also a stance we're seeing again and again now, whether on this board, or reddit, or any number of places where new individual investors without experience post. (Of course, I'm fully one of them, by the way!)
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MsRichLife

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Re: Why would I be in anything other than 100% stocks?
« Reply #21 on: February 03, 2015, 04:21:40 AM »
New investors focus on total return, while experienced investors focus all their efforts on managing risk.

This ^

Mr. Green

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Re: Why would I be in anything other than 100% stocks?
« Reply #22 on: February 03, 2015, 08:07:43 AM »
Well thank you for all the responses. I certainly have lots of information to digest.

In my personal example, I expect to FIRE at 33, then add no more funds to my investments unless I end up doing elective work that yields large sums of money. My thought process was, if cFIREsim already shows I'm safe at 100% stocks based on my expected drawdown, the 100% allocation give me the best chance of ending up with more than would allow us to enjoy some additional luxury things later in life. Maybe it's a nice vacation every so often, etc. However, I see the difference in Monte Carlo modeling for 80/20 vs. 100% so I will definitely keep reading and analyzing.

From an emotional perspective, I don't believe I will have any problem withstanding the down cycles. I actually get excited about market drops, particularly when I have money to invest. I regret not dumping a ton of cash into the market when it was at 6,000. What an opportunity missed. The fear aspect to me is a moot point because I know that when I FIRE I will be better off than 90% of the the US population. If the market were to drop 50% and never recover, sure it would hurt, but the repercussions for everyone else would be catastrophic. So in comparison, I would still be pretty well off. And something like that doesn't happen in a vacuum so with an event like that prices of good will decline, home prices, will drop, etc, which will all ultimately benefit me.

2008 was about as close at it gets to a total meltdown. Banks collapsing, the life insurance industry almost collapsed, auto companies collapsing, the whole thing was coming down. Something like that only happens once or twice in a lifetime because it takes 20-30 years just to fully recover from an event like that. From that perspective, the last 5 years and the next 15-25 years will be about the most risk free years you can get as far as the chances of another 2008 happening goes. That doesn't imply anything regarding returns, just odds of catastrophe.
« Last Edit: February 03, 2015, 08:14:35 AM by wdanner »
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Aphalite

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Re: Why would I be in anything other than 100% stocks?
« Reply #23 on: February 03, 2015, 08:28:05 AM »
2008 was about as close at it gets to a total meltdown. Banks collapsing, the life insurance industry almost collapsed, auto companies collapsing, the whole thing was coming down. Something like that only happens once or twice in a lifetime because it takes 20-30 years just to fully recover from an event like that. From that perspective, the last 5 years and the next 15-25 years will be about the most risk free years you can get as far as the chances of another 2008 happening goes. That doesn't imply anything regarding returns, just odds of catastrophe.

1987 -> 2000 -> 2008

Three in 20 years, if you're counting on the next 15-25 years being "risk free", I wish you luck

brooklynguy

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Re: Why would I be in anything other than 100% stocks?
« Reply #24 on: February 03, 2015, 08:47:55 AM »
From an emotional perspective, I don't believe I will have any problem withstanding the down cycles. I actually get excited about market drops, particularly when I have money to invest. I regret not dumping a ton of cash into the market when it was at 6,000. What an opportunity missed. The fear aspect to me is a moot point because I know that when I FIRE I will be better off than 90% of the the US population. If the market were to drop 50% and never recover, sure it would hurt, but the repercussions for everyone else would be catastrophic. So in comparison, I would still be pretty well off. And something like that doesn't happen in a vacuum so with an event like that prices of good will decline, home prices, will drop, etc, which will all ultimately benefit me.

2008 was about as close at it gets to a total meltdown. Banks collapsing, the life insurance industry almost collapsed, auto companies collapsing, the whole thing was coming down. Something like that only happens once or twice in a lifetime because it takes 20-30 years just to fully recover from an event like that. From that perspective, the last 5 years and the next 15-25 years will be about the most risk free years you can get as far as the chances of another 2008 happening goes. That doesn't imply anything regarding returns, just odds of catastrophe.

For investors who did not live through the 2008 meltdown, I like to recommend reading the introduction to Dr. Doom's drawdown series (link below) as a mental exercise to begin to judge your true risk tolerance.  And remember that the psychology differs when you are in the accumulation phase vs. the drawdown phase:  it's one thing to look at a market meltdown as a buying opportunity and a good thing when you're still accumulating assets, but it's quite another thing to watch your portfolio shrink in half at a time when that portfolio is your livelihood.

http://www.livingafi.com/2014/05/drawdown-part-1-the-basics/

Dodge

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Re: Why would I be in anything other than 100% stocks?
« Reply #25 on: February 03, 2015, 09:01:42 AM »
From an emotional perspective, I don't believe I will have any problem withstanding the down cycles. I actually get excited about market drops, particularly when I have money to invest.

It's easy to say that now, when you have a comparatively small amount of money invested.  How will you feel when your account goes from $900,000 (fire in less than a year), to $700,000 in two months.  You were counting down the days till fire, and now that day seems years away.  $200,000 just "gone".  Years of hard work down the drain.  Then a slow and steady drop.  8 months later you're at $600,000.  On the news all you hear is "This could be it" for the financial system.  Almost half your friends have lost their jobs, you've taken a pay cut at work, and everyone is nervous about rumors of layoffs.  3 months later, your portfolio plunges from $600,000 to $300,000 in a week's time.  The $900,000 account now seems like a distant memory.  Executive bankers are jumping off buildings in Wall Street.  Banks are failing left and right, there's a run on the banks as you see your friends emptying their entire life's savings to avoid losses.  The next day you look at the account, and see $270,000 left.

After saving up for a decade, if you think this situation would excite you, you simply haven't experienced it.
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Re: Why would I be in anything other than 100% stocks?
« Reply #26 on: February 03, 2015, 09:04:17 AM »

1987 -> 2000 -> 2008

Three in 20 years, if you're counting on the next 15-25 years being "risk free", I wish you luck
Sorry, but IMO 1987 and 2000 are not in the same ballpark as 2008.  1987 was a stock market crash following an enormous run-up.  The 2000 recession followed the longest economic period of growth in US history, and lasted 8 months.  In contrast, 2008 was twice as long, had deeper losses in the stock market accompanied by the drying up of credit.

If you're trying to point out that dips happen, sure.  Over the last century we've seen a recession ~7 years.  But 2008-2009 ≠ 2000-2001.
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Re: Why would I be in anything other than 100% stocks?
« Reply #27 on: February 03, 2015, 09:09:23 AM »

1987 -> 2000 -> 2008

Three in 20 years, if you're counting on the next 15-25 years being "risk free", I wish you luck
Sorry, but IMO 1987 and 2000 are not in the same ballpark as 2008.  1987 was a stock market crash following an enormous run-up.  The 2000 recession followed the longest economic period of growth in US history, and lasted 8 months.  In contrast, 2008 was twice as long, had deeper losses in the stock market accompanied by the drying up of credit.

If you're trying to point out that dips happen, sure.  Over the last century we've seen a recession ~7 years.  But 2008-2009 ≠ 2000-2001.
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Re: Why would I be in anything other than 100% stocks?
« Reply #28 on: February 03, 2015, 09:10:32 AM »
From an emotional perspective, I don't believe I will have any problem withstanding the down cycles. I actually get excited about market drops, particularly when I have money to invest.

It's easy to say that now, when you have a comparatively small amount of money invested.  How will you feel when your account goes from $900,000 (fire in less than a year), to $700,000 in two months.  You were counting down the days till fire, and now that day seems years away.  $200,000 just "gone".  Years of hard work down the drain.  Then a slow and steady drop.  8 months later you're at $600,000.  On the news all you hear is "This could be it" for the financial system.  Almost half your friends have lost their jobs, you've taken a pay cut at work, and everyone is nervous about rumors of layoffs.  3 months later, your portfolio plunges from $600,000 to $300,000 in a week's time.  The $900,000 account now seems like a distant memory.  Executive bankers are jumping off buildings in Wall Street.  Banks are failing left and right, there's a run on the banks as you see your friends emptying their entire life's savings to avoid losses.  The next day you look at the account, and see $270,000 left.

After saving up for a decade, if you think this situation would excite you, you simply haven't experienced it.
As somebody that has never had any skin in the game during a stock market crash, I appreciate the picture you've drawn here!

Hopefully I can avoid panicking and selling during a downtown. I say I can. But I know it's one thing to say I can and something else entirely to be actually able to do it.

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Re: Why would I be in anything other than 100% stocks?
« Reply #29 on: February 03, 2015, 09:20:11 AM »
From an emotional perspective, I don't believe I will have any problem withstanding the down cycles. I actually get excited about market drops, particularly when I have money to invest.

It's easy to say that now, when you have a comparatively small amount of money invested.  How will you feel when your account goes from $900,000 (fire in less than a year), to $700,000 in two months.  You were counting down the days till fire, and now that day seems years away.  $200,000 just "gone".  Years of hard work down the drain.  Then a slow and steady drop.  8 months later you're at $600,000.  On the news all you hear is "This could be it" for the financial system.  Almost half your friends have lost their jobs, you've taken a pay cut at work, and everyone is nervous about rumors of layoffs.  3 months later, your portfolio plunges from $600,000 to $300,000 in a week's time.  The $900,000 account now seems like a distant memory.  Executive bankers are jumping off buildings in Wall Street.  Banks are failing left and right, there's a run on the banks as you see your friends emptying their entire life's savings to avoid losses.  The next day you look at the account, and see $270,000 left.

After saving up for a decade, if you think this situation would excite you, you simply haven't experienced it.
If you're referencing 2008 I think your numbers are a little extreme. The loss was closer to 50% but I get your point. I have no way of knowing how I would have reacted then. I Would hope I would have said, "Wade, you still have 11 years worth of living expenses in the bank and this will either recover and be irrelevant, or it'll crash completely and money won't exist anymore." I feel like in scenario two I'd be more worried about how many guns I owned.  My plan is to put myself in a position where hopefully I could weather such a storm even if it did go the other way and the market truly died. Having a small house, no mortgage, and enough land to grow your own food, along with a properly built house that allows the use of free heat sources like wood makes the ability to survive much easier than someone who is stuck in a city with no grass. But now we're getting into apocalypse-type stuff.
« Last Edit: February 03, 2015, 09:24:51 AM by wdanner »
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Re: Why would I be in anything other than 100% stocks?
« Reply #30 on: February 03, 2015, 09:34:24 AM »
From an emotional perspective, I don't believe I will have any problem withstanding the down cycles. I actually get excited about market drops, particularly when I have money to invest.

It's easy to say that now, when you have a comparatively small amount of money invested.  How will you feel when your account goes from $900,000 (fire in less than a year), to $700,000 in two months.  You were counting down the days till fire, and now that day seems years away.  $200,000 just "gone".  Years of hard work down the drain.  Then a slow and steady drop.  8 months later you're at $600,000.  On the news all you hear is "This could be it" for the financial system.  Almost half your friends have lost their jobs, you've taken a pay cut at work, and everyone is nervous about rumors of layoffs.  3 months later, your portfolio plunges from $600,000 to $300,000 in a week's time.  The $900,000 account now seems like a distant memory.  Executive bankers are jumping off buildings in Wall Street.  Banks are failing left and right, there's a run on the banks as you see your friends emptying their entire life's savings to avoid losses.  The next day you look at the account, and see $270,000 left.

After saving up for a decade, if you think this situation would excite you, you simply haven't experienced it.
If you're referencing 2008 I think your numbers are a little extreme. The loss was closer to 50% but I get your point. I have no way of knowing how I would have reacted then. I Would hope I would have said, "Wade, you still have 11 years worth of living expenses in the bank and this will either recover and be irrelevant, or it'll crash completely and money won't exist anymore." I feel like in scenario two I'd be more worried about how many guns I owned.

Let's not talk about how bad a particular crash was, let's try and remember how it felt. Like there's been a turning point, a division between an old era and a new era, and therefore past history is no longer a guide to the future. Not just a big decline, but a big decline coupled with a feeling of seismic shifts in the financial world. A sense that the earth is moving under our feet. A sense that events are happening that are going to make it into the history books.

And that's my point: it always feels that way. That's always what a big downturn feels like. It's not a number, 30% or 50%. It's a sense that there's been a break, the ground has shifted, the rules have changed.

We love drama and after the fact the reality often turns out to be boring. Imagine thinking, "see, it wasn't so bad!" But that's later. And sometimes it is a turning point and sometimes it is that bad.

This is why it's so hard to stay the course.  Your investment plan needs to be in tune with your own personal willingness to take financial risk.  When you're deciding what your risk tolerance is, it's not a tolerance for the number 30% or the number 50% or the number 60%. It's not a tolerance for an "A" turning into a "+". It's a tolerance for accepting genuinely-scary, nothing-like-this-has-ever-happened-before, heralds-a-new-era news events.

That's not something you can judge from looking at a graph.
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Re: Why would I be in anything other than 100% stocks?
« Reply #31 on: February 03, 2015, 09:51:13 AM »
From an emotional perspective, I don't believe I will have any problem withstanding the down cycles. I actually get excited about market drops, particularly when I have money to invest.

It's easy to say that now, when you have a comparatively small amount of money invested.  How will you feel when your account goes from $900,000 (fire in less than a year), to $700,000 in two months.  You were counting down the days till fire, and now that day seems years away.  $200,000 just "gone".  Years of hard work down the drain.  Then a slow and steady drop.  8 months later you're at $600,000.  On the news all you hear is "This could be it" for the financial system.  Almost half your friends have lost their jobs, you've taken a pay cut at work, and everyone is nervous about rumors of layoffs.  3 months later, your portfolio plunges from $600,000 to $300,000 in a week's time.  The $900,000 account now seems like a distant memory.  Executive bankers are jumping off buildings in Wall Street.  Banks are failing left and right, there's a run on the banks as you see your friends emptying their entire life's savings to avoid losses.  The next day you look at the account, and see $270,000 left.

After saving up for a decade, if you think this situation would excite you, you simply haven't experienced it.
If you're referencing 2008 I think your numbers are a little extreme. The loss was closer to 50% but I get your point. I have no way of knowing how I would have reacted then. I Would hope I would have said, "Wade, you still have 11 years worth of living expenses in the bank and this will either recover and be irrelevant, or it'll crash completely and money won't exist anymore." I feel like in scenario two I'd be more worried about how many guns I owned.

Let's not talk about how bad a particular crash was, let's try and remember how it felt. Like there's been a turning point, a division between an old era and a new era, and therefore past history is no longer a guide to the future. Not just a big decline, but a big decline coupled with a feeling of seismic shifts in the financial world. A sense that the earth is moving under our feet. A sense that events are happening that are going to make it into the history books.

And that's my point: it always feels that way. That's always what a big downturn feels like. It's not a number, 30% or 50%. It's a sense that there's been a break, the ground has shifted, the rules have changed.

We love drama and after the fact the reality often turns out to be boring. Imagine thinking, "see, it wasn't so bad!" But that's later. And sometimes it is a turning point and sometimes it is that bad.

This is why it's so hard to stay the course.  Your investment plan needs to be in tune with your own personal willingness to take financial risk.  When you're deciding what your risk tolerance is, it's not a tolerance for the number 30% or the number 50% or the number 60%. It's not a tolerance for an "A" turning into a "+". It's a tolerance for accepting genuinely-scary, nothing-like-this-has-ever-happened-before, heralds-a-new-era news events.

That's not something you can judge from looking at a graph.
Got it. Thank you for painting that picture though. It is quite scary. I'm sure I will be thinking on this as I consider the stock/bonds allocation and reading as much material as I can.
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Re: Why would I be in anything other than 100% stocks?
« Reply #32 on: February 03, 2015, 10:14:55 AM »
Let's not talk about how bad a particular crash was, let's try and remember how it felt.

Yes.  Wdanner, read the Dr. Doom post I linked to in post # 25 above, which is the best description I've come across of the psychological experience of living through a market crash -- no matter how high you think your risk tolerance is, you're going to have to compete with your lizard brain that's trying to kick you into flight mode.

A few weeks ago we had one of our periodic fire drills in my office building.  As he always does, the fire marshal running the drill explained to us that in the event of a fire or other emergency, we should all dutifully follow the instructions announced over the building's PA system, which in many cases will involve staying put.  Our office building is a modern miracle of engineering designed to contain and control localized fire situations, he explained, and remaining in place will often represent the safest option in the event of a fire on another floor of the building.  I believed him.  I'm sure many of my coworkers did as well.  Yet, when and if we ever see smoke flowing through our halls, you can bet we're not going to calmly and rationally follow the advice of the voice over the loudspeakers telling us to stay where we are, but flee for the exits like the panicked mob we will become.

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Re: Why would I be in anything other than 100% stocks?
« Reply #33 on: February 03, 2015, 11:14:40 AM »
The past century we experienced an enormous expansion economically in the US. I would vote against it simply because past performance does not guarantee future returns.
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Re: Why would I be in anything other than 100% stocks?
« Reply #34 on: February 03, 2015, 11:27:30 AM »
The past century we experienced an enormous expansion economically in the US. I would vote against it simply because past performance does not guarantee future returns.
This is exactly why I believe the next 50 years will see similar gains.  We've got ~7B people on this planet, about half of whom live in poverty.  99% make less than $38k (adjusted for parity). Globally, we have light-years to go for increasing income, standards of living and productivity.  The last two decades have shown enormous gains in developing nations.
If you think that this doesn't matter to investments in the US markets, consider that almost all of the biggest US companies now earn the majority of their profits in foreign markets.

yes, I'm in optimist - and I see more room for economic expansion over the next century than the previous century. Only time will tell who was right.
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Re: Why would I be in anything other than 100% stocks?
« Reply #35 on: February 03, 2015, 11:31:16 AM »
The past century we experienced an enormous expansion economically in the US. I would vote against it simply because past performance does not guarantee future returns.
This is exactly why I believe the next 50 years will see similar gains.  We've got ~7B people on this planet, about half of whom live in poverty.  99% make less than $38k (adjusted for parity). Globally, we have light-years to go for increasing income, standards of living and productivity.  The last two decades have shown enormous gains in developing nations.
If you think that this doesn't matter to investments in the US markets, consider that almost all of the biggest US companies now earn the majority of their profits in foreign markets.

yes, I'm in optimist - and I see more room for economic expansion over the next century than the previous century. Only time will tell who was right.

Trust me, I'm not one to be all doom and gloom. Heck I have plans of FIRE that rely on you being more right than I am. I have posted this before however. Global economics in its current state is fucked. On top of a historical wealth gap you can only kick the proverbial can down the road so long. This was posted by a very intelligent individual on another board I am on

"Global deflationary depression is unavoidable and has been, and will continue to occur. Despite trillions of dollars of global monetary stimulus we have seen falling commodities prices for more than a year now and they are going to continue to fall to unexpected levels as deflationary expectations become mentally entrenched in consumers creating a deflationary spiral where everyone waits to buy in the future as things will be cheaper then.

Fossil fuel deflation is the most recent and prominent example of even the most powerful and wealthy global cartel’s inability to stem deflation. Nothing can stop it. Why? There are several reasons: Un-repayable debt, global economic contraction, and wage pressures.

Because the planet has aggregate debt (personal, business, and governmental) exceeding $230 Trillion and only has Official GDP of approximately $73 Trillion. (Real GDP is closer to $58 Trillion when the gimmicks are removed.) For example, Italy (8th largest economy in the world) just decided to include estimates for illegal drug sales and prostitution in their GDP as they experience their 14th consecutive quarter of GDP contraction.

The bottom line is the debt can never be repaid and will be repudiated. At the personal and business levels that looks like bankruptcy where debt is discharged and at the sovereign level that looks like “restructuring”, where bondholders are offered pennies on the dollar like the Greeks just did.

When debt is repudiated, money supply contracts usually by 10 times the amount repudiated. When money supply contracts, prices fall. It’s just that simple.

Global economic cycles will run their course and have been “postponed” by incessant monetary manipulation, which will make the snapback commensurately faster and deeper as it does occur. Aging populations, reduced family formations, declining birthrates, "one child Policies", technological innovations including robotics all contribute to the declining employment in the world and its associated economic activity. Central Bank money creation will not stop deflation either as Japan has proven. Under Abe, Japan's monetary base doubled in the last year and still they fight deflation. Monetary velocity has slowed dramatically as aging populations spend less, more than offsetting the increase in monetary supply.

Global population is now 7.3 Billion and half of all those people live on less than $2.50 per day. 80% of all humans live on less than $10 per day. The US makes up less than 5% of the world’s population and we live in a massive wage bubble blown out of all semblance of proportion or relativity by unions and government mandate financed with massive un-repayable debt. When interest rates see free markets again they will snap higher and the US will not be able to pay its interest and will not have new debt available to it any more and will have to compete in global labor markets forcing wages to drop dramatically furthering deflation."
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Re: Why would I be in anything other than 100% stocks?
« Reply #36 on: February 03, 2015, 11:49:11 AM »
Trust me, I'm not one to be all doom and gloom. Heck I have plans of FIRE that rely on you being more right than I am. I have posted this before however. Global economics in its current state is fucked. On top of a historical wealth gap you can only kick the proverbial can down the road so long. This was posted by a very intelligent individual on another board I am on

"Global deflationary depression is unavoidable ... we have seen falling commodities prices ... creating a deflationary spiral ...

Nothing can stop it. ... Un-repayable debt, global economic contraction, and wage pressures.

aggregate debt... exceeding $230 Trillion .

... debt can never be repaid ... like the Greeks ..

Global economic cycles ...incessant monetary manipulation ...faster and deeper ...Aging populations, reduced family formations, declining birthrates, "one child Policies", technological innovations ... deflation...Monetary velocity ...

Global population is now 7.3 Billion and half of all those people live on less than $2.50 per day. 80% of all humans live on less than $10 per day. ... we live in a massive wage bubble ...unions and government ...massive un-repayable debt. ... the US will not be able to pay its interest
Wow.  Now that's one of the most pessimistic and fearful posts I've seen in a very long time (edited to illustrated the random list of fears).  I'm sure most of those would require lenghty threads of their own.  But my take-home-message is at the end: there's an almost mind-boggling number of people out there who's economic conditions can be improved, and who's productivity can be harnessed. 
In a very broad way, this is exactly what has happened to China, India and others over the last 30 years. 

Like I said, time will tell, but throwing all the intellegent-sounding psycho-babble into the mix won't make it true.  The global economy has survived multiple world-wars, genocides, pandemics and whacko-governments.  But in the end if individuals, families and communities are collectively striving to make lives better the economy will roll along.
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Re: Why would I be in anything other than 100% stocks?
« Reply #37 on: February 03, 2015, 11:53:00 AM »
This was posted by a very intelligent individual on another board I am on

He or she may be intelligent but they're susceptible to logical fallacies and conspiratorial thinking like anyone.  Some of their claims stray dangerously close to and even over the line of "wacko conspiracy theories" in my opinion.  Their claims of a "global cartel" / etc.  It's easy to write posts like that when you aren't too concerned about facts or critical analysis of them.

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Re: Why would I be in anything other than 100% stocks?
« Reply #38 on: February 03, 2015, 12:07:59 PM »
Personally, I'm planning on keeping ~2 years in bonds that i will use if stocks take a dive soon after ER.  Then I won't have to touch my equities portion when prices are low.  It's my own plan of rebalancing, but instead of holding to a fixed % it will be based on market performance.

curious what others think here....

Nereo, I meant to respond to this earlier and then forgot about it.  Is your plan to "replenish" the bonds if you end up tapping them due to a market dive shortly after ER?  Or would you stay 100% equities forever after tapping the bonds?

Your approach sounds similar to the strategy of holding a cash buffer to get through bear markets, which generally results in worse performance and higher failure rates (see the research described in this article, for example:  https://www.kitces.com/blog/research-reveals-cash-reserve-strategies-dont-work-unless-youre-a-good-market-timer/), except the drag effect on your performance shouldn't be as bad with bonds as with cash (since they are generally higher-performing assets).

But the extended bear market example discussed in the Kitces article demonstrates how you could be worse off using your buffer strategy if you plan to replenish the buffer.  If you experience a return sequence on your equity portfolio of -5%, -10%, -20% in the three years immediately following ER, you will have exhausted your bond reserve in years 1 and 2 and then be selling two years of expenses' worth of equities in year 3, leading to a lower average sale price than if you had simply sold one year's worth of equities each year.

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Re: Why would I be in anything other than 100% stocks?
« Reply #39 on: February 03, 2015, 12:23:06 PM »
My Money Blog kinda covered this recently, pointing to an interesting study.
Adding bonds does historically decrease your returns but not as much as you'd think, and the volatility goes way down.

See also efficient frontier:
"High investment returns cannot be earned without taking substantial risk. Safe investments produce low returns."
"The history of the stock and bond markets shows that risk and reward are inextricably intertwined. Do not expect high returns without high risk. Do not expect safety without correspondingly low returns."
"Be especially wary of data demonstrating the superior long-term performance of U.S. stocks. For most of its history, the U.S. was a very risky place to invest, and its high investment returns reflect that. Now that the U.S. seems to be more of a "sure thing," prices have risen, and future investment returns will of necessity be lower."

For me it's hard to put a price on sleep at night factor.
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Re: Why would I be in anything other than 100% stocks?
« Reply #40 on: February 03, 2015, 12:23:43 PM »
Regarding AA allocation after FIRE: 

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2324930

 "We find, surprisingly, that rising equity glidepaths in retirement – where the portfolio starts out conservative and becomes more aggressive through the retirement time horizon – have the potential to actually reduce both the probability of failure and the magnitude of failure for client portfolios. This result may appear counterintuitive from the traditional perspective, which is that equity exposure should decrease throughout retirement as the retiree’s time horizon (and life expectancy) shrinks and mortality looms. Yet the conclusion is actually entirely logical when viewed from the perspective of what scenarios cause a client’s retirement to “fail” in the first place. In scenarios that threaten retirement sustainability – e.g., an extended period of poor returns in the first half of retirement – a declining equity exposure over time will lead the retiree to have the least in stocks if/when the good returns finally show up in the second half of retirement (assuming the entire retirement period does not experience continuing poor returns). With a rising equity glidepath, the retiree is less exposed to losses when most vulnerable in early retirement and the equity exposure is greater by the time subsequent good returns finally show up. In turn, this helps to sustain greater retirement income over the entire time period. Conversely, using a rising equity glidepath in scenarios where equity returns are good early on, the retiree is so far ahead that their subsequent asset allocation choices do not impact the chances to achieve the original retirement goal. "  Pfau and Kitces.

At retirement, a sequence of returns risk could jettison your SWR, but adding risk incrementally to a more conservative AA improves integrity of SWR.
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Re: Why would I be in anything other than 100% stocks?
« Reply #41 on: February 03, 2015, 12:30:38 PM »
From an emotional perspective, I don't believe I will have any problem withstanding the down cycles. I actually get excited about market drops, particularly when I have money to invest.

It's easy to say that now, when you have a comparatively small amount of money invested.  How will you feel when your account goes from $900,000 (fire in less than a year), to $700,000 in two months.  You were counting down the days till fire, and now that day seems years away.  $200,000 just "gone".  Years of hard work down the drain.  Then a slow and steady drop.  8 months later you're at $600,000.  On the news all you hear is "This could be it" for the financial system.  Almost half your friends have lost their jobs, you've taken a pay cut at work, and everyone is nervous about rumors of layoffs.  3 months later, your portfolio plunges from $600,000 to $300,000 in a week's time.  The $900,000 account now seems like a distant memory.  Executive bankers are jumping off buildings in Wall Street.  Banks are failing left and right, there's a run on the banks as you see your friends emptying their entire life's savings to avoid losses.  The next day you look at the account, and see $270,000 left.

After saving up for a decade, if you think this situation would excite you, you simply haven't experienced it.
If you're referencing 2008 I think your numbers are a little extreme. The loss was closer to 50% but I get your point. I have no way of knowing how I would have reacted then. I Would hope I would have said, "Wade, you still have 11 years worth of living expenses in the bank and this will either recover and be irrelevant, or it'll crash completely and money won't exist anymore." I feel like in scenario two I'd be more worried about how many guns I owned.

Let's not talk about how bad a particular crash was, let's try and remember how it felt. Like there's been a turning point, a division between an old era and a new era, and therefore past history is no longer a guide to the future. Not just a big decline, but a big decline coupled with a feeling of seismic shifts in the financial world. A sense that the earth is moving under our feet. A sense that events are happening that are going to make it into the history books.

And that's my point: it always feels that way. That's always what a big downturn feels like. It's not a number, 30% or 50%. It's a sense that there's been a break, the ground has shifted, the rules have changed.

We love drama and after the fact the reality often turns out to be boring. Imagine thinking, "see, it wasn't so bad!" But that's later. And sometimes it is a turning point and sometimes it is that bad.

This is why it's so hard to stay the course.  Your investment plan needs to be in tune with your own personal willingness to take financial risk.  When you're deciding what your risk tolerance is, it's not a tolerance for the number 30% or the number 50% or the number 60%. It's not a tolerance for an "A" turning into a "+". It's a tolerance for accepting genuinely-scary, nothing-like-this-has-ever-happened-before, heralds-a-new-era news events.

That's not something you can judge from looking at a graph.

Thanks so much for posting this. I had just read Dr. Doom's post the other day, which made me re-think my capacity for risk tolerance. I'm definitely not comfortable with a 100% stock portfolio! 

nereo

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Re: Why would I be in anything other than 100% stocks?
« Reply #42 on: February 03, 2015, 12:37:40 PM »
Personally, I'm planning on keeping ~2 years in bonds that i will use if stocks take a dive soon after ER.  Then I won't have to touch my equities portion when prices are low.  It's my own plan of rebalancing, but instead of holding to a fixed % it will be based on market performance.

curious what others think here....

Nereo, I meant to respond to this earlier and then forgot about it.  Is your plan to "replenish" the bonds if you end up tapping them due to a market dive shortly after ER?  Or would you stay 100% equities forever after tapping the bonds?

My plan (which could still evolve, I have about a decade before implementing it) is to keep about 2 years in bonds/MMA and the rest in equities.  This should start me at around 92/8, which is aggressive according to the mainstream media.
the bonds would be tapped in years when the market has gone down by more than a certain percentage, and they would be replenished when it has gone up by more than a certain percentage.  I'm fiddling with the % now but I'm thinking in both cases around 15%.
This in effect would be a variation of auto-balancing, causing me to sell stocks after a run-up and protect my principle  during a downturn.  In almost all historical cases, equities have recovered after 2 years with dividends reinvested
The difference between my strategy and the typical "fixed XX/XX equities-to-bonds is that I wouldn't be fixed to a specific percentages of stocks/bonds.  After a few bad years I'd be 100% stocks, and after consecutive good years I'd replenish my bonds. I would stop replenishing anytime I had more than 3 years' worth.
In almost all cases, equities have recovered after 2 years.
I realize that it may do very little to actually increase my returns, but it's intended to give both me and my SO piece of mind during market drops, knowing that we have something to draw from when stocks are down. 
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brooklynguy

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Re: Why would I be in anything other than 100% stocks?
« Reply #43 on: February 03, 2015, 12:52:54 PM »
My plan (which could still evolve, I have about a decade before implementing it) is to keep about 2 years in bonds/MMA and the rest in equities.  This should start me at around 92/8, which is aggressive according to the mainstream media.
the bonds would be tapped in years when the market has gone down by more than a certain percentage, and they would be replenished when it has gone up by more than a certain percentage.  I'm fiddling with the % now but I'm thinking in both cases around 15%.
This in effect would be a variation of auto-balancing, causing me to sell stocks after a run-up and protect my principle  during a downturn.  In almost all historical cases, equities have recovered after 2 years with dividends reinvested
The difference between my strategy and the typical "fixed XX/XX equities-to-bonds is that I wouldn't be fixed to a specific percentages of stocks/bonds.  After a few bad years I'd be 100% stocks, and after consecutive good years I'd replenish my bonds. I would stop replenishing anytime I had more than 3 years' worth.
In almost all cases, equities have recovered after 2 years.
I realize that it may do very little to actually increase my returns, but it's intended to give both me and my SO piece of mind during market drops, knowing that we have something to draw from when stocks are down.

The Kitces article explains why holding a cash reserve to tap during market downturns historically produced not only lower returns but also higher failure rates than using a "rigid" asset allocation with periodic rebalancing (because the drag effect of the cash position outweighed the benefit of holding the high-performing assets during the periods when the cash was tapped).  However, I believe this research assumed that the cash reserve would always be replenished once it was exhausted, unlike your proposal where the markets need to cover by some threshold percentage before the reserve gets replenished.

Dodge

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Re: Why would I be in anything other than 100% stocks?
« Reply #44 on: February 03, 2015, 01:03:26 PM »
If you experience a return sequence on your equity portfolio of -5%, -10%, -20% in the three years immediately following ER, you will have exhausted your bond reserve in years 1 and 2 and then be selling two years of expenses' worth of equities in year 3, leading to a lower average sale price than if you had simply sold one year's worth of equities each year.

I just mapped this out with an 80/20 allocation for fun:
  • $1,000,000 portfolio
  • Withdrawing 4%, $40,000 a year
  • Bonds grow 5.5% a year
  • Stocks fall 5%, then 10% then 20%

First year:



Second year:



Third year:



Final Balance after the third year withdrawal:



= $663,574

Compared to the 100% stock portfolio: $583,200

About a 13.8% difference, or over 2 years of living expenses. 
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RapmasterD

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Re: Why would I be in anything other than 100% stocks?
« Reply #45 on: February 03, 2015, 01:04:52 PM »
Whether it's 90/10, 80/20, 70/30 or even...perish the thought....60/40, it sounds like one of the rationales on this thread is about mastering one's emotions in order to not make a stupid selling decision.

Now...what if a sleepy mother fucking 60/40 mutual fund could cause one to master her/his emotions and never sell?

It may not be optimal.

But it probably wouldn't be so terrible, even if it smells like mothballs and listens to bad polka music.

I'm thinking of one snooze fest mutual fund that has a 10 year average return of 7.95% annually, and a long term return of 8.29% annually.

Yeah yeah yeah...the past doesn't predict the future. And who would ever invest in an actively managed fund? I certainly don't.

But this track record goes back to mid-1929.

For many people, this could arguably be their one 'set it and forget it' option.

Meet Mr. Wellington: https://personal.vanguard.com/us/funds/snapshot?FundId=0021&FundIntExt=INT#tab=1
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AlexK

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Re: Why would I be in anything other than 100% stocks?
« Reply #46 on: February 03, 2015, 01:17:12 PM »

Trust me, I'm not one to be all doom and gloom. Heck I have plans of FIRE that rely on you being more right than I am. I have posted this before however. Global economics in its current state is fucked. On top of a historical wealth gap you can only kick the proverbial can down the road so long. This was posted by a very intelligent individual on another board I am on

Was it this guy?

https://m.youtube.com/watch?v=IVd-zAXACrU

brooklynguy

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Re: Why would I be in anything other than 100% stocks?
« Reply #47 on: February 03, 2015, 01:24:12 PM »
Final Balance after the third year withdrawal:

= $663,574

Compared to the 100% stock portfolio: $583,200

About a 13.8% difference, or over 2 years of living expenses.

Not sure why all that was necessary -- obviously if the stock market is tanking over a three year period then during those thre years you are going to be better off with 20% bond exposure instead of 0% bond exposure.

The sequence of returns example was intended to address nereo's proposal of holding a cash buffer as a "side holding" beyond your true desired asset allocation (whether that be 100% stocks, 80/20 or what have you).

Dodge

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Re: Why would I be in anything other than 100% stocks?
« Reply #48 on: February 03, 2015, 01:43:49 PM »
Not sure why all that was necessary

For fun :)
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Kaspian

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Re: Why would I be in anything other than 100% stocks?
« Reply #49 on: February 03, 2015, 01:53:43 PM »
I sound like a broken record but "winners rotate".  Most crazy graphs show returns based on a buy-and-hold strategy instead of a rebalancing one.  Why would you not take advantage of diversification?  A one-asset investment strategy has never been particularly smart or clever.  (Ask people who spent all their money in real estate bidding wars in Florida an Arizona around 2006.)  You can drive without a seatbelt and trust yourself to never get in an accident, but why would you do that?   (See attached. I have yet to hear anyone refute the data in a way that made sense.)
« Last Edit: February 03, 2015, 01:59:47 PM by Kaspian »
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