The Money Mustache Community
Learning, Sharing, and Teaching => Investor Alley => Topic started by: Mr. Green on February 02, 2015, 03:07:22 PM
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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.
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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.
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Because deflation (and to a lesser extent, population stagnation)
See Japan or European stock market
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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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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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Seems there were threads on this already. I've linked them for the others interested.
http://forum.mrmoneymustache.com/investor-alley/asset-allocation-100-stocks-for-how-long/
http://forum.mrmoneymustache.com/investor-alley/never-reallocating-from-100-equity-with-age/
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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
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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?
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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.
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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.
(http://i.imgur.com/WASyDmL.png)
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:
(http://i.imgur.com/5NnzoWK.png)
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:
(http://i.imgur.com/EdyXlMu.png)
While the 80/20 portfolio hits it in 2007:
(http://i.imgur.com/UKhWo9Q.png)
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:
(http://i.imgur.com/FTmYo5m.png)
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:
(http://i.imgur.com/js2bzs9.png)
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?
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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.
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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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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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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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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:
(http://i.imgur.com/SwUkYZL.png)
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:
(http://i.imgur.com/gjAM3B2.png)
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:
(http://i.imgur.com/xxFBic5.png)
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.
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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.
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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.
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New investors focus on total return, while experienced investors focus all their efforts on managing risk.
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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:
(http://i.imgur.com/SwUkYZL.png)
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:
(http://i.imgur.com/gjAM3B2.png)
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:
(http://i.imgur.com/xxFBic5.png)
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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Dodge, I really enjoy all of your graph laden replies. Seriously, awesome.
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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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New investors focus on total return, while experienced investors focus all their efforts on managing risk.
This ^
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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.
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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
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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/
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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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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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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.
Agreed.
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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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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, "I 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.
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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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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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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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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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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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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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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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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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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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My Money Blog (http://www.mymoneyblog.com/this-is-why-my-retirement-portfolio-is-simple-and-balanced.html) 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 (http://www.efficientfrontier.com/t4poi/Ch1.htm):
"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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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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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!
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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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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.
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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:
(http://i.imgur.com/3lLkjBK.png)
Second year:
(http://i.imgur.com/h2hyR78.png)
Third year:
(http://i.imgur.com/rcn3JSf.png)
Final Balance after the third year withdrawal:
(http://i.imgur.com/VPjFRDi.png)
= $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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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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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
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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).
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Not sure why all that was necessary
For fun :)
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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.)
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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. 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.)
The cfiresim results that we've been talking about include rebalancing and allow you to gauge the historical performance of different asset allocations, including periodic rebalancing in the case of allocations with mixed asset classes. Read through the "100% stock forever" threads linked to at the beginning of this thread for extended discussions of why a single-asset class investment strategy can be considered "smart or clever". The short answer, as already discussed in this thread, is that holding 100% stocks over extended time periods historically has produced equal or near-equal (which one depends on the exact variables for things like expense ratios) success rates and wildly higher portfolio ending values that allocations that include bond exposure. But, in spite of this, a compelling reason not to hold 100% stocks is that we are not robots and when the shit hits the fan we are likely to abandon reason, panic and sell low.
All your chart shows is that in any given year a different asset class or sub-class will emerge as the highest-performing one for that year. It does not automatically follow that a mixed or diversified asset allocation will perform better over extended time periods (what it will do, however, is smooth out volatility).
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[snip]...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.
exactly - my strategy is to only replenish when the markets have returned above a certain percentage and only if necessary.
so far the only way i've found of doing this is through a rather clunky excel sheet of my own making where i tracking the running average returns of the SP and simulate two portfolios, one all SP500, the other the 'dynamic' one. Right now I'm limited by my own programming abilities, but preliminary results are encouraging.
Regardless, my holdings in bonds won't ever exceed 10%, and I fully except that the biggest advantage my be that it helps my own sanity.
"Do nothing" may be the easiest advice, but the hardest to follow when everyone else around you is going mad. Sometimes just have something to do, even if it is slightly less than the most optimal thing to do, is better than being left to your own stupidity.
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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.
You can offset the drag to an extend with T-bills instead of a wad of cash.
Actually there are quite a few assumptions the Kitces article made which are less than ideal. Also, holding huge wads of cash is a proven strategy that corporations have used over the decades to purchase other companies at fire-sale prices. Berkshire Hathaway is the obvious example.
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Also, holding huge wads of cash is a proven strategy that corporations have used over the decades to purchase other companies at fire-sale prices. Berkshire Hathaway is the obvious example.
Holding cash as "dry powder" to purchase assets at fire-sale prices is also known as "market timing" and is very unlikely to be successful strategy (to say the least).
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I am 100% stocks. I don't much care why it might be right for others to have less than 100% stocks. That is their call and I don't judge them. But I do think they can expect less return over time unless they are very careful to rebalance appropriately and are still mostly stocks. I don't want to rebalance, I don't care about volitility, I have good job security, I have a long time before I expect to withdraw anything, I don't scare easy including 2008, I very much like simplicity, etc. Sure, I might find a reason to change allocation at some point, and am always open to rational reasons to do so. But for now I am 100% stock and comfortable with that.
So yes, there are reasons to not be in 100% stocks for certain individuals, but I don't think there is a reason not to be 100% stocks that applies to everyone.
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Also, holding huge wads of cash is a proven strategy that corporations have used over the decades to purchase other companies at fire-sale prices. Berkshire Hathaway is the obvious example.
Holding cash as "dry powder" to purchase assets at fire-sale prices is also known as "market timing" and is very unlikely to be successful strategy (to say the least).
I realize you were addressing dungoofed, but to be clear I'm talking about a small portion of bonds, not cash. I read the kitces article with a lot of interest, and I'm going to keep thinking about it. But a very small position and the fact that it would be held in securities, NOT cash, make it a bit different. If i find anything earthshattering in my simulations i'll let you know.
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Yes, I realize your proposed strategy uses bonds instead of cash which as I said earlier should reduce the drag effect, but really it's the setting of the recovery threshold for replenishing that potentially makes your strategy much stronger (after all cash can be thought of as a low rate bond). Moreover, even the pure cash buffer strategy isn't necessarily a bad thing; you're not trading away that much performance or chances of portfolio success, and you're getting an important psychological benefit that will keep you from panicking (exactly like having some bonds in your allocation in general as we've been discussing in this thread). I believe Nords uses a form of cash buffer in his withdrawal strategy.
Do keep us posted on what you learn in your modeling.
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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.
Hi Brooklynguy - I was just wondering, what would be your advice to someone who had a 100% stocks portfolio but lost their job in the 2008 downturn (as many did) and had burnt through their emergency money despite working a few part time jobs over the period?
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So you intend to rent forever? (if 100% stocks) Must admit I am comfortable with my plan to buy property outright when I retire. Sure, stocks might return higher than rent, but the reduction in risk looks worth it (not needing to move if landlord requests etc.)
Plan to be 20-25% of net worth in property
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So you intend to rent forever? (if 100% stocks) Must admit I am comfortable with my plan to buy property outright when I retire. Sure, stocks might return higher than rent, but the reduction in risk looks worth it (not needing to move if landlord requests etc.)
yes, because if the landlord forces you to leave you won't ever find another place ::eyeroll::
lots of reasons to be a perma-renter, including geographical flexibility, higher returns, no maintenance worries, etc.
Also, i think many here consider their home part of their net worth, but not part of their asset allocation so long as it doesn't generate revenue. Yes it can be looked at both ways.
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People don't seem to understand that the value of bonds can go down the drain too.
If rates on 30 years treasury bills got up to 5%, their value would be ridiculously low compared to their current level. That's why I don't want to get into bonds now. Rates can't possibly go much further down (unless you believe negative interest is possible for a while), while they have plenty of historical room upwards.
I guess that leaves cash.
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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.
This doesn't make any sense. If your sticker net worth changed from $900,000 to $700,000, your "FIRE" date has not changed. It's still the same. The sticker value of your account changing does not mean your level of wealth has changed.
The fire date as described in the MrMoneyMustache blog, is the day the 4% rule applies to your portfolio. If you have $1,000,000 and your expenses are $40,000, you can fire. If it takes one portfolio an extra 5 years to reach $1,000,000, then you have delayed your fire date by 5 years. If you have $900,000, and are saving $100,000 a year, you are expected to reach your fire date in under a year. If your portfolio drops to $700,000, your expected fire date has changed.
The sticker value of your account changing does not mean your level of wealth has changed.
Your net worth is calculated based on the current market value of your assets. If your assets becomes less valuable, then yes your level of wealth has changed.
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Hi Brooklynguy - I was just wondering, what would be your advice to someone who had a 100% stocks portfolio but lost their job in the 2008 downturn (as many did) and had burnt through their emergency money despite working a few part time jobs over the period?
I'm not sure if your question was meant to be rhetorical, but that's where the following part of the quoted language from my post comes in:
"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."
If you may need to access the funds in the short-term (whether because of job loss or desire to buy a house or any other reason), then a 100% stock allocation is not prudent. You're gambling as to whether you'll get lucky and liquidate your stocks at a time when they're high or get unlucky and have to sell during a down market. That's why it can make sense to have an emergency fund if your job security isn't air tight -- the sacrifice in returns is the premium you pay for the insurance protection against an unexpected need for cash.
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People don't seem to understand that the value of bonds can go down the drain too.
If rates on 30 years treasury bills got up to 5%, their value would be ridiculously low compared to their current level. That's why I don't want to get into bonds now. Rates can't possibly go much further down (unless you believe negative interest is possible for a while), while they have plenty of historical room upwards.
I guess that leaves cash.
I have copied my response from a similar question below. I'd rather not reinvent the wheel every time someone advocates market-timing in the bond market :)
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Everyone knows (well almost everyone) not to market time the stock market. The bond market is no different. My standard "market-timing bond" response is below, but I'll add one more chart, just for fun :)
You might not see it, but this is market timing. Ignore the noise, the news reports, and the doomsday articles. You can't guess where the market will go next. Let's review what happened to bonds the last time interest rates soared:
(http://i.imgur.com/kC7BM2H.png)
Interest rates spiked pretty high from 1975 through 1981 (the peak). Let's see what happened to intermediate term bonds during this time (orange line):
(http://i.imgur.com/6fEeV4U.png)
A $10,000 deposit grew almost 60%!
This is why we say ignore the noise.
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Now let's look at another point on the chart, the two decades from 1950-1970, where interest rates tripled from their record low. What happens to bonds then?
(http://i.imgur.com/7xpJe8A.png)
Unfortunately Morningstar's Intermediate bonds graph doesn't start until 1955, so I added "High Yield Bonds", a category which should be more negatively impacted by a rise in interest rates. Looking at the chart, we see:
- High Yield Bonds more than tripled during this time. With a $10,000 deposit growing to $31,775.33
- Intermediate Bonds more than doubled during this time, despite not starting until about 1955. A $10,000 deposit grew to $23,435.50
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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.
This doesn't make any sense. If your sticker net worth changed from $900,000 to $700,000, your "FIRE" date has not changed. It's still the same. The sticker value of your account changing does not mean your level of wealth has changed.
The fire date as described in the MrMoneyMustache blog, is the day the 4% rule applies to your portfolio. If you have $1,000,000 and your expenses are $40,000, you can fire. If it takes one portfolio an extra 5 years to reach $1,000,000, then you have delayed your fire date by 5 years. If you have $900,000, and are saving $100,000 a year, you are expected to reach your fire date in under a year. If your portfolio drops to $700,000, your expected fire date has changed.
The sticker value of your account changing does not mean your level of wealth has changed.
Your net worth is calculated based on the current market value of your assets. If your assets becomes less valuable, then yes your level of wealth has changed.
MMM does not use the term "FIRE" as far as I can remember, so "FIRE date" is not a concept you can cite to the blog.
However, the only reasonable interpretation of the term would be the date when you can retire and expect to live indefinitely off your investments. That date is not affected by the sticker value of your assets changing.
Suppose you own a business that is generating $100,000 per year in after-tax profits and today somebody offers you $1 million for that business. Tomorrow that person retracts his offer and is now only offering $800,000. No one else is offering you any more. Has your FIRE date changed between today and yesterday? Of course not, you still have $100,000 per year in after-tax profits.
The determination of when you can retire -- and hence your level of wealth -- depends on what you actually own, not a magic number determined by the sticker value of your assets.
In the case of stocks, the sticker value of your account changing should not in itself cause you to revise your FIRE date, unless you believe that that change is because equity returns will actually be lower in the future.
In other words, your retirement date should be primarily determined by the intrinsic value of the assets you own, not the sticker value. We mostly use the sticker value because it's easter to ascertain, but for the purpose of this discussion, the intrinsic value is what matters.
When you're selling your portfolio at market value for income, market value is the only value that matters.
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Hi Brooklynguy - I was just wondering, what would be your advice to someone who had a 100% stocks portfolio but lost their job in the 2008 downturn (as many did) and had burnt through their emergency money despite working a few part time jobs over the period?
I'm not sure if your question was meant to be rhetorical, but that's where the following part of the quoted language from my post comes in:
"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."
If you may need to access the funds in the short-term (whether because of job loss or desire to buy a house or any other reason), then a 100% stock allocation is not prudent. You're gambling as to whether you'll get lucky and liquidate your stocks at a time when they're high or get unlucky and have to sell during a down market. That's why it can make sense to have an emergency fund if your job security isn't air tight -- the sacrifice in returns is the premium you pay for the insurance protection against an unexpected need for cash.
Hi Brooklynguy - thanks for the response. So we have established that "100% stocks" actually means "100% stocks, except for Emergency Money." Now, I might be a little slow but I'm still not understanding what advice you are giving to the person who has lost their job in the 2008 downturn and burnt through their emergency money. 100% stocks portfolio. I assume you're not saying "know in advance when you are likely to be layed off, and for how long, and determine your Emergency Fund based on that."
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People don't seem to understand that the value of bonds can go down the drain too.
If rates on 30 years treasury bills got up to 5%, their value would be ridiculously low compared to their current level. That's why I don't want to get into bonds now. Rates can't possibly go much further down (unless you believe negative interest is possible for a while), while they have plenty of historical room upwards.
I guess that leaves cash.
This is exactly where i'm at too. As per Buffett's 2012 article, bonds should be about risk free return, but at current prices all you get is return free risk.
And yes, I know it's market timing, which I agree is not a good idea usually. But I think sometimes you have very abnormal events, and the 2008 financial crisis, followed by this balance sheet recession / deleveraging and central bank ultra expansionary monetary policy, is such a case. To me, this is not a 7-10 year cycle, it's like a 80-100 year event (refer to the ray dalio economic machine video if you haven't seen it, worth a watch). I could be wrong of course. But as someone who has never held bonds, I don't think now is a prudent time to start. I will continue to hold my defensive allocation substantially in cash for the time being.
Yes, I realize your proposed strategy uses bonds instead of cash which as I said earlier should reduce the drag effect, but really it's the setting of the recovery threshold for replenishing that potentially makes your strategy much stronger (after all cash can be thought of as a low rate bond).
Personally, I see the distinction between cash vs a low rate bond. Maybe under "normal" circumstances these can be more or less interchangeable, but I am wary of the current times. As per YoungInvestor's first line "the value of bonds can go down the drain too." The FT article yesterday gave a rule of thumb, for a 1% rise in yield on a 10 year bond you will see a 10% decrease in value. I expect to see 10% or more moves in my growth assets, but not my defensive ones.
In another thread I was suggested to look into corporate bonds instead of treasuries. Still pondering this but my thinking so far it's still the same asset class and same underlying risk. I think if you look at most pricing models for a corporate bond it will just start with the price of a treasury and add the cost of credit insurance on the issuing company.
Anyway, for those who have been in bonds for the long haul, I'm sure you will continue to do well if you stick with it and rebalance. But for newbies considering getting started in bonds, some caution might be warranted until interest rates and central bank balance sheets return to conventional norms.
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This is exactly where i'm at too. As per Buffett's 2012 article, bonds should be about risk free return, but at current prices all you get is return free risk.
And yes, I know it's market timing, which I agree is not a good idea usually. But I think sometimes you have very abnormal events, and the 2008 financial crisis, followed by this balance sheet recession / deleveraging and central bank ultra expansionary monetary policy, is such a case. To me, this is not a 7-10 year cycle, it's like a 80-100 year event (refer to the ray dalio economic machine video if you haven't seen it, worth a watch).
Despite the data showing that bond funds have increased in value the last few times interest rates rose dramatically, it feels like this time is different? 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? You're realizing this only after reading a nothing-like-this-has-ever-happened-before, heralds-a-new-era news event?
Again, to any newbies in the thread. This is why it's so hard to stay the course.
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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.
This doesn't make any sense. If your sticker net worth changed from $900,000 to $700,000, your "FIRE" date has not changed. It's still the same. The sticker value of your account changing does not mean your level of wealth has changed.
The fire date as described in the MrMoneyMustache blog, is the day the 4% rule applies to your portfolio. If you have $1,000,000 and your expenses are $40,000, you can fire. If it takes one portfolio an extra 5 years to reach $1,000,000, then you have delayed your fire date by 5 years. If you have $900,000, and are saving $100,000 a year, you are expected to reach your fire date in under a year. If your portfolio drops to $700,000, your expected fire date has changed.
The sticker value of your account changing does not mean your level of wealth has changed.
Your net worth is calculated based on the current market value of your assets. If your assets becomes less valuable, then yes your level of wealth has changed.
MMM does not use the term "FIRE" as far as I can remember, so "FIRE date" is not a concept you can cite to the blog.
However, the only reasonable interpretation of the term would be the date when you can retire and expect to live indefinitely off your investments. That date is not affected by the sticker value of your assets changing.
Suppose you own a business that is generating $100,000 per year in after-tax profits and today somebody offers you $1 million for that business. Tomorrow that person retracts his offer and is now only offering $800,000. No one else is offering you any more. Has your FIRE date changed between today and yesterday? Of course not, you still have $100,000 per year in after-tax profits.
The determination of when you can retire -- and hence your level of wealth -- depends on what you actually own, not a magic number determined by the sticker value of your assets.
In the case of stocks, the sticker value of your account changing should not in itself cause you to revise your FIRE date, unless you believe that that change is because equity returns will actually be lower in the future.
In other words, your retirement date should be primarily determined by the intrinsic value of the assets you own, not the sticker value. We mostly use the sticker value because it's easter to ascertain, but for the purpose of this discussion, the intrinsic value is what matters.
When you're selling your portfolio at market value for income, market value is the only value that matters.
A little bit of nuance is required here, Dodge.
If your plan is that on the day you retire, you will enter a sell order to liquidate your entire portfolio at market value and then live off cash for the rest of your life, then yes, the sticker value of your account is the sole determinant of whether you can retire.
That is not a good plan.
The dramatic statements about market value changing from, say, $700,000 to $500,000 overlook the fact that you haven't "lost" anything unless you actually sell. Suppose you need to sell $28,000 to cover your expenses for the year. At that point, you have indeed locked in $11,200 of losses -- however, that is well within rounding error in the long term, because in the long term the market value of your portfolio will be approximately equal to its intrinsic value.
If you doubt the latter proposition, it would be irrational to invest in stocks at all. As in, if you don't believe that in the long term, the market value of your assets will approximate their intrinsic value, you must believe that you can predict "the crash" and liquidate before it. That is a foolhardy belief. So if you are investing in stocks at all, you must accept that we can rely on the market value to approximate the intrinsic value in the long term. So the small losses you take in a down market are not a big deal in the long run.
However, the real situation is even rosier than the above, because in real life, you wouldn't need to sell at all. Instead, you would just make use of a credit line secured by your assets. Then you don't need to lock in any losses at all.
That is the same reason I see no point in an "emergency fund". The correct solution is to use credit, not to sell assets.
This does not refute my position. The Trinity Study, and every retirement calculator based on it (FireCalc, Cfiresim...etc) determined the 4% safe withdrawal rate using historical data, based on the market value of the starting portfolio. If you FIRE at $700,000 with $40,000 in expenses, that's a 5.7% withdrawal rate, which is deemed unsafe. It doesn't matter if you believe the intrinsic value of the portfolio is actually $1,000,000, statistically you have a portfolio with a high rate of failure.
If your advocating this scenario as being safe, because you can take out a loan to cover your living expenses until the portfolio reaches the value you believe it to be worth ($1,000,000), that doesn't seem very prudent. I'd have to see some studies/simulations before I believed it.
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You should be dedicating 50% of your portfolio on long term options (LEAP). With all the leverages, you can easily earn up to 40% of your investment per year.
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Hi Brooklynguy - thanks for the response. So we have established that "100% stocks" actually means "100% stocks, except for Emergency Money." Now, I might be a little slow but I'm still not understanding what advice you are giving to the person who has lost their job in the 2008 downturn and burnt through their emergency money. 100% stocks portfolio. I assume you're not saying "know in advance when you are likely to be layed off, and for how long, and determine your Emergency Fund based on that."
No, we have established that everyone needs to ascertain their own personal risk tolerance and priorities. Everything is a tradeoff. If your goal is to retire as soon as possible and your temperament will allow you to stay the course during downturns, 100% stock allocation is your best bet, but you are assuming the risk that you may have to tap your stocks in the event of job loss. If you'd rather have protection against job loss, you should have some conservative assets in your allocation, but you're doing so at the cost of some return. Once you FIRE, job loss is no longer a concern, but you still need to perform the same type of analysis for the possibility of major unexpected expenses. I don't understand what point you are trying to make.
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Therefore, basing your retirement date purely on the sticker value of your portfolio is irrational.
It's irrational for a certain point of view, but what else would be the result when people invest blindly regardless of valuation? That's what regularly contributing to index funds is, after all.
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This is exactly where i'm at too. As per Buffett's 2012 article, bonds should be about risk free return, but at current prices all you get is return free risk.
And yes, I know it's market timing, which I agree is not a good idea usually. But I think sometimes you have very abnormal events, and the 2008 financial crisis, followed by this balance sheet recession / deleveraging and central bank ultra expansionary monetary policy, is such a case. To me, this is not a 7-10 year cycle, it's like a 80-100 year event (refer to the ray dalio economic machine video if you haven't seen it, worth a watch).
Despite the data showing that bond funds have increased in value the last few times interest rates rose dramatically, it feels like this time is different? 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? You're realizing this only after reading a nothing-like-this-has-ever-happened-before, heralds-a-new-era news event?
Again, to any newbies in the thread. This is why it's so hard to stay the course.
Hi Dodge, many thanks for all your data and guidance , I do appreciate it ! even though I might have a different view of what's best for my circumstances, which I have tried my best to explain.
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Dodge, let me put this another way to make my point better.
Suppose the world is currently behaving in a highly irrational fashion such that the market value of assets is varying wildly every day. You are considering retiring any day now. Here is what the market value of your portfolio was on each day of the last week:
Monday: $1,000,000
Tuesday: $500,000
Wednedsay: $700,000
Thursday: $600,000
Friday: $800,000
Saturday: $1,200,00
Sunday: $600,000
Here is my claim: Assuming your portfolio consists a broad index fund, then regardless of which day in the last week you chose to pull the plug and retire, your chance of successful retirement would be the same within rounding error, despite the dramatic difference in your portfolio value.
Do you disagree with that?
I don't know what the actual intrinsic value of this example portfolio is. But whatever it is, it probably hasn't actually fluctuated wildly during this week, so your chance of a successful retirement has also not been affected, to within rounding error.
Therefore, basing your retirement date purely on the sticker value of your portfolio is irrational.
When you're selling your portfolio at market value for income, market value is the only value that matters, because market value is what determines your sequence of returns risk (http://www.investopedia.com/terms/s/sequence-risk.asp). The Trinity Study was specifically created to avoid this, based on the market value of the starting portfolio. If you have another study which can reliably calculate the intrinsic value of a portfolio, and uses that to recommend a safe withdrawal rate which avoids sequence of returns risk, that would be a fun discussion (but please create a new thread). As it stands now, a person's FIRE date is determined by the 4% rule, which is based on the portfolio's market value.
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This is exactly where i'm at too. As per Buffett's 2012 article, bonds should be about risk free return, but at current prices all you get is return free risk.
And yes, I know it's market timing, which I agree is not a good idea usually. But I think sometimes you have very abnormal events, and the 2008 financial crisis, followed by this balance sheet recession / deleveraging and central bank ultra expansionary monetary policy, is such a case. To me, this is not a 7-10 year cycle, it's like a 80-100 year event (refer to the ray dalio economic machine video if you haven't seen it, worth a watch).
Despite the data showing that bond funds have increased in value the last few times interest rates rose dramatically, it feels like this time is different? 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? You're realizing this only after reading a nothing-like-this-has-ever-happened-before, heralds-a-new-era news event?
Again, to any newbies in the thread. This is why it's so hard to stay the course.
Hi Dodge, many thanks for all your data and guidance , I do appreciate it ! even though I might have a different view of what's best for my circumstances, which I have tried my best to explain.
No problem FFA. :) If you end up going with CDs for the fixed-income portion of your portfolio you'll be just fine. Especially at those Australia rates!
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I don't know what the actual intrinsic value of this example portfolio is. But whatever it is, it probably hasn't actually fluctuated wildly during this week, so your chance of a successful retirement has also not been affected, to within rounding error.
Therefore, basing your retirement date purely on the sticker value of your portfolio is irrational.
Cathy, which model do you typically use to determine the intrinsic value of a stock?
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Dodge, let me put this another way to make my point better.
Suppose the world is currently behaving in a highly irrational fashion such that the market value of assets is varying wildly every day. You are considering retiring any day now. Here is what the market value of your portfolio was on each day of the last week:
Monday: $1,000,000
Tuesday: $500,000
Wednedsay: $700,000
Thursday: $600,000
Friday: $800,000
Saturday: $1,200,00
Sunday: $600,000
Here is my claim: Assuming your portfolio consists a broad index fund, then regardless of which day in the last week you chose to pull the plug and retire, your chance of successful retirement would be the same within rounding error, despite the dramatic difference in your portfolio value.
Do you disagree with that?
I don't know what the actual intrinsic value of this example portfolio is. But whatever it is, it probably hasn't actually fluctuated wildly during this week, so your chance of a successful retirement has also not been affected, to within rounding error.
Therefore, basing your retirement date purely on the sticker value of your portfolio is irrational.
When you're selling your portfolio at market value for income, market value is the only value that matters, because market value is what determines your sequence of returns risk (http://www.investopedia.com/terms/s/sequence-risk.asp).
I already responded to that argument above. Unless you are selling your entire portfolio at market value on the day you retire, market value on the day you retire alone does not control your chance of success at retirement.
You do not need to be able to calculate the intrinsic value of a portfolio to know that this is true. So long you accept that stocks are assets that have an intrinsic value (as opposed to their value being totally random), then the sticker value of your portfolio is not the sole determinant of when you can retire.
To attach a mystical significance to the market value of your portfolio on the day you retire is actually a form of market timing, which is normally discouraged on this forum.
In effect, you are claiming that if you can time your retirement at a market peak, your chance of a successful retirement will be higher than if you retired one week earlier when your portfolio was worth 50% as much. That is wrong and also the kind of thinking that probably leads to "one more year" syndrome.
Yes, the Trinity study, and every retirement calculator based on it, says this. Your chance of a successful retirement will be higher if you start out with a higher portfolio.
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So long you accept that stocks are assets that have an intrinsic value (as opposed to their value being totally random), then the sticker value of your portfolio is not the sole determinant of when you can retire.
One of your key premises is mistaken.
When you mechanically invest in index funds regardless of valuation, you do not accept that. To people who do that, the value truly is random. So the sticker value of your portfolio is the sole determinant.
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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/
[/quote]
Japan also has a really bad aging population issue and they're highly nationalistic, so they weren't exactly welcoming immigrants to the extent that we do...
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Hi Brooklynguy - thanks for the response. So we have established that "100% stocks" actually means "100% stocks, except for Emergency Money." Now, I might be a little slow but I'm still not understanding what advice you are giving to the person who has lost their job in the 2008 downturn and burnt through their emergency money. 100% stocks portfolio. I assume you're not saying "know in advance when you are likely to be layed off, and for how long, and determine your Emergency Fund based on that."
No, we have established that everyone needs to ascertain their own personal risk tolerance and priorities. Everything is a tradeoff. If your goal is to retire as soon as possible and your temperament will allow you to stay the course during downturns, 100% stock allocation is your best bet, but you are assuming the risk that you may have to tap your stocks in the event of job loss. If you'd rather have protection against job loss, you should have some conservative assets in your allocation, but you're doing so at the cost of some return. Once you FIRE, job loss is no longer a concern, but you still need to perform the same type of analysis for the possibility of major unexpected expenses. I don't understand what point you are trying to make.
Ok maybe the part I have misunderstood is where you said this:
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.
I read it as "there are only three reasons to hold anything less than a 100% stocks when you have a sufficiently long investment horizon" and then you listed four cases (I'm including that last paragraph because essentially it's a fourth reason). Have I missed something?
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Hi Dodge, many thanks for all your data and guidance , I do appreciate it ! even though I might have a different view of what's best for my circumstances, which I have tried my best to explain.
No problem FFA. :) If you end up going with CDs for the fixed-income portion of your portfolio you'll be just fine. Especially at those Australia rates!
yeah I probably should've clarified when I say cash, I mean a high interest saving account (in Australia these fetch 3.5-4%, although maybe slightly less after the RBA cut cash rate by 0.25% yday). I'm not stashing it under the bed :) Definitely I will look at splitting some into "term deposits" / CDs as you'd suggested, to at least have some fixed rate, not all floating. thanks again!
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The most important reason not to hold 100% stocks would be that you have sufficient personal expertise or some other edge in other investment types so that you personally would get better returns there. Like arebelspy with real estate. Or many other people with their own private, local businesses.
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Now I want you to consider a slightly less trivial case.
Suppose that on January 1, 2015, Bill has $1,000,000 in assets but he's a pretty conservative guy so he decides to work for another two years. After this point, Bill never sells any assets. He does not rebalance or tamper with anything. None of his assets pay dividends or make other distributions.
During those two years, he saves another $200,000 and uses it to buy more investments.
On January 1, 2017, it's finally time for Bill's retirement, but due to market fluctuations, his portfolio is only worth $1,000,000 (in 2015 dollars) despite the two extra years of work!
Based on all your arguments in this thread, both the 2015 Bill and the 2017 Bill would have the same chance of a successful retirement, since they would both be beginning their retirements with $1,000,000 in 2015 dollars.
That conclusion would be incorrect. The 2017 Bill obviously has a higher chance of a successful retirement because he owns more assets. It is highly unlikely he could possibly be worse off, or only as well off, as the 2015 Bill, because he owns strictly more assets.
I claim that is obvious, and it alone is enough to disprove all of your arguments fixated on the final value of the portfolio.
Do you disagree with that Dodge, or do you accept that the 2017 Bill is in a better position to retire than the 2015 Bill would have been, if they had commenced their retirements in 2017 and 2015 respectively?
2017 Bill is a better position because he has two years less of life left, so less chance of running out of cash...
If you own 100,000 USD of stock at 100 USD a share, and they have a 2:1 share split, do you now own double the amount of assets?
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If you own 100,000 USD of stock at 100 USD a share, and they have a 2:1 share split, do you now own double the amount of assets?
No, because the fraction of the company that you own is still the same after the split. You own the same amount of assets and will receive the same fraction of earnings as before.
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For me having a specified % portion of my portfolio allocated to bonds meant I could buy stocks index funds during the 2008/2009 crash to bring the asset allocation back in line. And then conversely as the stocks rose I had to reallocate some back to bonds. Additional savings helped in this regard as well.
My fear about stocks is the Nikkei 225 graph of the last 30 years, or the NASDAQ graph of the last 20 years. Of course, to answer my own fear, I just diversify the stock portion as much as possible.
Deflationary secular stagnation could also play a role in poor stock performance. Hopefully, governments will spend more money and help boost the economy, even if it involves deficit spending. The increased government spending however will generate increased tax revenues, and then there might not even be an increase in deficits.
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About a century ago all publicly traded common stocks were seen as speculative. Only bonds were seen as prudent investments. Obviously that was too extreme a view, and we have improved on that view with the benefit of experience. But the view that stocks are safe investments for the long-term is classically always only remembered in bull markets. And the hotter the market, the safer stocks seem.
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It's an interesting idea Cathy. To know the intrinsic value you almost would have to be able to accurately predict just how well the earnings of the companies are going to be in the future. If earnings are equivalent to the idea of rent on a home, then you would have to predict in the future what a company like Apple would earn in 2016, or five years from now. How else would you know what the intrinsic value is of the stocks you own? The market value would then eventually align itself with the intrinsic value, and therefore your 4% rule is based on what you believe is the theoretical intrinsic value of a portfolio of stock investments.
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I should clarify that it's not my intent to express a view on whether 100% stocks is a good idea. I am not 100% invested in stocks.
I merely wanted to dispute the model that retirement planning consists of working exactly until the fair market value of your assets exceeds a particular magic number. It seems I have not managed to convince anyone of that though.
For the average index investor with no knowledge or training in fundamental analysis, there is no other proxy for worth than price. I don't see what that's so hard for you to get.
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I read it as "there are only three reasons to hold anything less than a 100% stocks when you have a sufficiently long investment horizon" and then you listed four cases (I'm including that last paragraph because essentially it's a fourth reason). Have I missed something?
this is the way I understand it. Furthermore I personally would expect the vast majority of people to fall into at least one or more of these four categories and therefore they should NOT be holding 100% stocks.
IMHO, it will only be a small minority that have the capability, temperament, discipline and risk tolerance to ultimately succeed in 100% stocks and actually capture the theoretical increment in long-term returns. For the majority of us mere mortals its better to be diversified !
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I merely wanted to dispute the model that retirement planning consists of working exactly until the fair market value of your assets exceeds a particular magic number. It seems I have not managed to convince anyone of that though.
On the contrary, I am finding your intrinsic value arguments quite thought provoking and convincing. The only thing I really struggle with how to actually work out what the intrinsic value of an investment portfolio is at any point in time.
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I read it as "there are only three reasons to hold anything less than a 100% stocks when you have a sufficiently long investment horizon" and then you listed four cases (I'm including that last paragraph because essentially it's a fourth reason). Have I missed something?
this is the way I understand it. Furthermore I personally would expect the vast majority of people to fall into at least one or more of these four categories and therefore they should NOT be holding 100% stocks.
IMHO, it will only be a small minority that have the capability, temperament, discipline and risk tolerance to ultimately succeed in 100% stocks and actually capture the theoretical increment in long-term returns. For the majority of us mere mortals its better to be diversified !
Ok I read it the other way round and feel like a bit of a fool now. People losing their jobs is highly correlated with stocks plummeting, which to me is a massive reason to be diversified away from stocks if you have a job. But in fact Brooklynguy is saying that there are very few cases where 100% stocks allocation is actually a good idea.
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Haven't read the whole thread but just wanted to say I get what you are trying to explain Cathy. It would be a shame if we get a massive stock market bubble that pushed every company up to ridiculous prices and everyone on these forums retired based on a 4% withdrawal rule.
You have to consider whether your assets are capable of generating sufficient return to cover your expenditure and inflation with hopefully some buffer to cover risk. Relying on some arbitary rule seems stupid to me but this 4% rule seems to get a lot of following.
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Here's how to reconcile the Cathy vs. Dodge debate:
Cathy is talking about the actual chances of retirement success (which has the problem of being impossible to predict). Dodge is talking about the forecasted chances of retirement success using history as a guide (which has the problem of not necessarily being accurate).
If your portfolio value suddenly shrinks in half overnight due to market fluctuations, have your actual chances of retirement success suddenly gotten smaller? Of course not. But would you still be just as likely to be comfortable pulling the plug and declaring FIRE? Of course not.
We use the historical research and history-based calculators to make predictions about sustainable withdrawal rates in the future. This necessarily assumes that the past will to some extent predict the future, which we all know may or may not be true, but it's the best we have to go on. When we say a 4% withdrawal rate has a 95% chance of success, we really mean that historically it was successful 95% of the time. In that sense, the success rate does fluctuate with the market. If your $1 million portfolio drops to $500k overnight, then your "chances of success" (as forecasted by history) of retiring at that moment have been cut in half, even though your actual chances of success have not.
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The issue is that there's no one way to value stocks. Because the effective risk-free rate right now is so low, you could saw stocks are quite cheap. Or you could say they are hideously expensive, based on CAPE. Which way of thinking is right is only useful in retrospect.
The same goes for other heuristics used in evaluating a whole index. You could use dividend yield, but that's flawed because it doesn't take into account buybacks. You could use earnings yield, but that's not as accurate as free cash flow, or EBIT or EBITDA, depending on the firm. Valuing companies is hard. Valuing the whole market is exponentially harder. That's the whole reason index investing tells you to basically buy blind, on faith.
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Here's how to reconcile the Cathy vs. Dodge debate:
Cathy is talking about the actual chances of retirement success (which has the problem of being impossible to predict). Dodge is talking about the forecasted chances of retirement success using history as a guide (which has the problem of not necessarily being accurate).
If your portfolio value suddenly shrinks in half overnight due to market fluctuations, have your actual chances of retirement success suddenly gotten smaller? Of course not. But would you still be just as likely to be comfortable pulling the plug and declaring FIRE? Of course not.
We use the historical research and history-based calculators to make predictions about sustainable withdrawal rates in the future. This necessarily assumes that the past will to some extent predict the future, which we all know may or may not be true, but it's the best we have to go on. When we say a 4% withdrawal rate has a 95% chance of success, we really mean that historically it was successful 95% of the time. In that sense, the success rate does fluctuate with the market. If your $1 million portfolio drops to $500k overnight, then your "chances of success" (as forecasted by history) of retiring at that moment have been cut in half, even though your actual chances of success have not.
Here Here! We're mixing cold, hard math with human behavior. Sounds like a nerdy mid-day soap opera1 :)
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Haven't read the whole thread but just wanted to say I get what you are trying to explain Cathy. It would be a shame if we get a massive stock market bubble that pushed every company up to ridiculous prices and everyone on these forums retired based on a 4% withdrawal rule.
You have to consider whether your assets are capable of generating sufficient return to cover your expenditure and inflation with hopefully some buffer to cover risk. Relying on some arbitary rule seems stupid to me but this 4% rule seems to get a lot of following.
For normal people I see your point, if they followed the 4% rule and retired on a bubble that might affect their long term chances of success. But not for those who are like MMM. If I had 100% stock and retired right before a crash, I could pick up whatever job I could and cover my living expenses. I would probably already have cash on hand to cover a year or two, I wouldn't be 100% stocks at that point, but even if I did, I could drop my expenses to the bone, pick up some odd jobs either based on my career of simply whatever I could find, and I would hope to actually put more into the market during the crash if possible. Simply put, following the "arbitary" 4% rule doesn't force blindness to changes in the market, and retiring doesn't force you to avoid all paying work. Shit happens, we adapt, regardless of what rules we follow.
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Haven't read the whole thread but just wanted to say I get what you are trying to explain Cathy. It would be a shame if we get a massive stock market bubble that pushed every company up to ridiculous prices and everyone on these forums retired based on a 4% withdrawal rule.
You have to consider whether your assets are capable of generating sufficient return to cover your expenditure and inflation with hopefully some buffer to cover risk. Relying on some arbitary rule seems stupid to me but this 4% rule seems to get a lot of following.
For normal people I see your point, if they followed the 4% rule and retired on a bubble that might affect their long term chances of success. But not for those who are like MMM. If I had 100% stock and retired right before a crash, I could pick up whatever job I could and cover my living expenses. I would probably already have cash on hand to cover a year or two, I wouldn't be 100% stocks at that point, but even if I did, I could drop my expenses to the bone, pick up some odd jobs either based on my career of simply whatever I could find, and I would hope to actually put more into the market during the crash if possible. Simply put, following the "arbitary" 4% rule doesn't force blindness to changes in the market, and retiring doesn't force you to avoid all paying work. Shit happens, we adapt, regardless of what rules we follow.
Agreed. I'm basing my FIRE numbers off of $40,000 a year in expenses, knowing I could cut that to $20,000-25,000 if I really had to. That also doesn't take into account whatever paltry amount of SS is left by the time I "retire" or any rental income from a townhouse that I may choose to keep and rent. And then there's always another job if I absolutely had to. Multiple layers of security there.
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I did not read all the post but to put to but it very simply a person getting close to retire (your definition of "close" is going to very) you are worried about sequence of return risk.
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Here's how to reconcile the Cathy vs. Dodge debate:
Cathy is talking about the actual chances of retirement success (which has the problem of being impossible to predict). Dodge is talking about the forecasted chances of retirement success using history as a guide (which has the problem of not necessarily being accurate).
Yep. The reason we rely on 4% SWR studies is not because we trust them to accurately predict our financial paths. We rely on them because we don't have anything better. The 4% SWR is an extremely rough rule-of-thumb. It would certainly be better to choose our FIRE date based on the intrinsic value of our portfolio and its future returns, but since we know neither of those things, we're forced to fall back to SWR studies. To paraphrase Churchill: "The 4% SWR is the worst form of retirement-readiness predictor, except for all the rest"
Furthermore, it's critical to remember that the 4% SWR is a worst-case number, not an average-case number.
Say that at a market peak, Adam had a $1M portfolio and Betty had a $2M portfolio (so Betty unarguably has much more "intrinsic value"). Adam retires with $1M and uses a 4% WR. A month later, the market crashes, and Betty's portfolio is cut in half to $1M. She then retires, also with $1M and uses a 4% WR. Cathy would say that Adam is in a worse position than Betty, and she's right. But according to the 4% SWR rule-of-thumb, neither of their plans would fail.
However, that doesn't mean the 4% SWR calculations are unaware of the difference between the two. In a cFIREsim graph, Adam's line would likely be one that ends with a portfolio value near 0, while Betty's would likely be one that soars up-and-up-and-up and she dies with way more than the $1M she started with.
That worst-case nature is why we feel comfortable relying on 4% SWR studies, despite its ignorance of intrinsic values and future returns. The 4% SWR essentially counterbalances that ignorance by taking an extremely pessimistic approach.
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To paraphrase Churchill: "The 4% SWR is the worst form of retirement-readiness predictor, except for all the rest"
Hahahaha! Awesome!
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That worst-case nature is why we feel comfortable relying on 4% SWR studies, despite its ignorance of intrinsic values and future returns. The 4% SWR essentially counterbalances that ignorance by taking an extremely pessimistic approach.
And that is why 4% is considered "safe" even before the addition of extra layers of safety margin (such as flexibility to cut expenses or find supplemental sources of income, as James pointed out above). After factoring in additional built-in safety margin, a planned 4% WR becomes absurdly safe, unless you believe either (or both) of two things: (i) the future will be worse than the past, and/or (ii) you will incur unexpected expenses that force you to in fact use a higher-than-4% WR.
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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
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In other words: Possibly 4% of the population could successfully walk a tightrope between two skyscrapers. ...Would you care to see if you're one of them?
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In other words: Possibly 4% of the population could successfully walk a tightrope between two skyscrapers. ...Would you care to see if you're one of them?
What does this mean?
I can understand what you were trying to say with your earlier "holding 100% stocks is like driving without a seatbelt" analogy (even though I think it is wrong, unless you meant that the "seatbelt"--i.e., the bond portion of your portfolio--is protecting you from panic-selling or incurrence of unexpected expenses, rather than from portfolio underperformance or likelihood of failure, but in the context of your post it sounded like the latter).
But I have no clue what you are trying to say with the tightrope-walking analogy.
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Here's how to reconcile the Cathy vs. Dodge debate:
Cathy is talking about the actual chances of retirement success (which has the problem of being impossible to predict). Dodge is talking about the forecasted chances of retirement success using history as a guide (which has the problem of not necessarily being accurate).
If your portfolio value suddenly shrinks in half overnight due to market fluctuations, have your actual chances of retirement success suddenly gotten smaller? Of course not. But would you still be just as likely to be comfortable pulling the plug and declaring FIRE? Of course not.
We use the historical research and history-based calculators to make predictions about sustainable withdrawal rates in the future. This necessarily assumes that the past will to some extent predict the future, which we all know may or may not be true, but it's the best we have to go on. When we say a 4% withdrawal rate has a 95% chance of success, we really mean that historically it was successful 95% of the time. In that sense, the success rate does fluctuate with the market. If your $1 million portfolio drops to $500k overnight, then your "chances of success" (as forecasted by history) of retiring at that moment have been cut in half, even though your actual chances of success have not.
Good summary of the differences, Brooklyn Guy!
If OP is to retire tomorrow and has enough in his stash for a given SWR, then he has it done, won the game, got his nut covered, over the road, under the road, flat out, finished, QED. So why would anyone gamble with a sure deal and go 100% equities? Doesn't it make sense to put aside, say, at least, 5 or 10 (or more) years of money into bonds, as buckets to draw on? As he does so, his AA tilts upwards, but he is still in a safer zone, c.f. Kitces. https://www.kitces.com/blog/should-equity-exposure-decrease-in-retirement-or-is-a-rising-equity-glidepath-actually-better/ and a fine tune of the concept at: https://www.kitces.com/blog/accelerating-the-rising-equity-glidepath-with-treasury-bills-as-portfolio-ballast/
"For the past 20 years, due both to the growing research on safe withdrawal rates, the adoption of Monte Carlo analysis, and just a difficult period of market returns, there has been an increasing awareness of the importance and impact that market volatility can have on a retiree's portfolio. Often dubbed the phenomenon of "sequence risk", retirees are cautioned that they must either spend conservatively, buy guarantees, or otherwise manage their investments to help mitigate the danger of a sharp downturn in the early years.
One popular way to manage the concern of sequence risk is through so-called "bucket strategies" that break parts of the portfolio into pools of money to handle specific goals or time horizons. For instance, a pool of cash might cover spending for the next 3 years, an account full of bonds could handle the next 5-7 years, and equities would only be needed for spending more than a decade away, "ensuring" that no withdrawals will need to occur from the portfolio if there is an early market decline.
Yet the reality is that strict implementation of a bucket strategy is more than just an exercise in mental accounting; it can actually distort the portfolio's asset allocation, leading to an increasing amount of equity exposure over time as fixed income assets are spent down while equities continue to grow. Yet recent research shows that despite the contrary nature of the strategy - allowing equity exposure to increase during retirement when conventional wisdom suggests it should decline as clients age - it turns out that a "rising equity glidepath" actually does improve retirement outcomes! If market returns are bad in the early years, a rising equity glidepath ensures that clients will dollar cost average into markets at cheaper and cheaper valuations; and if markets are good... well, clients won't have a lot to worry about in retirement anyway (except perhaps how much excess money will be left over at the end of their life)."
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In other words: Possibly 4% of the population could successfully walk a tightrope between two skyscrapers. ...Would you care to see if you're one of them?
Sure, what the hell. I would strap on a harness, clip it to the rope, and give it my best shot. Worst that could happen is I fall and the harness catches me.
But if this has something regarding the topic at hand I sure miss it...
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If OP is to retire tomorrow and has enough in his stash for a given SWR, then he has it done, won the game, got his nut covered, over the road, under the road, flat out, finished, QED. So why would anyone gamble with a sure deal and go 100% equities? Doesn't it make sense to put aside, say, at least, 5 or 10 (or more) years of money into bonds, as buckets to draw on?
The problem is how to know when you've accumulated enough to have "won the game." The 4% rule-of-thumb relies on having significant equity exposure in you allocation. If you've accumulated enough assets to support a ridiculously safe WR of, say, 1%, you can probably safely switch to an ultra-conservative allocation like 100% bonds or even 100% cash (alternatively, you can stick with significant equity exposure, "let it ride" and bequeath a massive fortune to your heirs or your charity of choice). But for most of us accumulating enough assets to support such a low withdrawal rate is antithetical to the idea of early retirement -- it requires working longer than necessary. So, instead, we retire once we've accumulated enough assets to support a more reasonable WR, like 4%, which requires holding a significant percentage of equities to generate the returns to support that WR.
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Posting to follow.