Author Topic: 100% Stock Portfolio  (Read 10445 times)

bob999

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100% Stock Portfolio
« on: March 13, 2018, 05:11:56 AM »
Hi all

My wife and I are in our mid to late 30s with two kids. We are likely to reach our FI number (not including PPOR) in our early 40s. We currently have investments in residential properties and index funds. I was planning on moving my portfolio towards 100% stocks over the next decade and then maintain 100% stock (index) allocation through out our life. Given that we will have significantly more money than we require when we FIRE, would 100% stock allocation be a good idea? Is anyone else doing 100% stock allocation?

The only risk I see in the above approach is our ability to stomach volatility. I do not think sequence of return risk will apply to us as we will have a significantly high portfolio balance compared to our withdrawal requirements. Is there anything other issue / risk that I may have missed?

Thanks.

NoStacheOhio

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Re: 100% Stock Portfolio
« Reply #1 on: March 13, 2018, 06:49:56 AM »
Do you own the residential properties directly, or are you investing through the market?

It's really just a matter of whether or not you can tolerate the volatility without making rash decisions. We're slightly younger than you with one child, and we're 100% equities (80/20 US/World). We might add 10-20% bonds when we get older, but I lean away from doing that.

Seradoc

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Re: 100% Stock Portfolio
« Reply #2 on: March 13, 2018, 06:51:27 AM »
I am in the same situation (aside the second child not existing yet) and taking the same approach.



My opinion is that the main risk here is the catastrophic failure scenario where all equities go to practically zero.  However, in that situation even holding some small amount of bonds isn't going to save you.  Everyone without a seriously conservative allocation will be pretty much in the same boat of being screwed.

Some people could argue that you are leaving money on the table that could be gained by re-balancing with a small bond holding, but if that money isn't needed then it may be moot.  Having to think about bond allocations makes me look at my accounts more often and worry about it.  My 100% allocation eases my mind since I don't have to ever look at my accounts to get my allocation correct.



Since my mentality is that I cannot allocate my money any better, I don't panic when markets crash.  There isn't a decision to be made.  The situation is what it is and nothing can be done to make it better, so I have never had an inclination to retreat.

My one exception to this is when I held a mortgage, in which case I sweated my brokerage holdings occasionally since there seemed to be a safe harbor.  My main concern is when I felt like equities are overvalued, I would end up wanting to move some of the brokerage holdings to the mortgage.  However, my retirement savings were never in question.
« Last Edit: March 13, 2018, 07:12:11 AM by Seradoc »

SeattleCPA

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Re: 100% Stock Portfolio
« Reply #3 on: March 13, 2018, 07:45:48 AM »
Hi all

My wife and I are in our mid to late 30s with two kids. We are likely to reach our FI number (not including PPOR) in our early 40s. We currently have investments in residential properties and index funds. I was planning on moving my portfolio towards 100% stocks over the next decade and then maintain 100% stock (index) allocation through out our life. Given that we will have significantly more money than we require when we FIRE, would 100% stock allocation be a good idea? Is anyone else doing 100% stock allocation?

The only risk I see in the above approach is our ability to stomach volatility. I do not think sequence of return risk will apply to us as we will have a significantly high portfolio balance compared to our withdrawal requirements. Is there anything other issue / risk that I may have missed?

Thanks.

Depending on what you mean by a 100% stocks portfolio, the approach you describe may suffer from either of two flaws. Risk #1: You may be  bearing more risk than you need to bear. Risk #2: You may be shortchanging yourself on the returns you can get.

If you're interested in testing this, blog post linked to below explains how to confirm or reject above statemeent:

100% stocks allocation suffers from two flaws

Note: You use Portfolio Visualizer to do the math. But it'll take you about three minutes.

Rob_bob

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Re: 100% Stock Portfolio
« Reply #4 on: March 13, 2018, 10:08:51 AM »
If you will have so much extra money when you Fire what is the point in being 100% stocks?  Will you be trying to generate even more excess wealth?  What would be the downside to have some % in a less volatile asset class? If you have won the game do you need to continue to play (full in)?

boarder42

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Re: 100% Stock Portfolio
« Reply #5 on: March 13, 2018, 10:50:26 AM »
If you will have so much extra money when you Fire what is the point in being 100% stocks?  Will you be trying to generate even more excess wealth?  What would be the downside to have some % in a less volatile asset class? If you have won the game do you need to continue to play (full in)?

the opposite arguement could easily be made if you've saved that much why not keep 100% stocks b/c you're not sure how long you will live and you can give more money away when you die.  The downside is it lags inflation terribly in most non stock Asset classes.

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Re: 100% Stock Portfolio
« Reply #6 on: March 13, 2018, 12:53:21 PM »
Have you run your numbers through FIRECalc or cFIREsim? We've based our allocation on what gives the highest percentage chance of success for our estimated payout period, which is in the neighborhood of 80/20 or 85/15 S&P/Total Bond. If you're comfortable with the success rate and can handle the stomach-churning drops, you're good to go.

boarder42

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Re: 100% Stock Portfolio
« Reply #7 on: March 13, 2018, 12:54:44 PM »
there really is dimishing returns past 90/10 which i still cant find the post on there that showed it.

secondcor521

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Re: 100% Stock Portfolio
« Reply #8 on: March 13, 2018, 01:26:50 PM »
Have you run your numbers through FIRECalc or cFIREsim? We've based our allocation on what gives the highest percentage chance of success for our estimated payout period, which is in the neighborhood of 80/20 or 85/15 S&P/Total Bond. If you're comfortable with the success rate and can handle the stomach-churning drops, you're good to go.

OP, note that the sweet spot varies based on the payout period.  Maenad is probably at about a 20-25 year payout period with the 80/20 target.  My 40 year payout period usually points to 90/10 or even 95/5.  You can use the FIREcalc investigate tab to find the sweet spot.  At 40 years and 90/10, the historical success rate is somewhere around 4% depending on which calculator you use.  (I'm at a net withdrawal rate today of under 1.5%, so I feel fine.  In fact, I'm trying to spend a little more.)

I was 100% US equity index funds LTBH from at least 1987 to 2016, when I shifted to 90/10.  It worked for me exactly as I thought it would; as previous posters mentioned you have to be comfortable with the volatility and you have to be confident in the investment decision - there is always a theoretical possibility that all US stocks go to zero.

Shane

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Re: 100% Stock Portfolio
« Reply #9 on: March 13, 2018, 01:43:45 PM »
Volatility ≠ Risk. Especially over long(er) periods of time, less stocks in a portfolio = more risk.

Also, there's something to be said for the simplicity of 100% stocks, especially if you anticipate being able to live off just the dividends. No rebalancing necessary.

SeattleCPA

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Re: 100% Stock Portfolio
« Reply #10 on: March 13, 2018, 05:20:06 PM »
I don't want to wade into a discussion where I'm inadvertently a trouble-maker... so sorry if this next comment comes across this way.

But are we all straight on how, if you have two investments that earn (say) 9.5% but which aren't perfectly correlated, you earn more than 9.5% if you blend them?

E.g., stocks may earn 9.5% over some long horizon... and so may REITs. But because these investments aren't correlated when you combine them 50%/50%, you won't get 9.5%... you get maybe 10%.

Similarly, if anyone here is saying they're okay with the risks of 100% US stocks, do they know they possibly can build a portfolio that generates similar return but shows less volatility?

Sorry if I'm underestimating people's understanding of "modern portfolio theory"...


steveo

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Re: 100% Stock Portfolio
« Reply #11 on: March 13, 2018, 05:54:14 PM »
I'd make one additional point excluding the projected returns and even potentially better returns utilising uncorrelated asset classes. The main concern for most retirees is obtaining the best income over the course of their retirement. Having safer assets may ensure that you have a much more reliable income source from your portfolio in the drawdown phase.

So the person in 100% stocks may potentially end up with more money in a lot of situations however there is a greater risk he will end up spending less and having to go back to work. The 100% stocks position may lead to increased chance of ER failure. The person with a stash of bonds may do better in that they are less at risk of portfolio failure. They may therefore end up having to to adjust their spending less (or work less) compared to the person with a 100% stock portfolio. I suppose another way to phrase this is that you may end up with a higher SWR compared to the person with a 100% stock position.
« Last Edit: March 13, 2018, 05:57:03 PM by steveo »

Padonak

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Re: 100% Stock Portfolio
« Reply #12 on: March 13, 2018, 06:03:19 PM »
there really is dimishing returns past 90/10 which i still cant find the post on there that showed it.
Can you elaborate?

DreamFIRE

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Re: 100% Stock Portfolio
« Reply #13 on: March 13, 2018, 06:25:42 PM »
Hi all

My wife and I are in our mid to late 30s with two kids. We are likely to reach our FI number (not including PPOR) in our early 40s.

So, you haven't even reached your FI number yet.  I don't think you should be planning 100% stocks when you're nearing FIRE.  It looks to me like you have a ways to go before you can say that you will have more than you will need.

SeattleCPA

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Re: 100% Stock Portfolio
« Reply #14 on: March 13, 2018, 06:52:16 PM »
I'd make one additional point excluding the projected returns and even potentially better returns utilising uncorrelated asset classes. The main concern for most retirees is obtaining the best income over the course of their retirement. Having safer assets may ensure that you have a much more reliable income source from your portfolio in the drawdown phase.

So the person in 100% stocks may potentially end up with more money in a lot of situations however there is a greater risk he will end up spending less and having to go back to work. The 100% stocks position may lead to increased chance of ER failure. The person with a stash of bonds may do better in that they are less at risk of portfolio failure. They may therefore end up having to to adjust their spending less (or work less) compared to the person with a 100% stock portfolio. I suppose another way to phrase this is that you may end up with a higher SWR compared to the person with a 100% stock position.

To amplify this thinking, Tyler at PortfolioCharts has some good discussions about how lower volatility, period, improves your withdrawal rate.

E.g., earning 9.5% with a 15% standard deviation delivers a lower withdrawal rate as compared to earning 9.5% with a 10% standard deviation.

I haven't done the math or modeling to prove this myself. But I  believe Tyler.

MrUpwardlyMobile

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Re: 100% Stock Portfolio
« Reply #15 on: March 13, 2018, 06:57:21 PM »
I'd make one additional point excluding the projected returns and even potentially better returns utilising uncorrelated asset classes. The main concern for most retirees is obtaining the best income over the course of their retirement. Having safer assets may ensure that you have a much more reliable income source from your portfolio in the drawdown phase.

So the person in 100% stocks may potentially end up with more money in a lot of situations however there is a greater risk he will end up spending less and having to go back to work. The 100% stocks position may lead to increased chance of ER failure. The person with a stash of bonds may do better in that they are less at risk of portfolio failure. They may therefore end up having to to adjust their spending less (or work less) compared to the person with a 100% stock portfolio. I suppose another way to phrase this is that you may end up with a higher SWR compared to the person with a 100% stock position.

To amplify this thinking, Tyler at PortfolioCharts has some good discussions about how lower volatility, period, improves your withdrawal rate.

E.g., earning 9.5% with a 15% standard deviation delivers a lower withdrawal rate as compared to earning 9.5% with a 10% standard deviation.

I haven't done the math or modeling to prove this myself. But I  believe Tyler.
. I donít know if that example is right but the basic premise behind it sounds plausible.

Shane

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Re: 100% Stock Portfolio
« Reply #16 on: March 14, 2018, 12:47:49 AM »
As many members of this forum are planning on retiring REALLY young, they're looking at potentially funding 60+ year retirements. For really long retirements, 100% stocks is SAFER! It's true in theory that owning investments that are not correlated to equities can provide higher returns, but you also have to take into account expenses of owning those investments and whether the assets are really not correlated. Here's an excerpt from a 2008 NYT article on what happened to REITs in the Great Recession:

Quote
A MAIN benefit for those who own real estate investment trusts has been their low historical correlation to the rest of the financial markets. In other words, REITs have tended not to move in tandem with most stocks and bonds, thus making them good portfolio diversifiers.

All of that seemed to change this year amid the deepening credit crisis and Wall Streetís meltdown. Just as stocks fell fast and furiously, so, too, did most REIT shares. (And at those times when stocks were rallying back, REITs also moved higher.)"

Early Retirement Now has a good series on safe withdrawal rates in which he models millions of possible retirement scenarios. For 60 year retirements this is what ERN found:

Quote
"It may be true that for a 30-year horizon, an equity share of 50-100% gives consistently high success rates if the withdrawal rate is 4% or lower. Essentially the main result of the Trinity Study! But for longer horizons, 100% stocks gives the highest success rate. This goes back to our earlier research that showed that over long horizons bonds can have extended drought periods and only equity-like returns are a guarantee for not running out of money over long horizons. For example, a 4% withdrawal rate has a 95% success probability in a 50%/50% over 30 years, but only 65% over 60 years. The failure probability is 7 times higher over the 60-year horizon!"

bob999

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Re: 100% Stock Portfolio
« Reply #17 on: March 14, 2018, 03:50:40 AM »
I'd make one additional point excluding the projected returns and even potentially better returns utilising uncorrelated asset classes. The main concern for most retirees is obtaining the best income over the course of their retirement. Having safer assets may ensure that you have a much more reliable income source from your portfolio in the drawdown phase.

So the person in 100% stocks may potentially end up with more money in a lot of situations however there is a greater risk he will end up spending less and having to go back to work. The 100% stocks position may lead to increased chance of ER failure. The person with a stash of bonds may do better in that they are less at risk of portfolio failure. They may therefore end up having to to adjust their spending less (or work less) compared to the person with a 100% stock portfolio. I suppose another way to phrase this is that you may end up with a higher SWR compared to the person with a 100% stock position.

I don't think that 100% stocks portfolio will end up with less money compared to a mix of Stocks/Bonds in most scenarios. Over the long run stocks give the best return. If the SWR is lower (say 2-3%) at the beginning of retirement then a dip in stocks will hit hard on a 100% stock portfolio compared to stock/bond portfolio but the recovery on 100% over a 50+ years period is likely to give better returns than stock/bond mix allocation.

Given that 4% SWR is based on 30 year retirement and not longer timeframes and we don't know how bad inflation is going to be in the future 100% is by default "the best you can do to ensure your portfolio will survive (and grow)".

bob999

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Re: 100% Stock Portfolio
« Reply #18 on: March 14, 2018, 03:53:35 AM »
Do you own the residential properties directly, or are you investing through the market?

It's really just a matter of whether or not you can tolerate the volatility without making rash decisions. We're slightly younger than you with one child, and we're 100% equities (80/20 US/World). We might add 10-20% bonds when we get older, but I lean away from doing that.

I am invested in residential properties and index stock funds right now but the maintenance headache of owning properties (even with a agent) is no longer appealing to me and after 15 years of doing this I am already over property.

bob999

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Re: 100% Stock Portfolio
« Reply #19 on: March 14, 2018, 03:57:53 AM »
If you will have so much extra money when you Fire what is the point in being 100% stocks?  Will you be trying to generate even more excess wealth?  What would be the downside to have some % in a less volatile asset class? If you have won the game do you need to continue to play (full in)?

My engineering brain thinks "Stocks are the best vehicle for investing" and "index funds are the best way to invest in stocks" so why not be in the best/fastest vehicle??

bob999

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Re: 100% Stock Portfolio
« Reply #20 on: March 14, 2018, 04:01:40 AM »
I am in the same situation (aside the second child not existing yet) and taking the same approach.



My opinion is that the main risk here is the catastrophic failure scenario where all equities go to practically zero.  However, in that situation even holding some small amount of bonds isn't going to save you.  Everyone without a seriously conservative allocation will be pretty much in the same boat of being screwed.

Some people could argue that you are leaving money on the table that could be gained by re-balancing with a small bond holding, but if that money isn't needed then it may be moot.  Having to think about bond allocations makes me look at my accounts more often and worry about it.  My 100% allocation eases my mind since I don't have to ever look at my accounts to get my allocation correct.



Since my mentality is that I cannot allocate my money any better, I don't panic when markets crash.  There isn't a decision to be made.  The situation is what it is and nothing can be done to make it better, so I have never had an inclination to retreat.

My one exception to this is when I held a mortgage, in which case I sweated my brokerage holdings occasionally since there seemed to be a safe harbor.  My main concern is when I felt like equities are overvalued, I would end up wanting to move some of the brokerage holdings to the mortgage.  However, my retirement savings were never in question.

Strangely I am thinking exactly the same way as you. The only remaining question for me is "will I be able to stomach the volatility associated with 100% stocks". I guess that will come through experience of the market over the years. Worst down that I have experienced with any significant money at stake is a 10% drop and that didn't phase me.

bob999

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Re: 100% Stock Portfolio
« Reply #21 on: March 14, 2018, 04:03:11 AM »
If you will have so much extra money when you Fire what is the point in being 100% stocks?  Will you be trying to generate even more excess wealth?  What would be the downside to have some % in a less volatile asset class? If you have won the game do you need to continue to play (full in)?

the opposite arguement could easily be made if you've saved that much why not keep 100% stocks b/c you're not sure how long you will live and you can give more money away when you die.  The downside is it lags inflation terribly in most non stock Asset classes.

Agree+++

AdrianC

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Re: 100% Stock Portfolio
« Reply #22 on: March 14, 2018, 04:07:28 AM »
I'd make one additional point excluding the projected returns and even potentially better returns utilising uncorrelated asset classes. The main concern for most retirees is obtaining the best income over the course of their retirement. Having safer assets may ensure that you have a much more reliable income source from your portfolio in the drawdown phase.

So the person in 100% stocks may potentially end up with more money in a lot of situations however there is a greater risk he will end up spending less and having to go back to work. The 100% stocks position may lead to increased chance of ER failure. The person with a stash of bonds may do better in that they are less at risk of portfolio failure. They may therefore end up having to to adjust their spending less (or work less) compared to the person with a 100% stock portfolio. I suppose another way to phrase this is that you may end up with a higher SWR compared to the person with a 100% stock position.

To amplify this thinking, Tyler at PortfolioCharts has some good discussions about how lower volatility, period, improves your withdrawal rate.

E.g., earning 9.5% with a 15% standard deviation delivers a lower withdrawal rate as compared to earning 9.5% with a 10% standard deviation.

When you say it like that...sure.

How about real examples, e.g. earning 6.7% with a 15% standard deviation compared with 4.4% with a 6% standard deviation?

The first one (60% US, 40% Int) is very much better than the second (Permanent Portfolio).

bob999

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Re: 100% Stock Portfolio
« Reply #23 on: March 14, 2018, 04:11:51 AM »
Hi all

Thanks.

Depending on what you mean by a 100% stocks portfolio, the approach you describe may suffer from either of two flaws. Risk #1: You may be  bearing more risk than you need to bear. Risk #2: You may be shortchanging yourself on the returns you can get.

If you're interested in testing this, blog post linked to below explains how to confirm or reject above statemeent:

100% stocks allocation suffers from two flaws

Note: You use Portfolio Visualizer to do the math. But it'll take you about three minutes.

Thanks for a very informative link. My only reservation with the mixed portfolio approach is that "past performance is not guarantee of future returns". So the only comfort I can get is that 'stocks give the best return over time'. Therefore looking forward I can only control being in the best investment vehicle (stocks), if shit hits the fan and my portfolio goes to zero then at least this 100% stock approach was the 'best I could do'.

hindsight is great and you can tweak your portfolio with sprinkling bonds, REITs, Commodities etc in your portfolio to get better returns than stocks but that is the benefit of hindsight. Looking forward we are blind.

NoStacheOhio

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Re: 100% Stock Portfolio
« Reply #24 on: March 14, 2018, 06:45:28 AM »
Thanks for a very informative link. My only reservation with the mixed portfolio approach is that "past performance is not guarantee of future returns". So the only comfort I can get is that 'stocks give the best return over time'. Therefore looking forward I can only control being in the best investment vehicle (stocks), if shit hits the fan and my portfolio goes to zero then at least this 100% stock approach was the 'best I could do'.

hindsight is great and you can tweak your portfolio with sprinkling bonds, REITs, Commodities etc in your portfolio to get better returns than stocks but that is the benefit of hindsight. Looking forward we are blind.

I think if a broad market index fund goes to zero (like, actual zero), we're going to have bigger problems than spending money.

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Re: 100% Stock Portfolio
« Reply #25 on: March 14, 2018, 07:18:10 AM »
I'd make one additional point excluding the projected returns and even potentially better returns utilising uncorrelated asset classes. The main concern for most retirees is obtaining the best income over the course of their retirement. Having safer assets may ensure that you have a much more reliable income source from your portfolio in the drawdown phase.

So the person in 100% stocks may potentially end up with more money in a lot of situations however there is a greater risk he will end up spending less and having to go back to work. The 100% stocks position may lead to increased chance of ER failure. The person with a stash of bonds may do better in that they are less at risk of portfolio failure. They may therefore end up having to to adjust their spending less (or work less) compared to the person with a 100% stock portfolio. I suppose another way to phrase this is that you may end up with a higher SWR compared to the person with a 100% stock position.

To amplify this thinking, Tyler at PortfolioCharts has some good discussions about how lower volatility, period, improves your withdrawal rate.

E.g., earning 9.5% with a 15% standard deviation delivers a lower withdrawal rate as compared to earning 9.5% with a 10% standard deviation.

When you say it like that...sure.

How about real examples, e.g. earning 6.7% with a 15% standard deviation compared with 4.4% with a 6% standard deviation?

The first one (60% US, 40% Int) is very much better than the second (Permanent Portfolio).

I don't know that I'd say that. They both have the same worst-case Perpetual Withdrawal Rate in Tyler's FI calculator. PWR is a big part of how I evaluate portfolio options since I plan on being retired for more than 30 years.

yachi

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Re: 100% Stock Portfolio
« Reply #26 on: March 14, 2018, 07:48:06 AM »
Thanks for a very informative link. My only reservation with the mixed portfolio approach is that "past performance is not guarantee of future returns". So the only comfort I can get is that 'stocks give the best return over time'. Therefore looking forward I can only control being in the best investment vehicle (stocks), if shit hits the fan and my portfolio goes to zero then at least this 100% stock approach was the 'best I could do'.

hindsight is great and you can tweak your portfolio with sprinkling bonds, REITs, Commodities etc in your portfolio to get better returns than stocks but that is the benefit of hindsight. Looking forward we are blind.

I think if a broad market index fund goes to zero (like, actual zero), we're going to have bigger problems than spending money.

This +100.
Don't forget we're not buying tulip bulbs here, or cyber 1's and 0's.  It's actual ownership of companies owning actual buildings, equipment, patent rights, inventory, cash, land rights and technology fueled by access to brilliant hard working human minds and bodies that are trying their best to make a profit.  All of this is spread across multiple market sectors and in multiple countries in different continents.  If the value of all of this goes to actual zero we're in a danger that money can't resolve.

NoStacheOhio

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Re: 100% Stock Portfolio
« Reply #27 on: March 14, 2018, 08:30:38 AM »
It's actual ownership of companies owning actual buildings, equipment, patent rights, inventory, cash, land rights and technology fueled by access to brilliant hard working human minds and bodies that are trying their best to make a profit.

And robots. Don't forget the robots. Those are going to be important.

Tyler

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Re: 100% Stock Portfolio
« Reply #28 on: March 14, 2018, 10:02:39 AM »
To amplify this thinking, Tyler at PortfolioCharts has some good discussions about how lower volatility, period, improves your withdrawal rate.

E.g., earning 9.5% with a 15% standard deviation delivers a lower withdrawal rate as compared to earning 9.5% with a 10% standard deviation.

When you say it like that...sure.

How about real examples, e.g. earning 6.7% with a 15% standard deviation compared with 4.4% with a 6% standard deviation?

The first one (60% US, 40% Int) is very much better than the second (Permanent Portfolio).

I don't know that I'd say that. They both have the same worst-case Perpetual Withdrawal Rate in Tyler's FI calculator. PWR is a big part of how I evaluate portfolio options since I plan on being retired for more than 30 years.

I'm really happy to see that people find the site useful.  :)

Supporting the above points about SWRs, you might find this interesting:



Percent stocks does not tell the whole story when it comes to portfolio retirement performance, and I also have data that shows SWRs are not particularly correlated to average return in diversified portfolios.  I've compiled lots of good info here for anyone interested in learning more: https://portfoliocharts.com/portfolio/retirement-income/ 

Also, my thoughts on diversification in accumulation are best summarized here.  Long story short, investing in 100% stocks is just fine but I believe diverse portfolios including bonds and other assets are more dependable, efficient, and sustainable for most investors.

BTW, my goal is not to argue against an all-stock portfolio but simply to provide good data for fairly evaluating alternative approaches.  I fully support anyone who is truly happy with their own personal asset allocation and hope to encourage more people with different needs and preferences to reach the same point.
« Last Edit: March 14, 2018, 10:04:48 AM by Tyler »

Rob_bob

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Re: 100% Stock Portfolio
« Reply #29 on: March 14, 2018, 12:00:25 PM »
If you will have so much extra money when you Fire what is the point in being 100% stocks?  Will you be trying to generate even more excess wealth?  What would be the downside to have some % in a less volatile asset class? If you have won the game do you need to continue to play (full in)?

My engineering brain thinks "Stocks are the best vehicle for investing" and "index funds are the best way to invest in stocks" so why not be in the best/fastest vehicle??

Well if you are talking about investing in the accumulation phase to build your net worth then 100% stocks is fine.  My comment was addressed to your comment about being 100% in stocks during retirement when you said you would have more than enough.  If you indeed do have more than enough why have 100% of it at risk?  Do you need even more growth?

I'm not saying not to do it, but just asking you to ask yourself why you would need all your eggs in one basket when you have more eggs than you need and can have two baskets full.

ooeei

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Re: 100% Stock Portfolio
« Reply #30 on: March 14, 2018, 02:51:31 PM »
It's pretty easy to create an extreme example where a higher overall return is handicapped by higher volatility.

Imagine there's an investment called CrazyStocks. CrazyStocks averages 15% per year returns over 50 year periods. Over this 50 years you can guarantee it will drop 95% at least 2 times, but it will slowly climb back up to eventually average out to 15%/year after 50 years.

Now, if you could just leave the money alone for 50 years, say during accumulation, obviously 15%/year is great, so there's no reason not to do it. The problem comes when that 95% drop happens, and you're relying on that money to eat/pay doctor's bills/pay rent/etc. Now you're screwed, because you just spent 50-60% of your portfolio in a down year or two, and you aren't able to take full advantage of that recovery.

This same phenomenon happens on a smaller scale when talking about regular stocks. In general crashes happen fast, and recoveries happen slow. If you are living off pure stock returns, you will eventually have to sell them during down years, sometimes significantly down. Having bonds in your portfolio allows you to use the bond money (effectively rebalancing) during those down times, and lets you insulate yourself some from the downturn. During the accumulation phase you're never spending the money, so having less/no bonds isn't as risky.

Obviously we can't predict the future and know the exact sequence of returns OP will be dealing with, but in general most of what I've read found 10-20% bonds worked out better in the long run when people were withdrawing from an investment on a regular basis. Whether future bond/stock return rates will hold true to the past is up for debate, but we need to keep in mind that overall long term return doesn't tell the whole story when we're withdrawing from an investment.
« Last Edit: March 14, 2018, 02:54:15 PM by ooeei »

steveo

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Re: 100% Stock Portfolio
« Reply #31 on: March 14, 2018, 02:54:24 PM »
I'd make one additional point excluding the projected returns and even potentially better returns utilising uncorrelated asset classes. The main concern for most retirees is obtaining the best income over the course of their retirement. Having safer assets may ensure that you have a much more reliable income source from your portfolio in the drawdown phase.

So the person in 100% stocks may potentially end up with more money in a lot of situations however there is a greater risk he will end up spending less and having to go back to work. The 100% stocks position may lead to increased chance of ER failure. The person with a stash of bonds may do better in that they are less at risk of portfolio failure. They may therefore end up having to to adjust their spending less (or work less) compared to the person with a 100% stock portfolio. I suppose another way to phrase this is that you may end up with a higher SWR compared to the person with a 100% stock position.

I don't think that 100% stocks portfolio will end up with less money compared to a mix of Stocks/Bonds in most scenarios. Over the long run stocks give the best return. If the SWR is lower (say 2-3%) at the beginning of retirement then a dip in stocks will hit hard on a 100% stock portfolio compared to stock/bond portfolio but the recovery on 100% over a 50+ years period is likely to give better returns than stock/bond mix allocation.

Given that 4% SWR is based on 30 year retirement and not longer timeframes and we don't know how bad inflation is going to be in the future 100% is by default "the best you can do to ensure your portfolio will survive (and grow)".

I don't think that is factually correct. It might be but we can't predict the future. We can look to the past and state that a 100% stock portfolio has a downside and that downside is increased chance of failure and an increased chance of lowering your income to a level where you have to return to work or live more frugally than you initially intended too.

SeattleCPA

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Re: 100% Stock Portfolio
« Reply #32 on: March 14, 2018, 07:30:40 PM »
To amplify this thinking, Tyler at PortfolioCharts has some good discussions about how lower volatility, period, improves your withdrawal rate.

E.g., earning 9.5% with a 15% standard deviation delivers a lower withdrawal rate as compared to earning 9.5% with a 10% standard deviation.

When you say it like that...sure.

How about real examples, e.g. earning 6.7% with a 15% standard deviation compared with 4.4% with a 6% standard deviation?

The first one (60% US, 40% Int) is very much better than the second (Permanent Portfolio).

I don't know that I'd say that. They both have the same worst-case Perpetual Withdrawal Rate in Tyler's FI calculator. PWR is a big part of how I evaluate portfolio options since I plan on being retired for more than 30 years.

I'm really happy to see that people find the site useful.  :)

Supporting the above points about SWRs, you might find this interesting:



Percent stocks does not tell the whole story when it comes to portfolio retirement performance, and I also have data that shows SWRs are not particularly correlated to average return in diversified portfolios.  I've compiled lots of good info here for anyone interested in learning more: https://portfoliocharts.com/portfolio/retirement-income/ 

Also, my thoughts on diversification in accumulation are best summarized here.  Long story short, investing in 100% stocks is just fine but I believe diverse portfolios including bonds and other assets are more dependable, efficient, and sustainable for most investors.

BTW, my goal is not to argue against an all-stock portfolio but simply to provide good data for fairly evaluating alternative approaches.  I fully support anyone who is truly happy with their own personal asset allocation and hope to encourage more people with different needs and preferences to reach the same point.

Tyler, you know I love your work. But gosh if one has a hope to build a portfolio with less than perfectly correlated asset classes and doesn't, one misses out on either dialing down risk a bit or dialing up the return.

Seradoc

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Re: 100% Stock Portfolio
« Reply #33 on: March 14, 2018, 08:20:12 PM »
Given that we will have significantly more money than we require when we FIRE, would 100% stock allocation be a good idea?

Unfortunately, it is blaspheme of the highest order to be sub-optimal, even when you have significantly more money than you require.
« Last Edit: March 14, 2018, 08:23:35 PM by Seradoc »

bob999

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Re: 100% Stock Portfolio
« Reply #34 on: March 15, 2018, 02:45:45 AM »
Given that we will have significantly more money than we require when we FIRE, would 100% stock allocation be a good idea?

Unfortunately, it is blaspheme of the highest order to be sub-optimal, even when you have significantly more money than you require.

People follow different strategies once they exceed their FI target number. For example, Wasting Asset Retirement Model where you approach 0% Stock allocation.

http://jlcollinsnh.com/2017/09/09/sleeping-soundly-thru-a-market-crash-the-wasting-asset-retirement-model/

Similarly, if your FI number was 1M with 70/30 stock allocation. You could put all excess income after you reach 1M into stocks and therefore your AA would slowly approach 100% stocks.

Nothing wrong with either approach IMHO

AdrianC

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Re: 100% Stock Portfolio
« Reply #35 on: March 15, 2018, 07:40:14 AM »
I'm really happy to see that people find the site useful.  :)

Supporting the above points about SWRs, you might find this interesting:



Percent stocks does not tell the whole story when it comes to portfolio retirement performance, and I also have data that shows SWRs are not particularly correlated to average return in diversified portfolios.  I've compiled lots of good info here for anyone interested in learning more: https://portfoliocharts.com/portfolio/retirement-income/ 

Also, my thoughts on diversification in accumulation are best summarized here.  Long story short, investing in 100% stocks is just fine but I believe diverse portfolios including bonds and other assets are more dependable, efficient, and sustainable for most investors.

BTW, my goal is not to argue against an all-stock portfolio but simply to provide good data for fairly evaluating alternative approaches.  I fully support anyone who is truly happy with their own personal asset allocation and hope to encourage more people with different needs and preferences to reach the same point.

Tyler, have you any thoughts about having a variable start date for your calculators? Some of us are very skeptical about certain data from the 1970's (gold!). Plus, many asset allocations were not even thought of back then. The Permanent Portfolio was first proposed in 1981, I think. It would be interesting to see how it's done since publication.

simonsez

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Re: 100% Stock Portfolio
« Reply #36 on: March 15, 2018, 09:32:53 AM »
 
Great interesting graph - but what I really get out of that is that all stocks is above 4% SWR and that's plenty good for me.  I'm lazy (investing in the cheapest broad index fund-only seems like maybe the laziest approach as well?  One fund to worry about and no re-balancing) and can't be bothered too much*.

*-However, I'm a big fan of doing whatever you're comfortable with and it's great for many that allocate differently.

Can't let perfect be the enemy of good, we're all winning the game at some point sooner than "normal".  Yay!

Tyler

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Re: 100% Stock Portfolio
« Reply #37 on: March 15, 2018, 09:53:12 AM »
Tyler, have you any thoughts about having a variable start date for your calculators? Some of us are very skeptical about certain data from the 1970's (gold!). Plus, many asset allocations were not even thought of back then. The Permanent Portfolio was first proposed in 1981, I think. It would be interesting to see how it's done since publication.

Every calculator on the site already models a minimum of 48 different investing timeframes simultaneously including every start date we have data for.  They're specifically designed to prevent cherry-picking of data, as I believe it's important to see the full context of portfolio performance in both good times and bad. 

If you want to exclude the first few years in the 1970's when considering a portfolio with gold, just ignore the darkest handful of lines in any chart like Portfolio Growth, Drawdowns, or Withdrawal Rates (color is sorted by start date).   Or if you want to see how the Permanent Portfolio did since 1981, pull up the Heat Map and only look in the 1981 row and lower (you can even see precise returns by hovering your mouse over individual cells in the calculator).  The data is all there.
« Last Edit: March 15, 2018, 10:01:05 AM by Tyler »

boarder42

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Re: 100% Stock Portfolio
« Reply #38 on: March 15, 2018, 10:24:38 AM »
i just wish you could get data that went back farther than the 70s.

Tyler

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Re: 100% Stock Portfolio
« Reply #39 on: March 15, 2018, 11:56:14 AM »
i just wish you could get data that went back farther than the 70s.

Me too.  :)

AdrianC

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Re: 100% Stock Portfolio
« Reply #40 on: March 15, 2018, 05:45:48 PM »
Tyler, have you any thoughts about having a variable start date for your calculators? Some of us are very skeptical about certain data from the 1970's (gold!). Plus, many asset allocations were not even thought of back then. The Permanent Portfolio was first proposed in 1981, I think. It would be interesting to see how it's done since publication.

Every calculator on the site already models a minimum of 48 different investing timeframes simultaneously including every start date we have data for.  They're specifically designed to prevent cherry-picking of data, as I believe it's important to see the full context of portfolio performance in both good times and bad. 

If you want to exclude the first few years in the 1970's when considering a portfolio with gold, just ignore the darkest handful of lines in any chart like Portfolio Growth, Drawdowns, or Withdrawal Rates (color is sorted by start date).   Or if you want to see how the Permanent Portfolio did since 1981, pull up the Heat Map and only look in the 1981 row and lower (you can even see precise returns by hovering your mouse over individual cells in the calculator).  The data is all there.

Thanks, Tyler. So is there a way to see what was the safe withdrawal rate and perpetual withdrawal rate starting at a certain date? I'd like to see what the 30 year SWR and PWR was for the Permanent Portfolio after it was published.

Tyler

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Re: 100% Stock Portfolio
« Reply #41 on: March 15, 2018, 06:31:01 PM »
Thanks, Tyler. So is there a way to see what was the safe withdrawal rate and perpetual withdrawal rate starting at a certain date? I'd like to see what the 30 year SWR and PWR was for the Permanent Portfolio after it was published.

The thing about SWRs is that you need to have as much data as possible for them to mean anything.  In fact, excluding data can only make them go up -- never down. That's because SWRs are defined by the worst retirement period, not the average, and removing start dates does absolutely nothing to the WR number until you eventually hit one of those worst case scenarios.

But to address the spirit of your question, one way to look at the consistency of withdrawal rates over different start years is to study all of the blue lines in the Withdrawal Rates calculator.  (Here's an explanation for how to interpret them). Some portfolios are definitely more consistent than others, which is why the 30-year SWR of the Permanent Portfolio after 1981 was 5.4%, or only about 0.2% higher than when it's calculated since 1970.  Contrast that to the 7.5% SWR for the stock market if you exclude data before Jack Bogle invented the first index fund in 1976.  Ignore stock history before that date at your own peril!  Covering particularly poor investing conditions is important to any good SWR analysis, and I do not recommend cutting things short.
« Last Edit: March 15, 2018, 09:52:12 PM by Tyler »

maizeman

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Re: 100% Stock Portfolio
« Reply #42 on: March 15, 2018, 06:41:25 PM »
i just wish you could get data that went back farther than the 70s.

Me too.  :)

Is it just the price history of gold that drops off in the 70s since before that the price relative to the dollar was fixed? Or do a lot of the other index datasets you use stop at the same point in time?

Tyler

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Re: 100% Stock Portfolio
« Reply #43 on: March 15, 2018, 07:28:52 PM »
Is it just the price history of gold that drops off in the 70s since before that the price relative to the dollar was fixed? Or do a lot of the other index datasets you use stop at the same point in time?

There's actually way more gold history available than for any other asset on the site!  It has been around for centuries.  ;)

The main issue is that index funds were not invented until 1976 so there's no direct index data to track before then.  The NYSE didn't really even standardize company reporting until the mid-60's, and believe it or not many of the long-run stock series you find from sources like Ibbotson were reconstructed by looking up individual company returns on microfiche prints of the New York Times business pages.  Today, even the big players like the central banks often don't bother publishing data for common things like interest rates prior to 1970. 

I'm always keeping an eye out, though.
« Last Edit: March 15, 2018, 09:57:04 PM by Tyler »

boarder42

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Re: 100% Stock Portfolio
« Reply #44 on: March 16, 2018, 06:15:38 AM »
Is it just the price history of gold that drops off in the 70s since before that the price relative to the dollar was fixed? Or do a lot of the other index datasets you use stop at the same point in time?

There's actually way more gold history available than for any other asset on the site!  It has been around for centuries.  ;)

The main issue is that index funds were not invented until 1976 so there's no direct index data to track before then.  The NYSE didn't really even standardize company reporting until the mid-60's, and believe it or not many of the long-run stock series you find from sources like Ibbotson were reconstructed by looking up individual company returns on microfiche prints of the New York Times business pages.  Today, even the big players like the central banks often don't bother publishing data for common things like interest rates prior to 1970. 

I'm always keeping an eye out, though.

we're probably going to look back at this in 30 years and say that 70s and later data was sufficient to set your portfolio by - i'm just not willing to make that jump and will stick to a total world stock index fund.

AdrianC

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Re: 100% Stock Portfolio
« Reply #45 on: March 16, 2018, 08:04:54 AM »
Thanks, Tyler. So is there a way to see what was the safe withdrawal rate and perpetual withdrawal rate starting at a certain date? I'd like to see what the 30 year SWR and PWR was for the Permanent Portfolio after it was published.

The thing about SWRs is that you need to have as much data as possible for them to mean anything.  In fact, excluding data can only make them go up -- never down. That's because SWRs are defined by the worst retirement period, not the average, and removing start dates does absolutely nothing to the WR number until you eventually hit one of those worst case scenarios.

Ah, of course! I'm getting confused since we so often talk about the Trinity study and 95% success rates. Your SWR is a 100% success rate. I'd forgotten that.

I just did a quick compare of a 75/25 portfolio between cFIREsim and your Withdrawal Rates calculator.

cFIREsim SWR 3.6% 100% success
Portfolio Charts SWR 4.5%

That's quite a difference...not having 1966!

cFIREsim doesn't have LTbonds data (FIRECalc does, but doesn't have gold), so we can't do longer term back tests of the exact Permanent Portfolio. In cFIREsim using 25% "bonds", 25% gold, 25% equities, 25% cash gives an SWR of 3% for 100% success rate.

Quote
But to address the spirit of your question, one way to look at the consistency of withdrawal rates over different start years is to study all of the blue lines in the Withdrawal Rates calculator.  (Here's an explanation for how to interpret them). Some portfolios are definitely more consistent than others, which is why the 30-year SWR of the Permanent Portfolio after 1981 was 5.4%, or only about 0.2% higher than when it's calculated since 1970.  Contrast that to the 7.5% SWR for the stock market if you exclude data before Jack Bogle invented the first index fund in 1976.  Ignore stock history before that date at your own peril!  Covering particularly poor investing conditions is important to any good SWR analysis, and I do not recommend cutting things short.

Agreed.

Tyler

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Re: 100% Stock Portfolio
« Reply #46 on: March 16, 2018, 08:27:57 AM »
cFIREsim doesn't have LTbonds data (FIRECalc does, but doesn't have gold), so we can't do longer term back tests of the exact Permanent Portfolio. In cFIREsim using 25% "bonds", 25% gold, 25% equities, 25% cash gives an SWR of 3% for 100% success rate.

Also keep in mind that cFIREsim uses a fixed interest rate for "cash".  That's nothing like the T-Bills in the PP.


cFIREsim SWR 3.6% 100% success
Portfolio Charts SWR 4.5%

That's quite a difference...not having 1966!

For a neutral outside reference, both Kitces and Pfau ran independent studies of a 60/40 portfolio using data since 1870 (the same as cFIREsim). Both of their absolute worst case numbers were still over 4%, while cFIREsim reports it was 3.6% for the same portfolio.  So the difference can't be completely attributed to timeframe.

I suspect it has to do with data sources, and you have to be really careful about comparing numbers apples to apples.  For example, you're using the Total Stock Market for my numbers while cFIREsim uses Large Cap Blend.  Also, various retirement studies define "bonds" differently.  I provide lots of detailed information in the Withdrawal Rates FAQ showing how the calculator tracks other prominent research even with the smaller data set.  Note that the link also includes the Kitces and Pfau charts that I reference above. 

But yes, I'd love to get more data!  FWIW, the bottleneck is bond data (I need more than simple bills and 10-year treasuries) and international data of all types.  If anyone has a good free source for stock returns or yield curves, please PM me.

« Last Edit: March 16, 2018, 12:57:33 PM by Tyler »

neo von retorch

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Re: 100% Stock Portfolio
« Reply #47 on: March 16, 2018, 01:28:59 PM »
@Tyler

I'm not sure if this is the thread for this question, but do you have a link or explanation where you go into more detail on understanding "uncorrelated" asset classes?

I ask mostly because things like Vanguard's equity, bond and REIT index funds all seem to rise and fall almost as one. I would have thought bond funds were less tightly correlated, but after reading some of your material and putting more thought into it, I'm worrying that my "diversified" portfolio, as far as asset classes go, isn't really much different from 100% stocks.

Thanks in advance if you a moment to weigh in and educate!

AdrianC

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Re: 100% Stock Portfolio
« Reply #48 on: March 16, 2018, 02:32:54 PM »
For a neutral outside reference, both Kitces and Pfau ran independent studies of a 60/40 portfolio using data since 1870 (the same as cFIREsim). Both of their absolute worst case numbers were still over 4%, while cFIREsim reports it was 3.6% for the same portfolio.  So the difference can't be completely attributed to timeframe.

I suspect it has to do with data sources, and you have to be really careful about comparing numbers apples to apples.  For example, you're using the Total Stock Market for my numbers while cFIREsim uses Large Cap Blend.  Also, various retirement studies define "bonds" differently.  I provide lots of detailed information in the Withdrawal Rates FAQ showing how the calculator tracks other prominent research even with the smaller data set.  Note that the link also includes the Kitces and Pfau charts that I reference above. 

That's very interesting. FIRECalc comes up with 3.7% (Equities 60%, 5-year treasuries 40%, SWR 3.7%, no failures, 1 failure at 3.8%).
I get 4.3% (more or less) at Portfolio Charts using 60% LCB and 40% Int Bonds, 30 years (3.9% for 40 years).

Data sources, as you say.

Read your Withdrawal Rates FAQ article. Very informative. Thanks for that. I saw it also had that Permanent Portfolio info I wanted, too.

Tyler

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Re: 100% Stock Portfolio
« Reply #49 on: March 16, 2018, 04:11:07 PM »
I'm not sure if this is the thread for this question, but do you have a link or explanation where you go into more detail on understanding "uncorrelated" asset classes?

I can't think of an obvious link to send you to, but that's a good question.  I'll have to think about it and write something up. 
« Last Edit: March 16, 2018, 08:33:29 PM by Tyler »