Author Topic: 100% Stock Portfolio  (Read 10107 times)

boarder42

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Re: 100% Stock Portfolio
« Reply #50 on: March 17, 2018, 04:51:18 AM »
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.

That'd be great bc that at it's core is really what anyone who wants to make money last a long time is after.  Assets that return similarly but fluctuate exactly opposite each other. This leads to higher swr and earlier FIRE

ol1970

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Re: 100% Stock Portfolio
« Reply #51 on: March 17, 2018, 06:57:44 AM »
I think the majority of the readers here have not had major skin in the game during a significant correction.  Until youíve seen and lived through the excitement of seeing 10 years of living expenses evaporate overnight you canít really know how youíll react.  Lots of tough guy talk on here, but like Mike Tyson said ďeverybody has a plan until they get punched in the mouth!Ē.  What I will say is thankfully there are is a nice support network like this to help people through it that there wasnít in previous decades.

Have 3 years of living expenses as a buffer, cash or bonds or whatever.  Keep the rest invested then youíll have total peace of mind.

maizeman

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Re: 100% Stock Portfolio
« Reply #52 on: March 17, 2018, 07:21:26 AM »
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.

That'd be great bc that at it's core is really what anyone who wants to make money last a long time is after.  Assets that return similarly but fluctuate exactly opposite each other. This leads to higher swr and earlier FIRE

To be annoyingly pedantic, what you're describing are assets which are highly correlated, just negatively. Now if you found two such assets which both had high returns but were also strongly negatively correlated, that would indeed be an amazing investment.

Two assets with equally high returns but zero correlation would still be a great investment, because the overall volatility would still decrease a lot relative to investing in either asset alone without sacrificing overall return, just not as much as assets with negatively correlated returns.

That's why I found the rate of return on everything thread so interesting. I don't buy that individual housing investors would really see the low volatility that the authors saw from aggregate data across the whole country. But if the rates of return on housing really are, on average, equivalent to stocks but don't show a strong correlation to stocks, they'd let people reduce the volatility of their portfolio significantly without sacrificing expected yield.

Ms.Fortuna

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Re: 100% Stock Portfolio
« Reply #53 on: March 17, 2018, 09:21:35 AM »
Too good to be true?
6.5% PWR!!

Amazing how a portfolio with a relatively aggressive percentage of stock (70%) including riskier small cap and emerging markets ended up with this high PWR..and the standard deviation is on the high side 12.2% and still high withdrawal rate..very tempting!

Tyler

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Re: 100% Stock Portfolio
« Reply #54 on: March 17, 2018, 11:07:52 AM »
Too good to be true?

Maybe.  ;) 

In this case, be sure to pay attention to that "estimated" alert.  That means that I don't have enough good data to confidently model the portfolio back so far, and because of that I would be cautious about taking the PWR at total face value.  Here's an explanation for how it works.  Another way to look at it is with the Withdrawal Rates "waterfall" chart.  Study the blue and gray lines and you'll get a feel for how the known good data holds up versus the rest. 

In any case, be smart about it and plan conservatively. I generally recommend focusing on portfolio consistency rather than simply maximizing returns or withdrawal rates.  The most conservative and dependable portfolio that comfortably met your needs in both good times and bad is a nice reference point to start with. 

DavidAnnArbor

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Re: 100% Stock Portfolio
« Reply #55 on: March 17, 2018, 06:57:53 PM »
I think the majority of the readers here have not had major skin in the game during a significant correction.  Until youíve seen and lived through the excitement of seeing 10 years of living expenses evaporate overnight you canít really know how youíll react.  Lots of tough guy talk on here, but like Mike Tyson said ďeverybody has a plan until they get punched in the mouth!Ē.  What I will say is thankfully there are is a nice support network like this to help people through it that there wasnít in previous decades.

Have 3 years of living expenses as a buffer, cash or bonds or whatever.  Keep the rest invested then youíll have total peace of mind.

I've been through 2000 and 2009

privatefarmer

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Re: 100% Stock Portfolio
« Reply #56 on: March 17, 2018, 07:12:43 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"...

here's the thing : REITS are stocks, its fine if someone wants to OVER-weight REITS but lets clarify they are not two separate things. REITS is simply a sector of the stock market. We don't have much data on the historical return of REITS, portfoliovisualizer only goes back 24 years. But if you want to play this game, you could plug in small-value stocks and see that holding anything else would dampen your returns, including REITS. Over weighting a segment of the stock market, such as REITS, should be done not bc of simply past returns but bc of a fundamental reason. Such as, overweighting the riskier small or valuey stocks bc of the higher expected return, due to the increased risk.

you mention modern portfolio theory, the idea being to pick two non-correlated assets that both go up at the same rate. that would be awesome if it existed. it doesn't. everything goes down but treasury bills during the big crashes. the standard deviation is not what we should be focused on. we should be focused on the MAX DRAWDOWN and during the great recession everything including REITS lost >50% except fixed income. The other point I would make is that owning the total stock market is the most efficient way to use modern portfolio theory. you are as diversified as you can possibly be, within stocks, at the lowest cost.

All this being said, I too am 100% stocks and in my 30s. The fact is, the expected return of stocks vs bonds over a 30+ year period is obviously highly favorable towards stocks. Take your risk in the stock market. bonds are for safety, NOT growth.

I would spend some time researching the efficient frontier. It's pretty simply, really. In order to get more return in the long-term you must take on more risk/volatility. This is why small stocks have outperformed large and value over growth - they are riskier. I would also read some of the work by Larry Swedroe. He advocates 100% small/value stocks and then adding enough short-term treasuries and TIPS to taper down the volatility to a comfortable level. This provides the most "bang for your buck", you should get the most return per unit of risk.

Anyhow, 100% stocks is totally reasonable as long as you are comfortable and EXPECT a 50-60% drawdown at some point (could even be worse, in the great depression stocks lost I believe 90%). But the good news is that it typically only takes a few years for a full market recovery and that stocks have gone up 70% of the years. So, if you can hang on during the rough times I think you will be rewarded in the end w/ 100% equities.

AdrianC

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Re: 100% Stock Portfolio
« Reply #57 on: March 18, 2018, 09:42:34 AM »
Quote
I would also read some of the work by Larry Swedroe. He advocates 100% small/value stocks and then adding enough short-term treasuries and TIPS to taper down the volatility to a comfortable level. This provides the most "bang for your buck", you should get the most return per unit of risk.

Thatís an idea he had, but Iím not sure he advocates that as a practical portfolio, does he? Hard to tell. Heís quite prolific.

Itís not clear to me that the small cap value effect will persist. Iím more in the Swenson camp - be in many markets, diversify across markets, take some risks, be exposed, donít chase performance, past performance is no guide to the future. That said, I canít do Swensonís recommended allocations to REITs or TIPS at current valuations.

boarder42

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Re: 100% Stock Portfolio
« Reply #58 on: March 18, 2018, 09:44:56 AM »
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.

That'd be great bc that at it's core is really what anyone who wants to make money last a long time is after.  Assets that return similarly but fluctuate exactly opposite each other. This leads to higher swr and earlier FIRE

To be annoyingly pedantic, what you're describing are assets which are highly correlated, just negatively. Now if you found two such assets which both had high returns but were also strongly negatively correlated, that would indeed be an amazing investment.

Two assets with equally high returns but zero correlation would still be a great investment, because the overall volatility would still decrease a lot relative to investing in either asset alone without sacrificing overall return, just not as much as assets with negatively correlated returns.

That's why I found the rate of return on everything thread so interesting. I don't buy that individual housing investors would really see the low volatility that the authors saw from aggregate data across the whole country. But if the rates of return on housing really are, on average, equivalent to stocks but don't show a strong correlation to stocks, they'd let people reduce the volatility of their portfolio significantly without sacrificing expected yield.

Agreed. If it existed you'd think all the data analytics people paid to do this for a living would be showcasing it as a golden portfolio

FrugalSaver

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Re: 100% Stock Portfolio
« Reply #59 on: March 18, 2018, 05:06:33 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. 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.

It depends on your goals.  Once you FI, if you choose not to RE, i would lean towards being more ok with this up until about age 55 with you and your wife understanding bad things could happen that lead to more years working.

If you FI AND RE, then I would move more towards a balanced portfolio so that you NEVER risk HAVING to go back to work (unless you're ok with that risk).

It will cap your upside to be sure, but will guarantee (as best one can guarantee anything) that you'll never HAVE TO wake up and head to a J-O-B again.

SeattleCPA

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Re: 100% Stock Portfolio
« Reply #60 on: March 18, 2018, 09:59:19 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.

That'd be great bc that at it's core is really what anyone who wants to make money last a long time is after.  Assets that return similarly but fluctuate exactly opposite each other. This leads to higher swr and earlier FIRE

To be annoyingly pedantic, what you're describing are assets which are highly correlated, just negatively. Now if you found two such assets which both had high returns but were also strongly negatively correlated, that would indeed be an amazing investment.

Two assets with equally high returns but zero correlation would still be a great investment, because the overall volatility would still decrease a lot relative to investing in either asset alone without sacrificing overall return, just not as much as assets with negatively correlated returns.

That's why I found the rate of return on everything thread so interesting. I don't buy that individual housing investors would really see the low volatility that the authors saw from aggregate data across the whole country. But if the rates of return on housing really are, on average, equivalent to stocks but don't show a strong correlation to stocks, they'd let people reduce the volatility of their portfolio significantly without sacrificing expected yield.

Maizeman, I am also very intrigued by the low volatility of housing. Accordingly, I've been looking at standard deviations of housing price indexes available here: https://www.census.gov/programs-surveys/ahs.html

The standard deviations I'm calculating match up pretty nicely with Rate of Return on Everything.