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Learning, Sharing, and Teaching => Investor Alley => Topic started by: Kevin K. on July 26, 2016, 05:20:15 PM

Title: 100% stocks in the accumulation phase?
Post by: Kevin K. on July 26, 2016, 05:20:15 PM
At the risk of rehashing some of the comments on the lengthy Golden Butterfly thread, I thought this new post by Tyler over at Portfolio Charts in response to a "why not go 100% stocks?" question on Bogleheads was really excellent and also the perfect introduction to a total return and truly non-correlated asset approach vs. the Boglehead asset allocation one that's so much more commonly used.

https://portfoliocharts.com/2016/07/25/thinking-beyond-stocks-can-fortify-your-accumulation-plan/ (https://portfoliocharts.com/2016/07/25/thinking-beyond-stocks-can-fortify-your-accumulation-plan/)

There are an awful lot of folks in the ER world (MMM himself and, especially, J. Collins) who seem to view the ability to hold on through devastating stock market crashes that can go on for years as some sort of badge of courage, but (a) it isn't; and (b) very few people in the real world can actually stay the course with huge equity allocations.

Tyler offered this gem of a comment on another forum in response to a question about whether allocations should change substantially pre vs. post FI, and I think it's damn near frame-worthy:

"I personally believe the time to start developing good investing habits is when you first start investing, and one's strategy should not involve taking unnecessary risks before FI or changing portfolios after. For the most part I think the best advice is to pick an enduring financial strategy from the start and focus on maximizing savings rather than returns. If it's too risky to retire on, it's probably also too risky to guarantee with any amount of certainty the retirement date you want so badly. And if the volatility causes you to sell low every few years, it's most likely hurting you more than it helps anyway.

I also believe that much of the equity glide path advice comes from the over-simplified perspective that total stock and total bond funds are the only investing options available and that good returns (important for accumulation) and low volatility (equally important for retirement) are mutually exclusive. Too many people tackle the exclusivity problem for those two assets by adjusting the percentages over time rather than challenging the two-option assumption. Following modern portfolio theory, there are good portfolio options with solid returns AND low volatility with no adjustments required. That's a common theme of the site and the reason that there's an entire section dedicated to portfolio examples."

IMHO this perspective and the Portfolio Charts site in general are pretty amazing - even revolutionary - tools to have available to the general public - and for free! This kind of perspective on asset allocation, in my experience, is normally the province of a small handful of DFA fund folks that manage huge endowments and the accounts of the super-rich.
Title: Re: 100% stocks in the accumulation phase?
Post by: nobodyspecial on July 26, 2016, 09:36:11 PM
I think yesterdays topic was that the first few (10) years post Fire are the most (or indeed only) risky ones.
In accumulation you can always simply work a few more years faced with a crash - if you have retired and your only option is to sell to buy food - then bonds might be useful.
 
Title: Re: 100% stocks in the accumulation phase?
Post by: Lagom on July 26, 2016, 09:49:55 PM
No mustachian should have issues with selling low (if they do, they should already know 100% stocks is not for them), so that part of the comment is irrelevant. Also, holding through down years is not a "badge of courage," it's just understanding that in the long run, prosperity prevails, and stock holdings bring the most value in times of prosperity. Obviously, a massive selloff just as you intend to retire would suck, but as has been discussed ad naseum in various threads, the chances of that are quite low, and historically, even if that does happen, the 4% rule still holds almost all of the time.

If for some reason this wisdom should collapse, no portfolio will make up for the financial Armageddon that would result (perhaps short of physical gold), so it's not worth worrying about that possibility. I found the GB portfolio tantalizing for the same reason many others have, but ultimately trusting the market actually seems to be one of the least risky things you can do if you want to support a 30-40-50+ year retirement.
Title: Re: 100% stocks in the accumulation phase?
Post by: arebelspy on July 26, 2016, 10:28:42 PM
That article to me showed why one wouldn't want to use the GB for accumulation.

Even a portfolio that backtests about as well as one CAN backtest (and one can argue if it was chosen because of backtesting or not, but even if you say it wasn't, you'll probably concede that it backtests amazingly well), and it still did quite poorly versus TSM over 30 years.

Here's the two charts he presents, put together:
(http://forum.mrmoneymustache.com/investor-alley/100-stocks-in-the-accumulation-phase/?action=dlattach;attach=23847;image)


The GB looks great, because of how narrow the range is--it's reliable!  But the thing is, what it's reliable at is under performing.  The y-axis scale is different for the two charts!  And unless one looks carefully, you won't notice it.

But I highlighted the 800k line in green.  TSM hits that almost every time (maybe 10% below, 90% above?).  GB only hits it about half the time.  The 900k line I highlighted in blue. TSM hits it half the time, GB not a single time!

If you want 800k, GB will take you about 30 years (half the time you'll hit it a bit before, half a bit after).  If you want 800k with TSM, you'll likely hit it around 23-ish years (from my eyeball of when about half of them have crested 800k at some point).  8 extra years of working, because you don't want to handle a little short term volatility?  No thanks.

Asset allocation isn't a free lunch, sad to say, and while your returns are much more stable, you do give up something for that.

To me, that chart above is exactly why one SHOULD be in TSM in the accumulation phase.  Because market setbacks can easily be made up for.  Imagine if you want 1MM.. about half the TSM ones have made it.  None of the GB lines have even hit 900k. 

If you want to go more conservative in ER, like GB or PP, in ER for capital preservation, okay.  I guess that's fine.  (Though my thought on it is..if it under performs so much over the 30 years of accumulation.. and I'm planning for 30+ years of ER...)

/shrug

GB has benefits, no doubt.  Big ones for those having trouble staying the course.   As to this:
There are an awful lot of folks in the ER world (MMM himself and, especially, J. Collins) who seem to view the ability to hold on through devastating stock market crashes that can go on for years as some sort of badge of courage

I don't advocate "staying the course" as a "badge of courage" so you can brag "yeah, I went through the crash of XYZ without selling!" but because it's a more mathematically optimal route.  :)

But if you can just ignore your accounts for your accumulation phase, TSM offers a much faster route than GB, the majority of the time (of course, the shorter your accumulation phase is, the more risk you're taking of having to OMY, but by using something like GB, you're basically guaranteeing it.  And I'd rather OMY if there was a big crash anyways, regardless of my AA, for the massive accumulation potential such as there was in 2009).

GB seems nice and fun, in that article, but looking at that y-axis?  Yikes.  That's seriously what I DON'T want in accumulation--lots of extra years of work, because I'm afraid of a little volatility at the one point when I shouldn't be--when I've got a firehose of cash bringing in funds to invest.
Title: Re: 100% stocks in the accumulation phase?
Post by: arebelspy on July 26, 2016, 10:35:30 PM
Can someone good at photoshop change all the GB lines to one color, all the TSM to another (and not worry about the lighter/darker for more recent year stuff), and superimpose the GB over TSM, with the axis scaled properly?

Original photos:
https://portfoliocharts.files.wordpress.com/2015/07/total-stock-market-accumulation-2016.jpg
https://portfoliocharts.files.wordpress.com/2015/09/golden-butterfly-accumulation-2016.jpg
Title: Re: 100% stocks in the accumulation phase?
Post by: Tyler on July 26, 2016, 10:45:03 PM
Can someone good at photoshop change all the GB lines to one color, all the TSM to another (and not worry about the lighter/darker for more recent year stuff), and superimpose the GB over TSM, with the axis scaled properly?

I think you missed this one in the article.  ;)

(https://portfoliocharts.files.wordpress.com/2016/07/three-portfolios-accumulation.jpg?w=840)

The yellow is the GB.  The light red is 100% stocks. 

But don't forget the blue one -- that's the Coward's portfolio.  It has 40% Short Term Treasuries, and basically matched the full range of TSM outcomes once you look past the 90's stock bubble that caused the red peak and subsequent crater. 

The article is about a lot more than the Golden Butterfly. 
Title: Re: 100% stocks in the accumulation phase?
Post by: arebelspy on July 26, 2016, 10:46:52 PM
I didn't miss that chart, it was right under the ones I was talking about.

I have a really hard time seeing those lines.  Can you do a solid color for TSM, and another for GB, and not worry about fading them, or other portfolios, or whatever, and just look at GB v TSM for 30-year accumulation?

And, FWIW, I didn't address that part, but I think that is even more deceptive than the y-axis shenanigans.

Quote
But surely that extra risk is rewarded in the end ó right?  Not necessarily.  Hereís what they all look like on the same chart
...
In year 30, thereís a $600k spread in historic outcomes for the stock market based simply on when you were lucky enough to start investing.  For the Cowardís Portfolio, itís about $500k ó overlapping most of the stock outcomes, but notably leaving out any of the temporary euphoric highs and subsequent drops of the 90ís stock bubble.  And the Golden Butterfly had a remarkably low spread of only $100k while still competing with stock market gains much more closely than one would expect from a portfolio with only 40% stocks.

When you say there's a 600k spread in outcomes for TSM versus 100k for GB, it makes TSM sound really bad.. but you neglect to mention the most important part: even the LOWEST of those TSMs are about equal to the HIGHEST of those GBs.  In other words, that 600k spread sounds really bad, but almost of that spread is above the GB results.

In fact, you start with a question "But surely that extra risk is rewarded in the end ó right?  Not necessarily." -- but it pretty much IS rewarded in the end, in almost every scenario.

I love much of your analysis, Tyler, but I think you've gotten a little blinded by GB and a lot of the analysis can be a bit biased nowadays versus your earlier commentary.

If this article was about investing on a 10-year timeframe, I think you'd have a decent point. And it may be more relevant for the ER folks.  But it seems apparent to me, based on that y-axis, that for 30 years, TSM beats GB basically every time.
Title: Re: 100% stocks in the accumulation phase?
Post by: Tyler on July 26, 2016, 11:43:55 PM
And, FWIW, I didn't address that part, but I think that is even more deceptive than the y-axis shenanigans.

When you say there's a 600k spread in outcomes for TSM versus 100k for GB, it makes TSM sound really bad.. but you neglect to mention the most important part: even the LOWEST of those TSMs are about equal to the HIGHEST of those GBs.  In other words, that 600k spread sounds really bad, but almost of that spread is above the GB results.

With respect...

I supplied a chart with all three portfolios overlayed on the same scale, and the relative accumulation of the portfolios is there for everyone to see.  I understand you have trouble reading it, and I appreciate you pointing that out.  I'll look into improving it.  The charts in question are in a section discussing dependability, not maximization, but I included the overlayed chart specifically so there would be no confusion with the terminal values and I directly addressed the stock upside.  The article is about so much more than that.

There are no shenanigans, and the GB is not at all the focus.  We have an entire thread for arguing about that.  ;)
Title: Re: 100% stocks in the accumulation phase?
Post by: Radagast on July 27, 2016, 12:22:34 AM
I agree with ARS that a very high allocation to stocks is most likely to result in the best outcome for accumulators. Adding other assets reduces the spread of outcomes, but the reduction has been more likely to occur on the high end instead of the low end unless the assets are chosen very carefully, and then only rarely. "Cash" and other tame investments have been especially detrimental. Either way the allocation to stocks vs. other assets seems to be the dominant factor for an accumulator, with higher stock allocations almost always resulting in more money. However, the GB and other portfolios with "tame" or non-correlated assets seem clearly better than 100% stocks for people siphoning money away instead adding it. So, ARS, you might want to rethink your allocation if you are subtracting from your stock funds rather than adding.

It boils down to this: volatility is almost always good for accumulators and bad for withdraw-ors.
Title: Re: 100% stocks in the accumulation phase?
Post by: steveo on July 27, 2016, 12:24:05 AM
I completely agree with Tyler points on the accumulation phase. I think the goal shouldn't be to get rich quickest or to end up with the most.

In stating that if you are cool with 100% stocks and the implications of that asset allocation go for it.

At the same time I have a massive fear that people that use Tyler's site and backtest possible asset allocations don't realise that the future will be different to the past. I'm much more a fan of picking a simple asset allocation and sticking with that.
Title: Re: 100% stocks in the accumulation phase?
Post by: arebelspy on July 27, 2016, 12:41:14 AM
So, ARS, you might want to rethink your allocation if you are subtracting from your stock funds rather than adding.

For me personally, I am adding to my equities positions.

But for those in the accumulation phase in general, TSM seems superior.

Quote
It boils down to this: volatility is almost always good for accumulators and bad for withdraw-ors.

If it comes with upside (as stocks tend to), this seems mostly correct.

Can someone good at photoshop change all the GB lines to one color, all the TSM to another (and not worry about the lighter/darker for more recent year stuff), and superimpose the GB over TSM, with the axis scaled properly?

Original photos:
https://portfoliocharts.files.wordpress.com/2015/07/total-stock-market-accumulation-2016.jpg
https://portfoliocharts.files.wordpress.com/2015/09/golden-butterfly-accumulation-2016.jpg

Still hoping to see this from someone willing and good at photoshop.  :)
Title: Re: 100% stocks in the accumulation phase?
Post by: arebelspy on July 27, 2016, 12:44:19 AM
I completely agree with Tyler points on the accumulation phase. I think the goal shouldn't be to get rich quickest or to end up with the most.

What should the goal during the accumulation phase be then?

(I'm not necessarily saying one of those should be the goal, but curious if you think those aren't it, what it should be.)
Title: Re: 100% stocks in the accumulation phase?
Post by: Tyler on July 27, 2016, 01:05:20 AM
Still hoping to see this from someone willing and good at photoshop.  :)

Does this help?

(http://i66.tinypic.com/24zfax3.jpg)

Red is TSM, blue is Cowards, gold is GB. 
Title: Re: 100% stocks in the accumulation phase?
Post by: arebelspy on July 27, 2016, 01:08:32 AM
That is much more legible, thanks!
Title: Re: 100% stocks in the accumulation phase?
Post by: arebelspy on July 27, 2016, 01:12:27 AM
The posed question of "But surely that extra risk is rewarded in the end ó right?  Not necessarily." and ending with "And the Golden Butterfly had a remarkably low spread of only $100k while still competing with stock market gains much more closely than one would expect from a portfolio with only 40% stocks." still seems like a false conclusion to me.  The GB got roundly beat over the 30-year periods from 1972-2015, for someone accumulating.

That whole paragraph is misleading, IMO.  The conclusion should be that yes, that extra risk paid off after 30 years, nearly every single time.

I'd love to see it as a 10, and maybe even 20 year timeframe, and the discussions of when an accumulator might benefit from GB over certain timeframes, and why they'd prefer it, but with an honest look at TSM and how once you go out 30 years, TSM flat out wins X%  (80? 90?) of the time.

As it is, this article as a whole just seems unbalanced.
Title: Re: 100% stocks in the accumulation phase?
Post by: Tyler on July 27, 2016, 01:46:09 AM
I disagree that anything is misleading, but I appreciate your point.  I reworded that section a bit to eliminate a few statements that are clearly stumbling blocks which unnecessarily distract from my larger point about portfolio dependability.

Thanks for the feedback. 
Title: Re: 100% stocks in the accumulation phase?
Post by: TheAnonOne on July 27, 2016, 09:29:20 AM
The posed question of "But surely that extra risk is rewarded in the end ó right?  Not necessarily." and ending with "And the Golden Butterfly had a remarkably low spread of only $100k while still competing with stock market gains much more closely than one would expect from a portfolio with only 40% stocks." still seems like a false conclusion to me.  The GB got roundly beat over the 30-year periods from 1972-2015, for someone accumulating.

That whole paragraph is misleading, IMO.  The conclusion should be that yes, that extra risk paid off after 30 years, nearly every single time.

I'd love to see it as a 10, and maybe even 20 year timeframe, and the discussions of when an accumulator might benefit from GB over certain timeframes, and why they'd prefer it, but with an honest look at TSM and how once you go out 30 years, TSM flat out wins X%  (80? 90?) of the time.

As it is, this article as a whole just seems unbalanced.

Similar conclusion on my end as well.

In this, and other research, that I have done, the TSM approach basically wins as soon as the investor passes through any 1 singular bull market. Even with the subsequent crash (if any, but mainly talking about 2000) they still end up over the bond/gold heavy portfolios for basically... the rest of time.
Title: Re: 100% stocks in the accumulation phase?
Post by: Cycling Stache on July 27, 2016, 09:46:15 AM
I think the goal shouldn't be to get rich quickest or to end up with the most.

That's exactly what the goal should be.  The more quickly you get to FI, the more quickly you move on with the rest of your life.  This is (mostly) an early retirement blog, after all.

The questions are what additional risk are you taking to get there more quickly, and is that risk worth it.  The answer over a 30-year period--as ARS pointed out pretty clearly--is absolutely when it comes to investing in equities.  TSM may have a larger spread, but almost all of it is upside, and based on net present value based on the various outcomes, the number is way higher.

The issue with the allocation becomes more important when you focus on time frames.  If you're 5 years (you hope) from your FI number based on a more conservative portfolio than 100% equities, then the potential downside risk of investing in 100% equities to try to get there in 4 years or 4.5 years might not be worth it.  But I think many people who have jobs probably do think in terms of being willing to work until whenever they get to their number, then stop.  So the downside risk isn't as significant as AFTER leaving the job (where portfolio allocation would matter more) because people really can and will work until they get to their number, and take on the extra risk of 100% equities in order to get there faster.

After you retire, you need to care more about allocations because of the increased difficulty of adding new income (compared to when you were already working).

I think the one point working against ARS's analysis is that the 30-year timeline is (hopefully) not that realistic for most of the people on this blog, so considering the volatility/increased risk of 10-15 year time frames might make more sense.  But I still bet most people would take the risk of 100% equities to get to their number more quickly while they have a job and are working, given the ability to keep working until they hit the number if the downside risk plays out.

And finally--and importantly, given the many posts on investor alley--this all depends on the ability to stick to the plan and not react to the markets, which many people do seem to struggle with when the likes of Brexit and a 5% move triggers numerous, multi-page "what should we do now" threads.
Title: Re: 100% stocks in the accumulation phase?
Post by: Kaspian on July 27, 2016, 09:58:09 AM
I completely agree with Tyler points on the accumulation phase. I think the goal shouldn't be to get rich quickest or to end up with the most.

What should the goal during the accumulation phase be then?

(I'm not necessarily saying one of those should be the goal, but curious if you think those aren't it, what it should be.)

Personally, it's to set a reasonable expectation for rate of return, stick to that, and hopefully it pans out to historic averages.  My goal (plan in Personal Investment Policy) is to theoretically get 5-7% returns over the long-term, not to "win".   It sounds like striving for mediocrity, but that's sort of what index investing is anyway.  I need to make a good soup, not the best soup in the fucking universe.  :D

Also, terribly afraid that people overestimate their courage levels.  ...In the same way people do their own driving abilities.  Everyone is above average.  It's easy to say you're not afraid of sharks if you're still standing in the boat.  Having invested through the Dot COM crash and 2008, I know my own bravery levels.  A lot of those guys who committed suicide during the crashes?  Yeah, they *thought* they had a "high risk tolerance".  :(
Title: Re: 100% stocks in the accumulation phase?
Post by: Retire-Canada on July 27, 2016, 10:22:40 AM
That's exactly what the goal should be.  The more quickly you get to FI, the more quickly you move on with the rest of your life.  This is (mostly) an early retirement blog, after all.

Agreed.

I'm in the accumulation phase and I am 100% stocks, but not 100% US stocks. I'd rather have higher volatility/higher returns now than lower volatility/lower returns since I have no need of the $$ I have invested and can ride out any crash. I didn't freak out in 2008 and I am much better informed now so I think I can handle a major paper value loss without doing something stupid.

Once I FIRE I will care about stability more as I'll need $$ every year. However, even then my goal would only be to have a stable portion of my portfolio that would cover me for say 5 years of living expenses to ride out a market downturn. So that would be something like $100K - $150K depending how I was feeling about doing some PT work. Out of a portfolio that will be in the $750K - $1M range that means the majority will still be in stocks.
Title: Re: 100% stocks in the accumulation phase?
Post by: bryan on July 27, 2016, 12:33:17 PM
Still hoping to see this from someone willing and good at photoshop.  :)

Does this help?

(http://i66.tinypic.com/24zfax3.jpg)

Red is TSM, blue is Cowards, gold is GB.

Would be nice to be able to specify x/y scale, or rather where the axis stops. Effectively it would be nice to reduce the 30 year scale/sample to 4-15 years for folks with higher savings rates so we can really see the effects more clearly.

Same issue (can't customize axis, scale, sample) for some calculators, so they aren't as visually helpful on certain cases (like firetime calc where you just need 4 years to go, everything is bunched up to the left and goes off graph quickly).
Title: Re: 100% stocks in the accumulation phase?
Post by: Tyler on July 27, 2016, 12:57:36 PM
Would be nice to be able to specify x/y scale, or rather where the axis stops. Effectively it would be nice to reduce the 30 year scale/sample to 4-15 years for folks with higher savings rates so we can really see the effects more clearly.

Same issue (can't customize axis, scale, sample) for some calculators, so they aren't as visually helpful on certain cases (like firetime calc where you just need 4 years to go, everything is bunched up to the left and goes off graph quickly).

Good idea!  I'll have to experiment a bit to find a way to adjust the various scales on the fly (the online service I use strips out VBA so not all solutions work).  I agree it would be a nice feature for certain charts.
Title: Re: 100% stocks in the accumulation phase?
Post by: arebelspy on July 27, 2016, 03:10:47 PM
I think the one point working against ARS's analysis is that the 30-year timeline is (hopefully) not that realistic for most of the people on this blog, so considering the volatility/increased risk of 10-15 year time frames might make more sense.  But I still bet most people would take the risk of 100% equities to get to their number more quickly while they have a job and are working, given the ability to keep working until they hit the number if the downside risk plays out.

Indeed.  Like I said earlier, I think an article on this same topic, looking at a 10 or 20 year time frame would be interesting.  But if the conclusion for 30 years wasn't "TSM wins over 30 years," it's hard to know how balanced that discussion over a shorter time frame will be.  Tyler clearly has different priorities for his portfolio than a lot of us, which is fine (and I like reading the different perspective), but then it tilts the articles that way.  I'd still like to read it though.

But the Bogleheads crowd, who started the topic, likely have a 30+ year accumulation period (they aren't so much into ER), so that article may be more relevant to them anyways.  We're the weird ones with 10-20 year timeframes.

I do think the "Time to FI" calculators are really, really useful for us, and often show TSM is not optimal for someone wanting to FIRE as quick as possible, as reliably as possible.
Title: Re: 100% stocks in the accumulation phase?
Post by: steveo on July 27, 2016, 04:24:45 PM
I completely agree with Tyler points on the accumulation phase. I think the goal shouldn't be to get rich quickest or to end up with the most.

What should the goal during the accumulation phase be then?

(I'm not necessarily saying one of those should be the goal, but curious if you think those aren't it, what it should be.)

The goal during the accumulation and the drawdown phase should be to achieve the best risk adjusted return. If the only goal is to be the richest or get there the quickest there is a chance that you will end up losing money at a time when you can't afford too. Same as in the drawdown phase. You need to be looking at potential negative investment returns as well as potential positive investment returns.
Title: Re: 100% stocks in the accumulation phase?
Post by: steveo on July 27, 2016, 04:29:44 PM
That whole paragraph is misleading, IMO.  The conclusion should be that yes, that extra risk paid off after 30 years, nearly every single time.

I'd love to see it as a 10, and maybe even 20 year timeframe, and the discussions of when an accumulator might benefit from GB over certain timeframes, and why they'd prefer it, but with an honest look at TSM and how once you go out 30 years, TSM flat out wins X%  (80? 90?) of the time.

You have to take everything into account. This is where a 100% TSM approach can fall apart. I'm 43 now. I've only just paid off my house at the start of this year. I figure I have 4-5 years and then I'm FI. So due to my circumstances (I'm Australian and we have crazy house prices) my accumulation phase won't really be 30 years. It will basically be about 5 years although I have accumulated some old man money prior to paying off my house. In my opinion my accumulation asset allocation and my drawdown asset allocation should be exactly the same or maybe better put I don't see investment returns as being a driving factor in getting my FI money. My FI money will be based predominantly on the amount of money I save.
Title: Re: 100% stocks in the accumulation phase?
Post by: steveo on July 27, 2016, 04:30:56 PM
I think the goal shouldn't be to get rich quickest or to end up with the most.

That's exactly what the goal should be.

I just answered this. I still don't see it as being as simple as what some of you are making out.
Title: Re: 100% stocks in the accumulation phase?
Post by: steveo on July 27, 2016, 04:32:55 PM
I completely agree with Tyler points on the accumulation phase. I think the goal shouldn't be to get rich quickest or to end up with the most.

What should the goal during the accumulation phase be then?

(I'm not necessarily saying one of those should be the goal, but curious if you think those aren't it, what it should be.)

Personally, it's to set a reasonable expectation for rate of return, stick to that, and hopefully it pans out to historic averages.  My goal (plan in Personal Investment Policy) is to theoretically get 5-7% returns over the long-term, not to "win".   It sounds like striving for mediocrity, but that's sort of what index investing is anyway.  I need to make a good soup, not the best soup in the fucking universe.  :D

Also, terribly afraid that people overestimate their courage levels.  ...In the same way people do their own driving abilities.  Everyone is above average.  It's easy to say you're not afraid of sharks if you're still standing in the boat.  Having invested through the Dot COM crash and 2008, I know my own bravery levels.  A lot of those guys who committed suicide during the crashes?  Yeah, they *thought* they had a "high risk tolerance".  :(

100% correct. Mediocre is just fine with me. I don't want the best. That is why I'm not really interested in backtesting a bunch of different asset allocations. I'll just pick something that I'm comfortable will do okay and stick with that.

Although I'm interested in asset allocation and savings and all the rest of it I figure money is something that you get right and then you forget about it. Some people will get better returns than me but I don't care.
Title: Re: 100% stocks in the accumulation phase?
Post by: Tyler on July 27, 2016, 04:59:47 PM
Tyler clearly has different priorities for his portfolio than a lot of us, which is fine (and I like reading the different perspective), but then it tilts the articles that way.

Oh -- I definitely have a point of view!  People don't read MMM for balanced stories on the benefits of corporate life.  ;)  While I absolutely strive to be factual and open-minded, true balance comes from multiple voices, not just one.  Don't just take my word for it!  I wholeheartedly endorse comparing and contrasting my opinions with JLCollins, Jason Fieber (Dividend Mantra), and other smart people with very different investing approaches (including arebelspy with his real estate expertise!) to find what resonates with you. 

Speaking of multiple voices, this one's for you and Bryan.  Discuss.

(http://i63.tinypic.com/2vunfbm.jpg)
(edited to fix incorrect description)
Title: Re: 100% stocks in the accumulation phase?
Post by: arebelspy on July 27, 2016, 05:00:44 PM
That whole paragraph is misleading, IMO.  The conclusion should be that yes, that extra risk paid off after 30 years, nearly every single time.

I'd love to see it as a 10, and maybe even 20 year timeframe, and the discussions of when an accumulator might benefit from GB over certain timeframes, and why they'd prefer it, but with an honest look at TSM and how once you go out 30 years, TSM flat out wins X%  (80? 90?) of the time.

You have to take everything into account. This is where a 100% TSM approach can fall apart. I'm 43 now. I've only just paid off my house at the start of this year. I figure I have 4-5 years and then I'm FI. So due to my circumstances (I'm Australian and we have crazy house prices) my accumulation phase won't really be 30 years. It will basically be about 5 years although I have accumulated some old man money prior to paying off my house. In my opinion my accumulation asset allocation and my drawdown asset allocation should be exactly the same or maybe better put I don't see investment returns as being a driving factor in getting my FI money. My FI money will be based predominantly on the amount of money I save.

Of course.  And we'd all agree with that.  But in this instance, we're talking about a 30-year accumulation period.  We're not talking about your particular circumstance (which none of us necessarily even knew).  Reread what I wrote that you quoted.

That whole paragraph is misleading, IMO.  The conclusion should be that yes, that extra risk paid off after 30 years, nearly every single time.

I'd love to see it as a 10, and maybe even 20 year timeframe, and the discussions of when an accumulator might benefit from GB over certain timeframes, and why they'd prefer it, but with an honest look at TSM and how once you go out 30 years, TSM flat out wins X%  (80? 90?) of the time.

On your five-year timeframe, certainly giving up some return in exchange for less volatility may be desirable.  But on a 30-year timeframe?  That's what's in question here.
Title: Re: 100% stocks in the accumulation phase?
Post by: arebelspy on July 27, 2016, 05:12:47 PM
Oh -- I definitely have a point of view!  People don't read MMM for balanced stories on the benefits of corporate life.  ;)  While I absolutely strive to be factual and open-minded, true balance comes from multiple voices, not just one.  Don't just take my word for it!  I wholeheartedly endorse comparing and contrasting my opinions with JLCollins, Dividend Mantra, and other smart people with very different investing approaches (including arebelspy with his real estate expertise!) to find what resonates with you. 

Definitely.  I just didn't realize, til this article, what your perspective was.  I previously thought it was to encourage people to look beyond the 60/40 standard portfolio to other asset classes, and give an honest evaluation towards where each might be better, and when one might prefer one over the other.  It seems like that's just part of it, but moreso to argue for and convince people that other ones are better than simple stocks, in nearly all cases.  In other words, I thought it was a more impartial look at all asset allocations to determine the best one(s) for different individuals, but this past article made it seem more like advocating for and against certain ones.  I think the bias just came out in this one, because TSM seems better in almost every 30-year period in your backtest timeframe, but it's mostly put down, which just seemed odd.  To me it'd seem like a pretty clear case of "yup, here's one of the few times TSM may be better."  Just how I read it.  :)

Quote
Speaking of multiple voices, this one's for you and Bryan.  Discuss.
(http://i65.tinypic.com/15nog0h.jpg)

Interesting.  15 year accumulation is certainly not as clear cut as 30 years .. I think I'd still personally pick TSM over GB (if those were the only two portfolios that existed), but I can definitely see why others wouldn't, especially if they like to constantly check the value of their holdings, and if they get bad feelings if that number goes down (strong loss aversion).
Title: Re: 100% stocks in the accumulation phase?
Post by: Tyler on July 27, 2016, 05:38:49 PM
Definitely.  I just didn't realize, til this article, what your perspective was.  I previously thought it was to encourage people to look beyond the 60/40 standard portfolio to other asset classes, and give an honest evaluation towards where each might be better, and when one might prefer one over the other.  It seems like that's just part of it, but moreso to argue for and convince people that other ones are better than simple stocks, in nearly all cases.  In other words, I thought it was a more impartial look at all asset allocations to determine the best one(s) for different individuals, but this past article made it seem more like advocating for and against certain ones.  I think the bias just came out in this one, because TSM seems better in almost every 30-year period in your backtest timeframe, but it's mostly put down, which just seemed odd.  To me it'd seem like a pretty clear case of "yup, here's one of the few times TSM may be better."  Just how I read it.  :)

Fair enough.  I definitely put a stake down from the start in this particular article to present the argument for thinking beyond stocks.  A lot of that is because of the way the Bogleheads post that posed the question was worded, but I fully admit to having a slant towards the benefits of diversification*.  I genuinely feel it can help a lot of people in ways that are rarely talked about outside of academic circles.  And let's be honest -- my calculators with only two or three funds would be pretty boring!  ;)  In all seriousness, I've learned a lot in the process of exploring the nuances of portfolio theory and the site is my way of sharing what I've learned (and continue to learn) with others. 

(*) Despite the perception people might have from the concentration of posts on this particular forum, however, I'm honestly not biased towards the Golden Butterfly.  I think any of the other portfolios on the site are great options, and I am more than happy to talk about the pluses and minuses of each to help you find one that works for you.  I'd love it if people had more questions about Swensen, Ivy, and all of the other interesting options! 

That said, as a personal challenge to keep myself honest I do have a fun post idea I'm tossing around.  If stock funds were my only option, what portfolio would I choose?  I'm still considering the various ways to approach that problem. 

Title: Re: 100% stocks in the accumulation phase?
Post by: arebelspy on July 27, 2016, 05:45:30 PM
That said, as a personal challenge to keep myself honest I do have a fun post idea I'm tossing around.  If stock funds were my only option, what portfolio would I choose?  I'm still tossing around the various ways to approach that problem.

Hmm, that's interesting.  I guess my first question would be to figure out how to avoid a backtesting problem (e.g. "small caps have done better, so that's what I choose")?
Title: Re: 100% stocks in the accumulation phase?
Post by: bryan on July 27, 2016, 06:29:44 PM

Quote
Speaking of multiple voices, this one's for you and Bryan.  Discuss.
(http://i63.tinypic.com/2vunfbm.jpg)
(edited to fix incorrect description)

Interesting.  15 year accumulation is certainly not as clear cut as 30 years .. I think I'd still personally pick TSM over GB (if those were the only two portfolios that existed), but I can definitely see why others wouldn't, especially if they like to constantly check the value of their holdings, and if they get bad feelings if that number goes down (strong loss aversion).

Cool. Tyler, are these 15 year samples as well, or still 30 year? i.e. are there ~13 lines for each or ~28?

I realize now I've already made a tangential comment on this sort of thing: http://forum.mrmoneymustache.com/investor-alley/betterment-45192/msg844484/#msg844484

Basically that the faster you get to FIRE, the less asset allocation even matters (duh). Here are two charts customized for the question at hand (anyone can go in and modify and re-run, if you find $80k too crazy etc):
- TSM : https://www.portfoliovisualizer.com/monte-carlo-simulation?s=y&initialAmount=250000&annualOperation=1&yearlyWithdrawal=80000&inflationAdjusted=true&yearlyPercentage=4.0&lifeExpectancyModel=0&currentAge=70&years=5&simulationModel=2&fullHistory=true&startYear=1972&endYear=2014&bootstrapModel=1&bootstrapMinYears=1&bootstrapMaxYears=20&circularBootstrap=true&distribution=1&meanReturn=7.0&volatility=12.0&inflationModel=1&inflationMean=4.26&inflationVolatility=3.13&asset1=TotalStockMarket&allocation1_1=100&asset2=IntlStockMarket&allocation2_1=0&asset3=TotalBond&allocation3_1=0&asset4=Commodities&allocation4_1=0&asset5=REIT&allocation5_1=0
- GB : https://www.portfoliovisualizer.com/monte-carlo-simulation?s=y&initialAmount=250000&annualOperation=1&yearlyWithdrawal=80000&inflationAdjusted=true&yearlyPercentage=4.0&lifeExpectancyModel=0&currentAge=70&years=5&simulationModel=2&fullHistory=true&startYear=1972&endYear=2014&bootstrapModel=1&bootstrapMinYears=1&bootstrapMaxYears=20&circularBootstrap=true&distribution=1&meanReturn=7.0&volatility=12.0&inflationModel=1&inflationMean=4.26&inflationVolatility=3.13&asset1=LargeCapValue&allocation1_1=20&asset2=SmallCapValue&allocation2_1=20&asset3=LongTermBond&allocation3_1=20&asset4=TwoYearTBills&allocation4_1=20&asset5=Gold&allocation5_1=20

Even lacking https://portfoliocharts.com/calculators/ niceties which help visually deciding, GB seems nice. If you don't plan to FIRE for 30 years, CAGR probably means more to you?

Though this introduces the idea that maybe you don't have a single asset allocation your entire life, but rather have a glidepath or optimum portfolio in a given situation... it's not timing the market, it's timing your own situation! (and possibly exposing yourself more to some demographic/macro risks)

That said, as a personal challenge to keep myself honest I do have a fun post idea I'm tossing around.  If stock funds were my only option, what portfolio would I choose?  I'm still tossing around the various ways to approach that problem.

Hmm, that's interesting.  I guess my first question would be to figure out how to avoid a backtesting problem (e.g. "small caps have done better, so that's what I choose")?

Yeah.. you have to throw out the best back-testing portfolio with reasoning like "well that surely can't last forever," until eventually you've added enough diversification that you are comfortable. Same issue some people have with holding gold, I think. So the reasonable solution is figuring out some interesting limitation options at the outset (min/max % holding, take advantage of some tax efficiency, must include certain classes of assets, etc). I guess this is how most of the porfolios on https://portfoliocharts.com/portfolios/ were created. So indeed, I would be interested to see how Tyler approaches it.
Title: Re: 100% stocks in the accumulation phase?
Post by: Tyler on July 27, 2016, 07:15:48 PM
Cool. Tyler, are these 15 year samples as well, or still 30 year? i.e. are there ~13 lines for each or ~28?

They're the same previous chart, but cropped at 3 years on the low end and 15 on the high.  It's hard to make out because of the density, but each portfolio actually has 42 lines -- 30 complete runs to 15 years, and every run 14 years down to 3.  I like showing even the shorter lines to illustrate when recent periods break from historical norms. 
Title: Re: 100% stocks in the accumulation phase?
Post by: steveo on July 27, 2016, 08:09:36 PM
That whole paragraph is misleading, IMO.  The conclusion should be that yes, that extra risk paid off after 30 years, nearly every single time.

I'd love to see it as a 10, and maybe even 20 year timeframe, and the discussions of when an accumulator might benefit from GB over certain timeframes, and why they'd prefer it, but with an honest look at TSM and how once you go out 30 years, TSM flat out wins X%  (80? 90?) of the time.

You have to take everything into account. This is where a 100% TSM approach can fall apart. I'm 43 now. I've only just paid off my house at the start of this year. I figure I have 4-5 years and then I'm FI. So due to my circumstances (I'm Australian and we have crazy house prices) my accumulation phase won't really be 30 years. It will basically be about 5 years although I have accumulated some old man money prior to paying off my house. In my opinion my accumulation asset allocation and my drawdown asset allocation should be exactly the same or maybe better put I don't see investment returns as being a driving factor in getting my FI money. My FI money will be based predominantly on the amount of money I save.

Of course.  And we'd all agree with that.  But in this instance, we're talking about a 30-year accumulation period.  We're not talking about your particular circumstance (which none of us necessarily even knew).  Reread what I wrote that you quoted.

That whole paragraph is misleading, IMO.  The conclusion should be that yes, that extra risk paid off after 30 years, nearly every single time.

I'd love to see it as a 10, and maybe even 20 year timeframe, and the discussions of when an accumulator might benefit from GB over certain timeframes, and why they'd prefer it, but with an honest look at TSM and how once you go out 30 years, TSM flat out wins X%  (80? 90?) of the time.

On your five-year timeframe, certainly giving up some return in exchange for less volatility may be desirable.  But on a 30-year timeframe?  That's what's in question here.

I agree. I even said earlier (I think) that so long as you are comfortable with a 100% stock allocation you should go for it.

Still we are all in a similar situation. Is it really about getting the best possible return - i.e. the maximum return or is it about getting the best risk adjusted return. I still think it's about the best risk adjusted return.

My portfolio needs to last 30 years so should I go 100% stocks. That should provide the best returns shouldn't it.

I think that it should also be about sleeping well at night.
Title: Re: 100% stocks in the accumulation phase?
Post by: steveo on July 27, 2016, 08:12:07 PM
Definitely.  I just didn't realize, til this article, what your perspective was.  I previously thought it was to encourage people to look beyond the 60/40 standard portfolio to other asset classes, and give an honest evaluation towards where each might be better, and when one might prefer one over the other.  It seems like that's just part of it, but moreso to argue for and convince people that other ones are better than simple stocks, in nearly all cases.  In other words, I thought it was a more impartial look at all asset allocations to determine the best one(s) for different individuals, but this past article made it seem more like advocating for and against certain ones.  I think the bias just came out in this one, because TSM seems better in almost every 30-year period in your backtest timeframe, but it's mostly put down, which just seemed odd.  To me it'd seem like a pretty clear case of "yup, here's one of the few times TSM may be better."  Just how I read it.  :)

Fair enough.  I definitely put a stake down from the start in this particular article to present the argument for thinking beyond stocks.  A lot of that is because of the way the Bogleheads post that posed the question was worded, but I fully admit to having a slant towards the benefits of diversification*.  I genuinely feel it can help a lot of people in ways that are rarely talked about outside of academic circles.  And let's be honest -- my calculators with only two or three funds would be pretty boring!  ;)  In all seriousness, I've learned a lot in the process of exploring the nuances of portfolio theory and the site is my way of sharing what I've learned (and continue to learn) with others. 

(*) Despite the perception people might have from the concentration of posts on this particular forum, however, I'm honestly not biased towards the Golden Butterfly.  I think any of the other portfolios on the site are great options, and I am more than happy to talk about the pluses and minuses of each to help you find one that works for you.  I'd love it if people had more questions about Swensen, Ivy, and all of the other interesting options! 

That said, as a personal challenge to keep myself honest I do have a fun post idea I'm tossing around.  If stock funds were my only option, what portfolio would I choose?  I'm still considering the various ways to approach that problem.

I disagree with your perception on what I consider micro-managing portfolio theory and I disagree with portfolios like the PP or the GB which I think you favour however I think it's good that you state an opinion.
Title: Re: 100% stocks in the accumulation phase?
Post by: Tyler on July 27, 2016, 08:33:39 PM
I disagree with your perception on what I consider micro-managing portfolio theory and I disagree with portfolios like the PP or the GB which I think you favour however I think it's good that you state an opinion.

Yeah, I admit there's no escaping my sweet spot for the PP.  Readers of "Fail Safe Investing" will even recognize Harry Browne's influence at the very end of the "Thinking Beyond Stocks" post that's the subject of this thread.

I've used it for many years, and always enjoy talking about it.  The core fundamentals that make the PP tick are really modern portfolio theory in a nutshell, and it's what got me interested in the subject to begin with.  But I certainly am under no illusions that it's the best choice for everyone. 
Title: Re: 100% stocks in the accumulation phase?
Post by: arebelspy on July 27, 2016, 08:42:35 PM
My portfolio needs to last 30 years so should I go 100% stocks. That should provide the best returns shouldn't it.

Mine needs to last 60 years, maybe longer, and picking something that has underperformed every single time historically over that timeframe adds a lot of risk to it not making it.  It's not about "best returns" for its own sake, but for the sake of ER success.

I think that it should also be about sleeping well at night.

Definitely.  But the neat thing about that, is you can LEARN to live with volatility.  You can psychologically prepare yourself, and (for free!) be able to deal with it.  But you can't "learn" to deal with a portfolio that just didn't grow enough, and left you without enough, sadly.  So it is a real--and big--deal. 

Certainly sleep at night is one important thing.  And oversaving and going with a portfolio that underperforms, but at the tradeoff of less volatility is one solution. Then you can choose that portfolio, and accept that tradeoff.  But if you don't KNOW that's the tradeoff, if you're told this alternate portfolio is "nearly as good in CAGR" and this portfolio is constantly argued as the best in all scenarios, maybe you don't realize and save enough to compensate for that underperformance.  And then you're in trouble.
Title: Re: 100% stocks in the accumulation phase?
Post by: Shane on July 27, 2016, 09:13:27 PM
^+1

People need to just get over their hang ups. Volatility ≠ risk. If you can't deal with volatility, that's your problem, not a problem with TSM. It's possible to educate yourself to understand that volatility is inevitable when investing in TSM, and just learn to accept it, rather than working so hard to come up with convoluted "diversified" portfolios that underperform TSM and require working decades longer to hit the same numbers.
Title: Re: 100% stocks in the accumulation phase?
Post by: bryan on July 27, 2016, 10:47:16 PM
My portfolio needs to last 30 years so should I go 100% stocks. That should provide the best returns shouldn't it.

Mine needs to last 60 years, maybe longer, and picking something that has underperformed every single time historically over that timeframe adds a lot of risk to it not making it.  It's not about "best returns" for its own sake, but for the sake of ER success.

I think that it should also be about sleeping well at night.

Definitely.  But the neat thing about that, is you can LEARN to live with volatility.  You can psychologically prepare yourself, and (for free!) be able to deal with it.  But you can't "learn" to deal with a portfolio that just didn't grow enough, and left you without enough, sadly.  So it is a real--and big--deal. 

Certainly sleep at night is one important thing.  And oversaving and going with a portfolio that underperforms, but at the tradeoff of less volatility is one solution. Then you can choose that portfolio, and accept that tradeoff.  But if you don't KNOW that's the tradeoff, if you're told this alternate portfolio is "nearly as good in CAGR" and this portfolio is constantly argued as the best in all scenarios, maybe you don't realize and save enough to compensate for that underperformance.  And then you're in trouble.
^+1

People need to just get over their hang ups. Volatility ≠ risk. If you can't deal with volatility, that's your problem, not a problem with TSM. It's possible to educate yourself to understand that volatility is inevitable when investing in TSM, and just learn to accept it, rather than working so hard to come up with convoluted "diversified" portfolios that underperform TSM and require working decades longer to hit the same numbers.


TSM is actually pretty average (above average with Vanguard etc) as far as portfolio returns go. Or so I was lead to believe; can't find a link to the picture of TSM being firmly in the middle of the CAGR cloud of asset allocation options. That's basically the point, right? Pretty amazing actually.. efficient markets and all that I guess.

If you two are true to your words, why aren't you both in 100% SCV or I-EM?!

Probably because you have expenses and must sell assets at some point. This means you are exposed to (extended) down year risks and tail risk.

Pretty crazy to want the .1% CAGR improvement of TSM over GB for the increased risks. I would hate it if (relevant to OP) I had to work for 7 extra years because I am in TSM instead of GB and just ended up with bad timing. Maybe it's just risk tolerance that others just prefer to roll the dice with TSM instead of having a more complex portfolio?

See the start-date-sensitivity as well:
https://portfoliocharts.com/portfolio/golden-butterfly/
https://portfoliocharts.com/portfolio/total-stock-market/
(scroll to the bottom)
or compare directly from what Tyler already shared: https://portfoliocharts.com/2016/07/25/thinking-beyond-stocks-can-fortify-your-accumulation-plan/

@Tyler, are the CAGR reported on your site median or average (heat map)? Or am I a newb and thinking of it wrong..
Title: Re: 100% stocks in the accumulation phase?
Post by: steveo on July 28, 2016, 02:16:55 AM
My portfolio needs to last 30 years so should I go 100% stocks. That should provide the best returns shouldn't it.

Mine needs to last 60 years, maybe longer, and picking something that has underperformed every single time historically over that timeframe adds a lot of risk to it not making it.  It's not about "best returns" for its own sake, but for the sake of ER success.

I think that it should also be about sleeping well at night.

Definitely.  But the neat thing about that, is you can LEARN to live with volatility.  You can psychologically prepare yourself, and (for free!) be able to deal with it.  But you can't "learn" to deal with a portfolio that just didn't grow enough, and left you without enough, sadly.  So it is a real--and big--deal. 

Certainly sleep at night is one important thing.  And oversaving and going with a portfolio that underperforms, but at the tradeoff of less volatility is one solution. Then you can choose that portfolio, and accept that tradeoff.  But if you don't KNOW that's the tradeoff, if you're told this alternate portfolio is "nearly as good in CAGR" and this portfolio is constantly argued as the best in all scenarios, maybe you don't realize and save enough to compensate for that underperformance.  And then you're in trouble.

I basically agree with all of this. My only proviso is the volatility part of your argument. I think most people probably need some safe money to handle downturns.
Title: Re: 100% stocks in the accumulation phase?
Post by: steveo on July 28, 2016, 02:18:45 AM
My portfolio needs to last 30 years so should I go 100% stocks. That should provide the best returns shouldn't it.

Mine needs to last 60 years, maybe longer, and picking something that has underperformed every single time historically over that timeframe adds a lot of risk to it not making it.  It's not about "best returns" for its own sake, but for the sake of ER success.

I think that it should also be about sleeping well at night.

Definitely.  But the neat thing about that, is you can LEARN to live with volatility.  You can psychologically prepare yourself, and (for free!) be able to deal with it.  But you can't "learn" to deal with a portfolio that just didn't grow enough, and left you without enough, sadly.  So it is a real--and big--deal. 

Certainly sleep at night is one important thing.  And oversaving and going with a portfolio that underperforms, but at the tradeoff of less volatility is one solution. Then you can choose that portfolio, and accept that tradeoff.  But if you don't KNOW that's the tradeoff, if you're told this alternate portfolio is "nearly as good in CAGR" and this portfolio is constantly argued as the best in all scenarios, maybe you don't realize and save enough to compensate for that underperformance.  And then you're in trouble.
^+1

People need to just get over their hang ups. Volatility ≠ risk. If you can't deal with volatility, that's your problem, not a problem with TSM. It's possible to educate yourself to understand that volatility is inevitable when investing in TSM, and just learn to accept it, rather than working so hard to come up with convoluted "diversified" portfolios that underperform TSM and require working decades longer to hit the same numbers.


TSM is actually pretty average (above average with Vanguard etc) as far as portfolio returns go. Or so I was lead to believe; can't find a link to the picture of TSM being firmly in the middle of the CAGR cloud of asset allocation options. That's basically the point, right? Pretty amazing actually.. efficient markets and all that I guess.

If you two are true to your words, why aren't you both in 100% SCV or I-EM?!

Probably because you have expenses and must sell assets at some point. This means you are exposed to (extended) down year risks and tail risk.

Pretty crazy to want the .1% CAGR improvement of TSM over GB for the increased risks. I would hate it if (relevant to OP) I had to work for 7 extra years because I am in TSM instead of GB and just ended up with bad timing. Maybe it's just risk tolerance that others just prefer to roll the dice with TSM instead of having a more complex portfolio?

See the start-date-sensitivity as well:
https://portfoliocharts.com/portfolio/golden-butterfly/
https://portfoliocharts.com/portfolio/total-stock-market/
(scroll to the bottom)
or compare directly from what Tyler already shared: https://portfoliocharts.com/2016/07/25/thinking-beyond-stocks-can-fortify-your-accumulation-plan/

@Tyler, are the CAGR reported on your site median or average (heat map)? Or am I a newb and thinking of it wrong..

This is what concerns me regarding Tylers site. You can chuck all those variables in but who says it is going to work like that. I bet that it doesn't.

At the same time I think 100% TSM is asking for trouble for most people.
Title: Re: 100% stocks in the accumulation phase?
Post by: steveo on July 28, 2016, 02:19:53 AM
^+1

People need to just get over their hang ups. Volatility ≠ risk. If you can't deal with volatility, that's your problem, not a problem with TSM. It's possible to educate yourself to understand that volatility is inevitable when investing in TSM, and just learn to accept it, rather than working so hard to come up with convoluted "diversified" portfolios that underperform TSM and require working decades longer to hit the same numbers.

This is hyperbole. Most people with a high saving rate will reach their target based upon savings rather than investment returns. TSM is probably more risky because you could get hit at the wrong time.
Title: Re: 100% stocks in the accumulation phase?
Post by: arebelspy on July 28, 2016, 02:26:49 AM
My portfolio needs to last 30 years so should I go 100% stocks. That should provide the best returns shouldn't it.

Mine needs to last 60 years, maybe longer, and picking something that has underperformed every single time historically over that timeframe adds a lot of risk to it not making it.  It's not about "best returns" for its own sake, but for the sake of ER success.

I think that it should also be about sleeping well at night.

Definitely.  But the neat thing about that, is you can LEARN to live with volatility.  You can psychologically prepare yourself, and (for free!) be able to deal with it.  But you can't "learn" to deal with a portfolio that just didn't grow enough, and left you without enough, sadly.  So it is a real--and big--deal. 

Certainly sleep at night is one important thing.  And oversaving and going with a portfolio that underperforms, but at the tradeoff of less volatility is one solution. Then you can choose that portfolio, and accept that tradeoff.  But if you don't KNOW that's the tradeoff, if you're told this alternate portfolio is "nearly as good in CAGR" and this portfolio is constantly argued as the best in all scenarios, maybe you don't realize and save enough to compensate for that underperformance.  And then you're in trouble.

I basically agree with all of this. My only proviso is the volatility part of your argument. I think most people probably need some safe money to handle downturns.

Absolutely.  And a cash buffer I think is a fine way to help you sleep at night.  Much better than an AA that underperforms in the long run (which your ER likely will be), IMO.  But to each his own.  :)
Title: Re: 100% stocks in the accumulation phase?
Post by: mathjak107 on July 28, 2016, 03:50:30 AM
as i said in another thread :

when it comes to an accumulation stage which can span decades ,   looking for ways to cut temporary short term volatility in downturns ends up costing you permanent long term gains .

the logic of trying to reduce a temporary situation which is likely irrelevant over the long term   and permanently effect the long term outcome is not the greatest idea for growing money  .

unless you lack pucker factor or have time constraints on the money , an answer to a temporary problem that may have little or no long term ramifications and  reduces long term  results makes little sense to me .


sure , i can see it for those who are somewhat risk sensitive  , i get that . but for the rest  this logic of mitigating volatility never made much sense to me when it is usually a temporary situation  .

the only time it mattered is a few years before i retired so at that point we reduced volatility . i try to maintain beta at about 40% the volatility of the s&p 500 now .








Title: Re: 100% stocks in the accumulation phase?
Post by: steveo on July 28, 2016, 06:31:34 AM
My portfolio needs to last 30 years so should I go 100% stocks. That should provide the best returns shouldn't it.

Mine needs to last 60 years, maybe longer, and picking something that has underperformed every single time historically over that timeframe adds a lot of risk to it not making it.  It's not about "best returns" for its own sake, but for the sake of ER success.

I think that it should also be about sleeping well at night.

Definitely.  But the neat thing about that, is you can LEARN to live with volatility.  You can psychologically prepare yourself, and (for free!) be able to deal with it.  But you can't "learn" to deal with a portfolio that just didn't grow enough, and left you without enough, sadly.  So it is a real--and big--deal. 

Certainly sleep at night is one important thing.  And oversaving and going with a portfolio that underperforms, but at the tradeoff of less volatility is one solution. Then you can choose that portfolio, and accept that tradeoff.  But if you don't KNOW that's the tradeoff, if you're told this alternate portfolio is "nearly as good in CAGR" and this portfolio is constantly argued as the best in all scenarios, maybe you don't realize and save enough to compensate for that underperformance.  And then you're in trouble.

I basically agree with all of this. My only proviso is the volatility part of your argument. I think most people probably need some safe money to handle downturns.

Absolutely.  And a cash buffer I think is a fine way to help you sleep at night.  Much better than an AA that underperforms in the long run (which your ER likely will be), IMO.  But to each his own.  :)

The thing is just say you need a cash buffer and I think you do because when the markets crash you want to either buy or at least not sell. What percentage do you have in cash ? Why not just put that into bonds which should have a better return. I suppose you can have some cash and some bonds. If you only have an emergency fund you probably won't have a cash buffer that will help if a crash occurs anyway.

That starts looking like a typical stocks/bonds portfolio. It's just how much you put into each option.

I'm not sure on the best option myself. I just don't think a 100% stock option is going to work out that well. It doesn't give you any buffer if the stock market goes through a tough time. I suppose if you have a massive portfolio and you can live just off dividends then thats okay however my take is that would mean you are working too long as well.

Maybe there is no perfect solution including 100% stocks.
Title: Re: 100% stocks in the accumulation phase?
Post by: mathjak107 on July 28, 2016, 06:36:43 AM
most of the academic study's all show that cash buffers are comforting to the mind but actually add little benefit . the drag of cash  in the up markets weighs down the gains . so much so that after an up cycle ,  spending down even in down years tends to leave you with a bigger  balance .

the bigger cushion gained in the up years covers the selling in down years .

many folks do not  use cash buffers although i do . they just spend equally from their invested assets preserving all their original allocations  .

i find in retirement i prefer the mental comfort of two years cash on hand even though it is really just mental masturbation .

we have the current years cash already on hand for spending  and all  dividends , interest and any cash we get fill up the reserve year .

this  way dividend cuts in bad drops or lighter then usual distributions  do not send us scrambling to fill short falls .   we have a whole other year to make up any differences we need .  it kind of keeps our spending plan flowing nicely with no hic cups this way .

there are lots of different ways to keep the income flowing including all kinds of bucket systems  but in the end one way is likely better then any other . the same gains and interest rates usually give you the same situation at the end of the day . you just arrive at it differently .


Title: Re: 100% stocks in the accumulation phase?
Post by: DK on July 28, 2016, 07:47:47 AM
http://www.gocurrycracker.com/path-100-equities/

relevant.
Title: Re: 100% stocks in the accumulation phase?
Post by: mathjak107 on July 28, 2016, 07:52:26 AM
the irony is that you would think the more conservative the investor the more likely they will be to stay the course .

but study's by ibbotson and morningstar tracking the money flow show that not to be the case .

investor returns vs the fund's returns are just as poor on balanced funds as growth funds .

humans are prewired to hate losing money more then making it so most exhibit poor investor behavior regardless . we get blindsided in financial forums because we tend to associate with those who make investing an interest or hobby . but most of the outside world is not like that .
Title: Re: 100% stocks in the accumulation phase?
Post by: Tyler on July 28, 2016, 07:58:42 AM
@Tyler, are the CAGR reported on your site median or average (heat map)? Or am I a newb and thinking of it wrong..

The CAGR in each cell of the heat map are for every single investing period (hover your mouse over the cells in the calculator to see specific values).  The point is to illustrate how different they can be for the same portfolio just based on timeframe.  The one reported in the "long-term CAGR" field is the longest one from 1972-2015 (the top-right cell on the chart).  You can find the median CAGR for any portfolio (and any timeframe) using the Long Term Returns chart/calculator.
Title: Re: 100% stocks in the accumulation phase?
Post by: DrF on July 28, 2016, 08:29:02 AM
Your savings rate (https://portfoliosolutions.com/latest-learnings/blog/save-and-grow-rich) is more important than your annual return during accumulation. (https://blog.mint.com/saving/why-your-savings-rate-may-be-more-important-than-your-rate-of-return-102011/) "It takes over 25 years for the one with the awesome 10% return to come out ahead."

Again, don't sweat the asset allocation too much. Save, Save, Save. How much better would your line be if you save 30, 40, 50% of your income vs the schmuck that only saves 5% to get the match?

(http://mamster.net/misc/mint/RickFerri-SaveAndGrowRich.jpg)
Title: Re: 100% stocks in the accumulation phase?
Post by: mathjak107 on July 28, 2016, 08:31:40 AM
our market gains in some years are more then we even earned .

i started as an investor in 1987 .  i have used the fidelity insight newsletter for decades . using the growth model ,  100k with not a penny added is worth 2.2 million today using plain ole fidelity funds , nothing special .. the s&p 500 is not that far behind either . about 400-500k less  .

so your time frame and results are going to vary . for some the gains out pace the savings put in . for other time frames not so much .

realize too that time frames you look at are dependent on the time frames you are not looking at . so as an example the great bull market of the 1980's was off the hook . but the time frames leading up sucked . high inflation , the stagnant markets for 20 years and high unemployment all made it hard to save money .

so great the party started but most regular folks had little to invest or invested .
it took years accumulating money in the 1980's to reach a level that was meaningful enough to benefit from the great run up .


most folks also have different amounts at different points in time .

gains later in life when fuel tanks are full mean a whole lot more then early on when you do not have much invested .

today a 6% gain on our portfolio represents 9 years of maxing out our 401k contributions at catch up ,  25 years ago it may have been a months pay .

Title: Re: 100% stocks in the accumulation phase?
Post by: Tyler on July 28, 2016, 09:07:09 AM
For me personally, I am adding to my equities positions.

@Arebelspy -- My impression (please correct me if that impression is incorrect or outdated) is that a significant percentage of your net worth over the years has been tied up in income-producing real estate.  FWIW, I'd also lay off bonds in your situation as you already have your fixed income covered in another way.  Your brokerage account may be 100% stocks, but your overall investments are actually well diversified.
Title: Re: 100% stocks in the accumulation phase?
Post by: thd7t on July 28, 2016, 09:22:08 AM
Following this great discussion! Really nice depth and a fair diversity of opinions.
Title: Re: 100% stocks in the accumulation phase?
Post by: arebelspy on July 28, 2016, 10:26:51 AM
My portfolio needs to last 30 years so should I go 100% stocks. That should provide the best returns shouldn't it.

Mine needs to last 60 years, maybe longer, and picking something that has underperformed every single time historically over that timeframe adds a lot of risk to it not making it.  It's not about "best returns" for its own sake, but for the sake of ER success.

I think that it should also be about sleeping well at night.

Definitely.  But the neat thing about that, is you can LEARN to live with volatility.  You can psychologically prepare yourself, and (for free!) be able to deal with it.  But you can't "learn" to deal with a portfolio that just didn't grow enough, and left you without enough, sadly.  So it is a real--and big--deal. 

Certainly sleep at night is one important thing.  And oversaving and going with a portfolio that underperforms, but at the tradeoff of less volatility is one solution. Then you can choose that portfolio, and accept that tradeoff.  But if you don't KNOW that's the tradeoff, if you're told this alternate portfolio is "nearly as good in CAGR" and this portfolio is constantly argued as the best in all scenarios, maybe you don't realize and save enough to compensate for that underperformance.  And then you're in trouble.

I basically agree with all of this. My only proviso is the volatility part of your argument. I think most people probably need some safe money to handle downturns.

Absolutely.  And a cash buffer I think is a fine way to help you sleep at night.  Much better than an AA that underperforms in the long run (which your ER likely will be), IMO.  But to each his own.  :)

The thing is just say you need a cash buffer and I think you do because when the markets crash you want to either buy or at least not sell. What percentage do you have in cash ? Why not just put that into bonds which should have a better return. I suppose you can have some cash and some bonds. If you only have an emergency fund you probably won't have a cash buffer that will help if a crash occurs anyway.

That starts looking like a typical stocks/bonds portfolio. It's just how much you put into each option.

I'm not sure on the best option myself. I just don't think a 100% stock option is going to work out that well. It doesn't give you any buffer if the stock market goes through a tough time. I suppose if you have a massive portfolio and you can live just off dividends then thats okay however my take is that would mean you are working too long as well.

Maybe there is no perfect solution including 100% stocks.

The point of the cash buffer wouldn't be to rebalance, or earn money, so putting it in bonds would be counter-productive.  It would be to live on (for up to two years before having to sell any stocks) when a crash happened.

As mathjak points out, cash buffers tend to just drag on portfolios--it wouldn't be for return purposes, but the sleep at night factor.
Title: Re: 100% stocks in the accumulation phase?
Post by: arebelspy on July 28, 2016, 10:29:48 AM
Your savings rate (https://portfoliosolutions.com/latest-learnings/blog/save-and-grow-rich) is more important than your annual return during accumulation. (https://blog.mint.com/saving/why-your-savings-rate-may-be-more-important-than-your-rate-of-return-102011/) "It takes over 25 years for the one with the awesome 10% return to come out ahead."

Again, don't sweat the asset allocation too much. Save, Save, Save. How much better would your line be if you save 30, 40, 50% of your income vs the schmuck that only saves 5% to get the match?

(http://mamster.net/misc/mint/RickFerri-SaveAndGrowRich.jpg)

Absolutely, and that's a great point if you're trying to convince someone to save more, or up their savings rate from 5% to 10% or whatever, but for this audience (Mustachians who are already going to try and max their savings rate), looking at the return is the next important step (not to chase yield, but to optimize).

E.g. if I'm going to have a 50-70% savings rate ANYWAYS, with no way to up it (per your initial analysis/suggestion of focusing on savings rate first), then looking at AA becomes the next important step.
Title: Re: 100% stocks in the accumulation phase?
Post by: arebelspy on July 28, 2016, 10:36:15 AM
For me personally, I am adding to my equities positions.

@Arebelspy -- My impression (please correct me if that impression is incorrect or outdated) is that a significant percentage of your net worth over the years has been tied up in income-producing real estate.

True.

Quote
FWIW, I'd also lay off bonds in your situation as you already have your fixed income covered in another way.

Bonds, yes, but you'd also lay off gold, tilting towards small caps, treasuries, etc.?  E.g. if you had rental properties covering all or most of your ER income, you'd just get 100% TSM?  I'm skeptical.  :P

Quote
Your brokerage account may be 100% stocks, but your overall investments are actually well diversified.

Oh? You, the master of portfolio diversification would call my "all stocks and physical real estate" portfolio "well diversified"?  I wouldn't think that would be the case.  ;)

(In other words, with this post, I'm meaning to say that yes, my portfolio makes sense why I wouldn't have bonds, but there's reasons why I might invest in other assets besides TSM, yet I still argue for TSM--that's why my comments like "I am adding to my equities positions" is still relevant despite my large real estate holdings.)
Title: Re: 100% stocks in the accumulation phase?
Post by: DrF on July 28, 2016, 10:54:05 AM
Absolutely, and that's a great point if you're trying to convince someone to save more, or up their savings rate from 5% to 10% or whatever, but for this audience (Mustachians who are already going to try and max their savings rate), looking at the return is the next important step (not to chase yield, but to optimize).

E.g. if I'm going to have a 50-70% savings rate ANYWAYS, with no way to up it (per your initial analysis/suggestion of focusing on savings rate first), then looking at AA becomes the next important step.

But, see this thread (http://forum.mrmoneymustache.com/investor-alley/meb-faber-which-asset-allocation-model-is-best/msg1091087/#msg1091087) started by hodedofome.
Basically, you could go blue in the face deciding which asset allocation is the "best" and there's a very good chance you'll choose incorrectly when you look back at your investments in 30+ years. Once you are "diverse enough" final tweaking of 10% vs 20% in this or that doesn't really change the outcome.

Honestly, tweaking may get you what, +/- 0.8%. Someone may get lucky and "market time" some event or buy an individual stock which would drastically alter their return for a few years, but if you are just indexing an AA of XX%/yy%/ZZ% then switching them slightly will be negligible. It's the human condition to tweak though, and think that you will "win". (https://en.wikipedia.org/wiki/Grandiose_delusions)

edit: this line of thinking specifically addresses the title of this thread "...accumulation..."
Title: Re: 100% stocks in the accumulation phase?
Post by: arebelspy on July 28, 2016, 10:59:39 AM
Absolutely, and that's a great point if you're trying to convince someone to save more, or up their savings rate from 5% to 10% or whatever, but for this audience (Mustachians who are already going to try and max their savings rate), looking at the return is the next important step (not to chase yield, but to optimize).

E.g. if I'm going to have a 50-70% savings rate ANYWAYS, with no way to up it (per your initial analysis/suggestion of focusing on savings rate first), then looking at AA becomes the next important step.

But, see this thread (http://forum.mrmoneymustache.com/investor-alley/meb-faber-which-asset-allocation-model-is-best/msg1091087/#msg1091087) started by hodedofome.
Basically, you could go blue in the face deciding which asset allocation is the "best" and there's a very good chance you'll choose incorrectly when you look back at your investments in 30+ years. Once you are "diverse enough" final tweaking of 10% vs 20% in this or that doesn't really change the outcome.

Honestly, tweaking may get you what, +/- 0.8%. Someone may get lucky and "market time" some event or buy an individual stock which would drastically alter their return for a few years, but if you are just indexing an AA of XX%/yy%/ZZ% then switching them slightly will be negligible. It's the human condition to tweak though, and think that you will "win". (https://en.wikipedia.org/wiki/Grandiose_delusions)

Those small percent differences, over a long time, add up to be quite a bit, which is the difference between ER success and failure (and between needing to sell extra years of your life or not). It's the same reason why minimizing fees is so important.

And that's giving the benefit of the doubt that you're "tweaking" between AAs that are fairly comparable (e.g. deciding exactly what percent in bonds is perfect).  Plenty of people come on here and have 300k in cash sitting because they're scared of the market.  Their AA is nowhere close to reasonable to a long-term ER, and "tweaking" their AA is a BIG deal.

I get your overall point, and I agree.  Once you've decided on a reasonable AA, tweaking is pretty minimal.  But we're arguing for fairly different AAs here, with quite different outcomes.  It's more than just minor tweaking ("should I do 25% bonds, or 30%" type tweaking).
Title: Re: 100% stocks in the accumulation phase?
Post by: Tyler on July 28, 2016, 11:15:14 AM

Bonds, yes, but you'd also lay off gold, tilting towards small caps, treasuries, etc.?  E.g. if you had rental properties covering all or most of your ER income, you'd just get 100% TSM?  I'm skeptical.  :P

Quote
Your brokerage account may be 100% stocks, but your overall investments are actually well diversified.

Oh? You, the master of portfolio diversification would call my "all stocks and physical real estate" portfolio "well diversified"?  I wouldn't think that would be the case.  ;)


Like I said, my personal bias is towards the benefits of diversification, not any single portfolio.  I very much respect your thoughtful approach to investing, and I just wanted to point out that we agree on the benefits of not putting all of our money in the stock market a lot more than this thread might indicate.  We just have different methods. 

If there was a practical and repeatable way of adding the stock/rentals "Arebelspy Portfolio" to the site, that would be a nice option.  ;)  Cheers!
Title: Re: 100% stocks in the accumulation phase?
Post by: arebelspy on July 28, 2016, 11:21:08 AM
I just wanted to point out that we agree on the benefits of not putting all of our money in the stock market a lot more than this thread might indicate.  We just have different methods. 

Absolutely.  And I enjoy a good discussion, even when I disagree, it's never personal.  I very much respect your opinion.  :)
Title: Re: 100% stocks in the accumulation phase?
Post by: mathjak107 on July 28, 2016, 11:24:01 AM
it all depends on goals and income . i never really had very high income so my investments had to do the heavy lifting all my life . on the other hand my son is a partner in a national law firm in his 30's and makes 2x what i retired at .  he stands a chance of not being so dependent on pedal to the metal growth  as i was .
Title: Re: 100% stocks in the accumulation phase?
Post by: DrF on July 28, 2016, 12:29:01 PM
Those small percent differences, over a long time, add up to be quite a bit, which is the difference between ER success and failure (and between needing to sell extra years of your life or not). It's the same reason why minimizing fees is so important.

And that's giving the benefit of the doubt that you're "tweaking" between AAs that are fairly comparable (e.g. deciding exactly what percent in bonds is perfect).  Plenty of people come on here and have 300k in cash sitting because they're scared of the market.  Their AA is nowhere close to reasonable to a long-term ER, and "tweaking" their AA is a BIG deal.

I get your overall point, and I agree.  Once you've decided on a reasonable AA, tweaking is pretty minimal.  But we're arguing for fairly different AAs here, with quite different outcomes.  It's more than just minor tweaking ("should I do 25% bonds, or 30%" type tweaking).

Respectfully disagree, due to the topic of this particular thread. During accumulation, let's say you take a while (15 years) to accumulate a sufficient stache of $1MM, by investing on Jan 1 of every year, starting with $32,500 at the beginning of year 1 and increasing your contribution by 3% (cost of living raise) every subsequent year, and annual interest of 7%, you would have $1.044MM at the end of 15 years. Say you tweak your investments so that you get an additional 0.8% (now 7.8%) better than the example - that would give you $1.1147MM after 15 full years (you could stop 1 year early, at the beginning of year 15 when you put your contribution in you would have $1.034MM). But say you tweaked your investments poorly and you get 0.8% worse (now 6.2%) return than the example - which would give you $0.9786MM (but as soon as you put your contribution in on Jan 1 for year 16, you would have $1.029MM, meaning you would have to work exactly 15 years and 1 day). On average you would end up with $1.046MM +/- 6.5%. The point is, no matter how you "tweak" your AA during accumulation, the mustachian effect results in a relatively small difference in net worth due to the truncated time that compounding has to work with. On the other hand, if you were to increase your annual contributions by 10% rather than 3% year to year through badassity (raises, promotions, job hopping, side income, real estate) then you would be able to retire at the end of 12 years (assuming 7% annual returns) with $1.072MM. 3 years earlier than the planned 15, and 2 years earlier than due to "tweaking" one's investments. So what if you wanted to be ultra conservative and aim for 5% annual return? You would have to work 16 years and 1 day to end up with $1.039MM. Not a lot of extra time for the risk averse to work before hitting their savings goal.

Once you are not accumulating any longer, then I agree that compounding a higher % return is definitely worth "tweaking" your portfolio to try and get that additional 0.8% so that your portfolio lasts 40-60 years.

To be fair, now that I've written out the entire scenario, there seems to be almost non-existant downside (and a fairly significant upside) to trying to maximize annual returns during accumulation. Obviously, the benefit of "tweaking" decreases with shorter and shorter accumulation time frames. Additionally, different sequences of returns would alter the above examples slightly, but not much.
Title: Re: 100% stocks in the accumulation phase?
Post by: mathjak107 on July 28, 2016, 12:38:37 PM
time frame is key . the shorter the time frame the greater the chances the recovery will outlive you .  but if you retire young you still have money that won't be used to eat for 40 or 50 years and that is still long term money
Title: Re: 100% stocks in the accumulation phase?
Post by: arebelspy on July 28, 2016, 12:39:29 PM
Excellent post, DrFunk.  I have nothing to disagree with.  :)
Title: Re: 100% stocks in the accumulation phase?
Post by: Kaspian on July 28, 2016, 02:47:16 PM
To be fair, now that I've written out the entire scenario, there seems to be almost non-existant downside (and a fairly significant upside) to trying to maximize annual returns during accumulation.

Not for us, perhaps.  The downside on an aggressive portfolio for the average young/novice investor though is he/she invests their first $5K, 6 months later gets a statement and sees that it's down to $3400.  In a spot where the majority of the people on the MMM forum would giggle a little and slap each other upside the head, the terrified newbie takes the money off the table and never goes back to investing.  This happens all the time.  Because it's their first chunk of cash in, it's their new baby.  If I ever ended up one of those "advisors," I would be sure to begin a person with a balanced portfolio (so they don't get spooked) and then slowly encourage them to dial up the aggressive portion annually.   The math here is so often 100% correct, but the human psychology gets off.  Remember just last year on this MMM forum when so many people had decided the S&P was stagnant and there were better places to put their money?  ...I wonder where they put it.  :(
Title: Re: 100% stocks in the accumulation phase?
Post by: mathjak107 on July 28, 2016, 02:52:50 PM
bad investor behavior is all over and know's no bounds .

many  folks panic when they lose money and conservative funds have just as poor  investor returns vs what the fund got as do growth funds .
Title: Re: 100% stocks in the accumulation phase?
Post by: Shane on July 28, 2016, 03:07:06 PM
Coddling people who exhibit irrational behavior shouldn't be necessary on this board. Maybe normal people need that, but anyone reading this post shouldn't because we are NOT normal. Think about it, saving 50-80% of income is not normal behavior. Anyone who is able to understand the concept of FIRE should also be able to understand and internalize the fact that TSM is volatile and act accordingly.

We have friends who, literally, keep all of their assets in physical gold in a safe in their house and think we're crazy to trust TSM or US currency for that matter. Guess what, they're not reading this post. :)
Title: Re: 100% stocks in the accumulation phase?
Post by: mathjak107 on July 28, 2016, 03:12:45 PM
believe me you  have your share the same as bogleheads do and every other financial forum .  when folks have accumulated large sums of money and the crap hits the fan what they think or planned to do and will do may not be the same . i vouch for no one but myself , i learned that a long time ago .
Title: Re: 100% stocks in the accumulation phase?
Post by: DrF on July 28, 2016, 03:31:49 PM
Not for us, perhaps.  The downside on an aggressive portfolio for the average young/novice investor though is he/she invests their first $5K, 6 months later gets a statement and sees that it's down to $3400.  In a spot where the majority of the people on the MMM forum would giggle a little and slap each other upside the head, the terrified newbie takes the money off the table and never goes back to investing.  This happens all the time.  Because it's their first chunk of cash in, it's their new baby.  If I ever ended up one of those "advisors," I would be sure to begin a person with a balanced portfolio (so they don't get spooked) and then slowly encourage them to dial up the aggressive portion annually.   The math here is so often 100% correct, but the human psychology gets off.  Remember just last year on this MMM forum when so many people had decided the S&P was stagnant and there were better places to put their money?  ...I wonder where they put it.  :(

Agreed that human behavior is irrational, but the argument I've made is that your % savings rate is much more effective at producing wealth than return on investment. The greater your savings rate, the less investment return matters...during accumulation. Yes, sequence of returns matters in that a drop in 30% in your final year of saving will hurt much more than a drop of 30% in your first year of saving. That, I believe, is Tyler's main argument (please correct me if I'm wrong), that the risk of return sequence is so incredibly important that a person should tailor their portfolio to reduce it at the expense of return on investment. I disagree with that assessment (trying not to put words in Tyler's mouth here, I disagree whether or not that is Tyler's stance), because staying fully invested with additional contributions in 100% TSM through the trough of a bear market pullback would still likely get you to your target savings more quickly than a balanced portfolio designed to preserve principal. Statistically, 100% TSM is the way to go. Only a small percentage of the time would a broadly diversified portfolio consisting of multiple mostly non-correlated assets be superior during accumulation, and never ever never during a retirement of any minimal to lengthy period (20-60 years).

Although, settling for a mediocre return of 5% will not substantially change your fire time frame, which you are right in proposing that new investors should be much more diverse than advanced investors.
Title: Re: 100% stocks in the accumulation phase?
Post by: steveo on July 28, 2016, 04:01:06 PM
My portfolio needs to last 30 years so should I go 100% stocks. That should provide the best returns shouldn't it.

Mine needs to last 60 years, maybe longer, and picking something that has underperformed every single time historically over that timeframe adds a lot of risk to it not making it.  It's not about "best returns" for its own sake, but for the sake of ER success.

I think that it should also be about sleeping well at night.

Definitely.  But the neat thing about that, is you can LEARN to live with volatility.  You can psychologically prepare yourself, and (for free!) be able to deal with it.  But you can't "learn" to deal with a portfolio that just didn't grow enough, and left you without enough, sadly.  So it is a real--and big--deal. 

Certainly sleep at night is one important thing.  And oversaving and going with a portfolio that underperforms, but at the tradeoff of less volatility is one solution. Then you can choose that portfolio, and accept that tradeoff.  But if you don't KNOW that's the tradeoff, if you're told this alternate portfolio is "nearly as good in CAGR" and this portfolio is constantly argued as the best in all scenarios, maybe you don't realize and save enough to compensate for that underperformance.  And then you're in trouble.

I basically agree with all of this. My only proviso is the volatility part of your argument. I think most people probably need some safe money to handle downturns.

Absolutely.  And a cash buffer I think is a fine way to help you sleep at night.  Much better than an AA that underperforms in the long run (which your ER likely will be), IMO.  But to each his own.  :)

The thing is just say you need a cash buffer and I think you do because when the markets crash you want to either buy or at least not sell. What percentage do you have in cash ? Why not just put that into bonds which should have a better return. I suppose you can have some cash and some bonds. If you only have an emergency fund you probably won't have a cash buffer that will help if a crash occurs anyway.

That starts looking like a typical stocks/bonds portfolio. It's just how much you put into each option.

I'm not sure on the best option myself. I just don't think a 100% stock option is going to work out that well. It doesn't give you any buffer if the stock market goes through a tough time. I suppose if you have a massive portfolio and you can live just off dividends then thats okay however my take is that would mean you are working too long as well.

Maybe there is no perfect solution including 100% stocks.

The point of the cash buffer wouldn't be to rebalance, or earn money, so putting it in bonds would be counter-productive.  It would be to live on (for up to two years before having to sell any stocks) when a crash happened.

As mathjak points out, cash buffers tend to just drag on portfolios--it wouldn't be for return purposes, but the sleep at night factor.

I don't think that this is correct but correct me if I'm wrong. If you have an index bond fund ala Vanguard you should be able to simply withdraw from that at any point with no penalty. It should be very similar to cash but with a higher return.
Title: Re: 100% stocks in the accumulation phase?
Post by: steveo on July 28, 2016, 04:06:08 PM
I get your overall point, and I agree.  Once you've decided on a reasonable AA, tweaking is pretty minimal.  But we're arguing for fairly different AAs here, with quite different outcomes.  It's more than just minor tweaking ("should I do 25% bonds, or 30%" type tweaking).

I'm not sure what we are discussing here though. My impression was that there is an argument that 100% stocks is always the right approach. I don't agree with that. I think you should have a certain amount in bonds and some in cash.

My gut feel is that a 75 stocks /25 bonds and some cash buffer somewhere will do basically just as well as any 100% stock portfolio. Maybe via backtesting you will get better returns most times via 100% stocks but I don't trust backtesting to derive the best possibly asset allocation now and into the future.
Title: Re: 100% stocks in the accumulation phase?
Post by: steveo on July 28, 2016, 04:11:32 PM
believe me you  have your share the same as bogleheads do and every other financial forum .  when folks have accumulated large sums of money and the crap hits the fan what they think or planned to do and will do may not be the same . i vouch for no one but myself , i learned that a long time ago .

This is why I'm not a fan of 100% stocks. When there is a 50% drop and you retired yesterday on a 5 % WR  it's going to hurt. If you can sit back and state well I'm not pulling any money out of stocks for the next 5 years so I'll just wait it out I think that is going to hurt less. What if you are in this situation and then you go back to work. Isn't that what we are trying to avoid ?
Title: Re: 100% stocks in the accumulation phase?
Post by: arebelspy on July 28, 2016, 04:15:39 PM
I don't think that this is correct but correct me if I'm wrong. If you have an index bond fund ala Vanguard you should be able to simply withdraw from that at any point with no penalty. It should be very similar to cash but with a higher return.

Well you'd have to sell the bonds, and potentially pay taxes and stuff.  And the value can fluctuate up and down.  So no, it's not really similar to cash at all.  :)
Title: Re: 100% stocks in the accumulation phase?
Post by: arebelspy on July 28, 2016, 04:21:44 PM
I get your overall point, and I agree.  Once you've decided on a reasonable AA, tweaking is pretty minimal.  But we're arguing for fairly different AAs here, with quite different outcomes.  It's more than just minor tweaking ("should I do 25% bonds, or 30%" type tweaking).

I'm not sure what we are discussing here though. My impression was that there is an argument that 100% stocks is always the right approach. I don't agree with that. I think you should have a certain amount in bonds and some in cash.

My gut feel is that a 75 stocks /25 bonds and some cash buffer somewhere will do basically just as well as any 100% stock portfolio. Maybe via backtesting you will get better returns most times via 100% stocks but I don't trust backtesting to derive the best possibly asset allocation now and into the future.

Many of us disagree.  GCC has a good argument as to why:
http://www.gocurrycracker.com/path-100-equities/

There's been a ton of research into this topic, most around stock/bond mixes (60/40 is quite typical).  Cash tends to just be a drag.  If you can stay the course though, many of us argue that 100% equities is better in the end, despite any gut feel to the contrary.  :)

believe me you  have your share the same as bogleheads do and every other financial forum .  when folks have accumulated large sums of money and the crap hits the fan what they think or planned to do and will do may not be the same . i vouch for no one but myself , i learned that a long time ago .

This is why I'm not a fan of 100% stocks. When there is a 50% drop and you retired yesterday on a 5 % WR  it's going to hurt. If you can sit back and state well I'm not pulling any money out of stocks for the next 5 years so I'll just wait it out I think that is going to hurt less. What if you are in this situation and then you go back to work. Isn't that what we are trying to avoid ?

You'd ride it out, selling stocks as needed.  Going back to work wouldn't be necessary, if your WR was low enough.  Flexibility in early years (in case of sequence of returns risk) means with 100% TSM your portfolio would grow enough that you can easily ride out volatility, yes, even selling stocks while they're down, and end up with more overall (and ending up with more not for the sake of more, but to prolong/improve one's ER chances). 

But this thread isn't even talking about that, it's talking about TSM for the accumulation phase.  While working.  So there's no need to withdraw at that point, you're adding to.  If a crash happened right as you're going to ER, yes, it could delay you ERing a bit, but it's better then than right after, and most likely you'd still have more money after 30 years (even with a crash) with TSM than with other portfolios due to TSM's 30-year record (see Tyler's charts/graphs posted in this thread), so you'd probably have already FIRE'd earlier, or you'd have more money so you could still FIRE.
Title: Re: 100% stocks in the accumulation phase?
Post by: Jeremy on July 28, 2016, 04:22:06 PM
sorry for short comment, we are in a B&B in the middle of nowhere Ireland and I have a shite data connection

This may be relevant to the discussion:
"Note that in no year does a lower allocation of equities (less than 100%) help us reach our FI goal sooner."
http://www.gocurrycracker.com/financial-independence-how-long-will-it-take/

Title: Re: 100% stocks in the accumulation phase?
Post by: steveo on July 28, 2016, 04:49:07 PM
I don't think that this is correct but correct me if I'm wrong. If you have an index bond fund ala Vanguard you should be able to simply withdraw from that at any point with no penalty. It should be very similar to cash but with a higher return.

Well you'd have to sell the bonds, and potentially pay taxes and stuff.  And the value can fluctuate up and down.  So no, it's not really similar to cash at all.  :)

I hear this a lot but I'm not convinced. The volatility isn't that bad. It's nothing like stocks. Plus if bonds go down in value you'd expect the return to increase. So increased interest rates should decrease the value of bonds but increase the yield.
Title: Re: 100% stocks in the accumulation phase?
Post by: steveo on July 28, 2016, 04:52:30 PM
I get your overall point, and I agree.  Once you've decided on a reasonable AA, tweaking is pretty minimal.  But we're arguing for fairly different AAs here, with quite different outcomes.  It's more than just minor tweaking ("should I do 25% bonds, or 30%" type tweaking).

I'm not sure what we are discussing here though. My impression was that there is an argument that 100% stocks is always the right approach. I don't agree with that. I think you should have a certain amount in bonds and some in cash.

My gut feel is that a 75 stocks /25 bonds and some cash buffer somewhere will do basically just as well as any 100% stock portfolio. Maybe via backtesting you will get better returns most times via 100% stocks but I don't trust backtesting to derive the best possibly asset allocation now and into the future.

Many of us disagree.  GCC has a good argument as to why:
http://www.gocurrycracker.com/path-100-equities/

There's been a ton of research into this topic, most around stock/bond mixes (60/40 is quite typical).  Cash tends to just be a drag.  If you can stay the course though, many of us argue that 100% equities is better in the end, despite any gut feel to the contrary.  :)

believe me you  have your share the same as bogleheads do and every other financial forum .  when folks have accumulated large sums of money and the crap hits the fan what they think or planned to do and will do may not be the same . i vouch for no one but myself , i learned that a long time ago .

This is why I'm not a fan of 100% stocks. When there is a 50% drop and you retired yesterday on a 5 % WR  it's going to hurt. If you can sit back and state well I'm not pulling any money out of stocks for the next 5 years so I'll just wait it out I think that is going to hurt less. What if you are in this situation and then you go back to work. Isn't that what we are trying to avoid ?

You'd ride it out, selling stocks as needed.  Going back to work wouldn't be necessary, if your WR was low enough.  Flexibility in early years (in case of sequence of returns risk) means with 100% TSM your portfolio would grow enough that you can easily ride out volatility, yes, even selling stocks while they're down, and end up with more overall (and ending up with more not for the sake of more, but to prolong/improve one's ER chances). 

But this thread isn't even talking about that, it's talking about TSM for the accumulation phase.  While working.  So there's no need to withdraw at that point, you're adding to.  If a crash happened right as you're going to ER, yes, it could delay you ERing a bit, but it's better then than right after, and most likely you'd still have more money after 30 years (even with a crash) with TSM than with other portfolios due to TSM's 30-year record (see Tyler's charts/graphs posted in this thread), so you'd probably have already FIRE'd earlier, or you'd have more money so you could still FIRE.

There are a lot of good points here. I get the argument from a rational perspective. I'm just not sure if I get it from a reality perspective of living through a bear market. I also think that there is always a chance of a Japan like deflation period.

Maybe my concern is about what if scenarios that are unlikely to occur but if they do then you aren't protected. You are betting on everything going well or maybe better put there is a chance you are optimising based upon backtested results.

I completely agree that the key point is not to become the richest but to maximise the chance of success within ER.
Title: Re: 100% stocks in the accumulation phase?
Post by: mathjak107 on July 28, 2016, 05:04:27 PM
john templton's famous words have still never been wrong .     The four most expensive words in the English language are "this time itís different." .
Title: Re: 100% stocks in the accumulation phase?
Post by: bryan on July 28, 2016, 05:15:19 PM
@Tyler, are the CAGR reported on your site median or average (heat map)? Or am I a newb and thinking of it wrong..

The CAGR in each cell of the heat map are for every single investing period (hover your mouse over the cells in the calculator to see specific values).  The point is to illustrate how different they can be for the same portfolio just based on timeframe.  The one reported in the "long-term CAGR" field is the longest one from 1972-2015 (the top-right cell on the chart).  You can find the median CAGR for any portfolio (and any timeframe) using the Long Term Returns chart/calculator.

Great! Thanks, those bits weren't immediately obvious to me. Makes sense now that I look closely.
Title: Re: 100% stocks in the accumulation phase?
Post by: steveo on July 28, 2016, 05:25:19 PM
john templton's famous words have still never been wrong .     The four most expensive words in the English language are "this time itís different." .

I agree with this but I think that there is a little more to the story of asset allocation than just going 100% stocks all the time.

I should add that I have a high percentage of my asset allocation in stocks.
Title: Re: 100% stocks in the accumulation phase?
Post by: Radagast on July 28, 2016, 09:57:48 PM
Many of us disagree.  GCC has a good argument as to why:
http://www.gocurrycracker.com/path-100-equities/
If you can stay the course though, many of us argue that 100% equities is better in the end, despite any gut feel to the contrary.  :)
I have seen this link posted a couple of times. Am I the only one who noticed that 100% stocks did not lead to the highest success rate ever in the entire post? It looks to me like 10%-20% bonds led to the greatest success rate every time. I'm going to be Tyler-lite and suggest a higher backtested future success rate will probably include 10% invested in each of either two or three of these: series I savings bonds, long term US treasuries, gold. (I realize the latter is a strange one, I haven't been able to talk myself into it despite the pretty backtests).

Additionally, I see a lot of people talking about being all stocks and seeming to mean 100% US total stock market. I do not know what combination of investments will produce the highest safe rate of withdrawal in the future, but I will bet (not against you guys, sorry, I only bet against the market :) ) that it will not be 100% US TSM. It will probably not be 100% stocks either. I suggest a major proportion of stock ownership be invested internationally. My current theoretical favorite is my version of the "four slice ultimate buy and hold" from the Bogleheads forum. For my version this is an equal split between US large cap stock index (S&P500 or total market), US small cap value, international developed market small cap, and international emerging market value. If I include those four at 20% each combined with two of the three from above at 10% each, I am likely to greatly improve my odds. The original TrevH four slices of S&P500, US small cap value, international small, international value would work also. The deaths of diversification and modern portfolio theory have been greatly exaggerated, especially for retirees who need to sell regularly. OK, you end up with six asset classes instead of one. Toughen up cupcake. (<-- cunning reversal on Jim Collins).

In any case, 100% stocks is probably as good an allocation as any while accumulating. Just, don't forget international, kids.

Edit: I looked at the gocurrycracker snapshot at the bottom and noticed it actually reads 61% US stocks, 16% international stocks, 10% bonds, and 10% "alternatives". Almost exactly what I had in mind, so not 100% equities after all. However I'll agree with posters above that cash drags.
Title: Re: 100% stocks in the accumulation phase?
Post by: arebelspy on July 28, 2016, 10:08:23 PM
Additionally, I see a lot of people talking about being all stocks and seeming to mean 100% US total stock market. I do not know what combination of investments will produce the highest safe rate of withdrawal in the future, but I will bet (not against you guys, sorry, I only bet against the market :) ) that it will not be 100% US TSM.

I wouldn't take that bet, I agree with you.

BUT, I don't think I can predict which WILL have the highest SWR in the future, nor can anyone, and I think TSM is more likely than most--i.e. it's about your best shot to have it be the highest, and if it's not the highest, it'll be up there.

Other portfolios that backtest well but don't pass the sniff test might be up there, but I think their chances of being the highest are lower than TSM's chance of being the highest, and it's equally likely that they'll be much lower.

In other words, TSM probably won't be the highest, and I think there's little chance that it will be, but it's still the safest bet.
Title: Re: 100% stocks in the accumulation phase?
Post by: Radagast on July 28, 2016, 10:50:42 PM
Additionally, I see a lot of people talking about being all stocks and seeming to mean 100% US total stock market. I do not know what combination of investments will produce the highest safe rate of withdrawal in the future, but I will bet (not against you guys, sorry, I only bet against the market :) ) that it will not be 100% US TSM.
In other words, TSM probably won't be the highest, and I think there's little chance that it will be, but it's still the safest bet.
I have to disagree. I think any reasonable attempt is nearly certain to outperform TSM over a 50 year drawdown period. For example, 60% US TSM, 30% international stocks, 10% US government bonds if you are trying to keep it simple. There will be multiple times in the future when the US stock market does not support a high safe withdrawal rate, but many or most other possible investments will. Even if US stocks perform best in isolation, there will be periods you need to sell when it is down which will more than justify not being 100% TSM. Mandatory selling will make 100% TSM suboptimal, even if it is the highest returning asset class in the whole world for the next 50 years. You can modify it with whatever you want: tilts, international stocks, bonds, real estate, gold, 10-20% pretty much of anything will improve the odds. And that statement is made even with the assumption the US will be the best performing for the next 50 years. If it isn't, then a much lower allocation to TSM would be better.
Title: Re: 100% stocks in the accumulation phase?
Post by: arebelspy on July 28, 2016, 11:19:18 PM
I think any reasonable attempt is nearly certain to outperform TSM over a 50 year drawdown period.

Wow.  I could not disagree more.

I think it'd be extremely difficult to beat TSM over a 50-year period (especially accumulation, but even during drawdowns).

Quote
there will be periods you need to sell

Yes, and that will hurt, but it will grow so much more in the periods you AREN'T in a crash (i.e. the vast majority of the time) that you'll end up ahead, in the end.

Reasonable minds differ, obviously.  :)
Title: Re: 100% stocks in the accumulation phase?
Post by: Radagast on July 29, 2016, 12:32:20 AM
Quote
there will be periods you need to sell

Yes, and that will hurt, but it will grow so much more in the periods you AREN'T in a crash (i.e. the vast majority of the time) that you'll end up ahead, in the end.
It has nothing to do with pain. It is about better results. As I see it there are three reasons to not be 100% US stocks:
1. You want the highest ending value. Not my perspective because I don't care if I am dead, but 10-40% international stocks will probably result in a higher ending value for a retiree (it is less clear for accumulators).
2. You want the greatest chance of success for a withdrawal rate, or a higher maximum withdrawal rate. In this case 10-40% international stocks will increase your odds, and so will adding 10-30% low-returning low-correlation assets (bonds, gold).
3. You want to be diversified in case the future is not like the past. In this case you probably want 50% or less in TSM.

I can think of two reasons to be 100% TSM:
1. America is best. (<--Warren Buffet, John Bogle)
2. Simplicity. I would agree more strongly with this if Vanguard did not also offer a Total World index fund, which seems far more zen-like to me.

I find the first three more compelling than the second two.
Title: Re: 100% stocks in the accumulation phase?
Post by: arebelspy on July 29, 2016, 12:39:18 AM
See, and I would move your one and two down to the bottom, so only your number 3 remains, and I'd accept that adding international is "more diversified," but that TSM is probably diversified enough anyways, so that's not a huge deal.

I'm okay with international, though (thinking about getting some myself, beyond the international exposure I have via domestic stocks, mainly for the currency hedge it provides).  In fact, when we argue for 100% stocks, that could include international just fine.  The case for 100% equities (the topic of this thread) remains true even if some of those equities are non-domestic.  The international v. domestic is its own interesting aside.
Title: Re: 100% stocks in the accumulation phase?
Post by: mathjak107 on July 29, 2016, 02:15:32 AM
if you have a high percentage of stocks there is nothing wrong selling when down to raise cash for spending .

the up years generate that extra cushion which you would not have being more diversified .

100% stocks has produced the highest success rates over every rolling 40 year period going back to 1926 . 50/50 has done the best out to 30 years .

in all fairness you can't test any portfolio  for a true safe withdrawal rate that has gold in it .

the american citizen could not own gold nor did it trade here except as collectible coins until 1975 .

the  term safe withdrawal rate  by definition means the portfolio was stress tested against the 4 actual worst case scenario dates , 1929 ,1937 ,1965/1966 .  there was no gold market here for americans so we have no way of knowing how gold would have done under a free trading market . it was also influenced heavily because it came off the gold standard in its early years .


the term swr also does not consider the pile left over at the end .

if you pick random time frames and stress test say the permanent portfolio  , which you accurately  can't test pre 1975  you really are missing all the worst case scenario's .

so you can show some pretty high success rates as well as draw rates  using other time frames . but if we eliminated those dates above from a 70/30 mix the average safe withdrawal rate would be not 4% but 6.50% .

so while we can get portfolio's with small equity allocations to pass a 4% draw rate the difference is what is left at the end .

90% of   every rolling 30 year period  a 70/30 mix left you with more then you started with , while providing that income stream . 2/3's of the time frames it left you with more then 2x what you started with .

so when comparing allocations and stress testing for a safe withdrawal rate you have to look at the whole picture . it is not about squeaking through with a buck left and deeming it a good plan because it held a constant dollar cash flow .
Title: Re: 100% stocks in the accumulation phase?
Post by: steveo on July 29, 2016, 02:57:53 AM
The international v. domestic is its own interesting aside.

I think we should discuss this at the end of this discussion. I'm unclear on this point as well.
Title: Re: 100% stocks in the accumulation phase?
Post by: steveo on July 29, 2016, 03:03:41 AM
100% stocks has produced the highest success rates over every rolling 40 year period going back to 1926 . 50/50 has done the best out to 30 years .
.....
90% of   every rolling 30 year period  a 70/30 mix left you with more then you started while providing that income stream . 2/3's of the time frames it left you with more then 2x what you started with .

All interesting points.

This is just for me but I have three phases. One to get to 60. One from 60 to about 70. A government pension from 70 onwards.

I have to do all of this though from a backdrop of not getting the pension and still just trying to have a 40 year potential plus retirement. I probably won't live that long but it could happen and I'd rather leave my kids with money than leave them with debt.

So if I look at that scenario maybe it's smarter to have a higher percentage of cash or bonds than go 100% stocks especially in the money to get me to 60.
Title: Re: 100% stocks in the accumulation phase?
Post by: arebelspy on July 29, 2016, 03:10:30 AM
This is just for me but I have three phases. One to get to 60. One from 60 to about 70. A government pension from 70 onwards.

I have to do all of this though from a backdrop of not getting the pension and still just trying to have a 40 year potential plus retirement. I probably won't live that long but it could happen and I'd rather leave my kids with money than leave them with debt.

So if I look at that scenario maybe it's smarter to have a higher percentage of cash or bonds than go 100% stocks especially in the money to get me to 60.

It very much depends on the size of the stache.  If you're underfunded, you may need the higher returns (and accept the volatility that comes with) to get there (it's a gamble, and you may be going back to work).  If you have enough, you can dial down the volatility, smooth the ride, and not worry that you're ending up with less, as long as you end up with some (which again, may not happen if the stache isn't big enough, and you don't give it enough returns to grow enough).

If you're more conservative, it's probably worth doing OMY, and a less volatile portfolio.  If you're okay with volatility, but not giving up more years of your life, you may not want to water down a portfolio with uncorrelated (and lower returning) assets.

Tyler does a good job showing some portfolios that do their best at that trade off (i.e. much less volatility for not that much worse of returns), but you are still giving up something (i.e. no free lunch), and whether or not what you give up is worth it depends on your priorities.
Title: Re: 100% stocks in the accumulation phase?
Post by: mathjak107 on July 29, 2016, 03:23:10 AM
100% stocks has produced the highest success rates over every rolling 40 year period going back to 1926 . 50/50 has done the best out to 30 years .
.....
90% of   every rolling 30 year period  a 70/30 mix left you with more then you started while providing that income stream . 2/3's of the time frames it left you with more then 2x what you started with .

All interesting points.

This is just for me but I have three phases. One to get to 60. One from 60 to about 70. A government pension from 70 onwards.

I have to do all of this though from a backdrop of not getting the pension and still just trying to have a 40 year potential plus retirement. I probably won't live that long but it could happen and I'd rather leave my kids with money than leave them with debt.

So if I look at that scenario maybe it's smarter to have a higher percentage of cash or bonds than go 100% stocks especially in the money to get me to 60.

my plan was grow all i could until my late 50's .  that meant maximizing returns in both my market investments and real estate .

ben franklin said a penny saved is a penny earned , plus taxes i might add but what he left out is that penny will always be a penny without good  compounding .

once i pretty much hit my savings goals  i cut back to about a 60/40 mix pre retirement  .

finally at retirement in light of low rates and high valuations i am using a rising glide path . i am at 35% equity's and over the next 15 years will increase by 2% a year up to 50/50 eventually .

the risk of a extended flat or downturn at this point is pretty high and i don't want to get caught in it day 1 of retirement so having just completed 1 year in retirement i still need a good up cycle to build that cushion .

we are delaying social security so while my draw now is about 3.50% from our portfolio once ss kicks in we will drop to 2% . that means very little dependency on markets so we can leave things at about 50/50 or we can reduce equity's way down because the draw is so little .

having options and choices in life is what having money is about . money may not buy happiness but it sure buys choices .
Title: Re: 100% stocks in the accumulation phase?
Post by: steveo on July 29, 2016, 03:55:29 AM
This is just for me but I have three phases. One to get to 60. One from 60 to about 70. A government pension from 70 onwards.

I have to do all of this though from a backdrop of not getting the pension and still just trying to have a 40 year potential plus retirement. I probably won't live that long but it could happen and I'd rather leave my kids with money than leave them with debt.

So if I look at that scenario maybe it's smarter to have a higher percentage of cash or bonds than go 100% stocks especially in the money to get me to 60.

It very much depends on the size of the stache.  If you're underfunded, you may need the higher returns (and accept the volatility that comes with) to get there (it's a gamble, and you may be going back to work).  If you have enough, you can dial down the volatility, smooth the ride, and not worry that you're ending up with less, as long as you end up with some (which again, may not happen if the stache isn't big enough, and you don't give it enough returns to grow enough).

If you're more conservative, it's probably worth doing OMY, and a less volatile portfolio.  If you're okay with volatility, but not giving up more years of your life, you may not want to water down a portfolio with uncorrelated (and lower returning) assets.

Tyler does a good job showing some portfolios that do their best at that trade off (i.e. much less volatility for not that much worse of returns), but you are still giving up something (i.e. no free lunch), and whether or not what you give up is worth it depends on your priorities.

I actually think that I'll retire with a reasonably aggressive WR. I will be higher than 4% for sure. If I choose to do OMY I think I'll do it part time. That additional year gives me more stash but it's also another year of not drawing down.
Title: Re: 100% stocks in the accumulation phase?
Post by: steveo on July 29, 2016, 03:58:09 AM
having options and choices in life is what having money is about . money may not buy happiness but it sure buys choices .

I've never really thought money or stuff was that important. I think it's critically important to have a baseline level of money but past that point I think it's not important at all.
Title: Re: 100% stocks in the accumulation phase?
Post by: mathjak107 on July 29, 2016, 04:05:38 AM
choices become important and choices take money . plus the older you get the more important money for choices become .

would you rather be forced in to a nursing home 100 miles away from family in a medicaid facility  or have the dough to modify your own home so you can stay there ?

as i get older tent camping and shoddy rooming houses to stay in while traveling no longer cut it . today i need the extra leg room in planes with more expensive tickets  and i want more comforts in hotels .

i learned early on just how important money can be and how important choices in life are .

just a quick story .

i was pretty low end growing up and lived in a new york city housing project .  well one day my best friend was arrested and he was arrested for something he didn't do . but his family was just over the limit for legal aid  and they could not afford a lawyer so he was going to  plead guilty to something he didn't do rather then risk a jury trial and it was all because he had no choice  financially .

oh , and how did i know he didn't do it ?  at the last minute he and i chickened out and did not go with the group that night .

at the last minute a relative took a loan and got him a lawyer and all charges were dropped .

 here was a teenager going to plead guilty to something he didn't do just because of lack of money and lack of choice.

it was that moment in my life i realized not only do i never want to go back to the projects  as an adult with my own family , but i always wanted to have money for choices . that motivated me for decades to do well financially one way or another .

i don't regret it for one moment . one of  the greatest feeling's you can have in life is choices  but choices can take money .
Title: Re: 100% stocks in the accumulation phase?
Post by: steveo on July 29, 2016, 04:22:42 AM
@mathjak - I get what you are stating but I still don't see the point of working too long to have a massive buffer. To me that is more of a risk than working to the point where I feel reasonably safe.
Title: Re: 100% stocks in the accumulation phase?
Post by: mathjak107 on July 29, 2016, 04:24:29 AM
one thing that has changed since 2000 is volatility . today we say greater volatility in markets . if in days of old you were comfortable with a 60/40 mix along came 2008 and the swings were far in excess of what you likely signed on for . today a 50/50 or even 40/60 may be the equivalent comfort range .

i prefer to maintain my portfolio by beta as opposed to a fixed allocation .

so as an example i am 35% equity's right now , but 1/3 the bond budget is a high yield fund . the high yield fund acts as a proxy for stocks in this case not bonds . when i bought it the  high yield market was beaten to a pulp . it priced things like 1/2 the energy company's were defaulting .  there was a lot of value there  in high yield .

so the high yield fund has returned 10% ytd total return  beating our  stocks , yet it has a beta of 1/2 of what the s&p 500  does .

so at times you can achieve better returns at less risk by watching beta on the total portfolio instead of fixed allocations .

 in retirement i try to maintain a beta about 40% to 60% less then the s&p 500 .
Title: Re: 100% stocks in the accumulation phase?
Post by: mathjak107 on July 29, 2016, 04:27:05 AM
@mathjak - I get what you are stating but I still don't see the point of working too long to have a massive buffer. To me that is more of a risk than working to the point where I feel reasonably safe.

i can't tell you what is enough for you , only you can do that . but everything has a balance point . it is up to you to find it .

the problem is as humans our logic only deals with what we know . it does not take in to consideration all the things we don't know yet or that will eventually be important .

my list of priority's have  changed so much  as i age and i am only 63 . .

in fact we owned a 2nd home in the pocono's of pa.  where we had planned to retire to eventually . why not , it was cheaper , we loved hunting and fishing and small town life .

well once we reached the point where we could retire i switched to my retirement hat and boy were our heads turned around .

now we are realizing everything we would want as we aged we lacked .

limited medical facility's  with few choices

limited specialists with few choices

limited doctors with few choices

no public transportation system  if we could not drive . you can't get milk without a 15 minute drive .

if i wanted to work a bit there were only low paying near minimum wage jobs

after 5 years there we were running out of things to do daily .

we were to far from family if we needed help or some care .

we were to far to be a weekly or daily part of our grand kids lives .

the list went on and on and we ended up selling and retiring right here in queens in nyc where we lived  .  it has everything we want in retirement although at a higher price but to us , well worth it .

when we first thought about buying the place and retiring in pa , these thoughts were not even on the radar and were totally left out of the equation by our brains at the time. .

so we were glad we developed the leval of savings we did . the life we planned around in pa was not the life we ended up really wanting .

at the end of the day only you know how much is enough , but i will say odds are that  number will change as you go through life and different things become more important .

in our case we always wanted to live better in retirement then we did while  saving , investing  and struggling raising a family . it was our reward for reaching that point so we wanted as much as we could muster while retiring , still  young enough to do anything we wanted . so we found our balance , everyone else has to find theirs .

Title: Re: 100% stocks in the accumulation phase?
Post by: Retire-Canada on July 29, 2016, 07:38:00 AM
@mathjak - I get what you are stating but I still don't see the point of working too long to have a massive buffer. To me that is more of a risk than working to the point where I feel reasonably safe.

People also seem to forget that if you are going to retire early and have a 40 - 50yr+ retirement it's unlikely you'll never earn another dollar again.

I won't be particularly shocked if I want to do some PT work 20yrs after I FIRE to keep active and stay engaged. First I've got a ton of mountain biking, surfing, fly fishing, etc... to do and missing out on that while my body and mind are healthy would be a crime. ;)
Title: Re: 100% stocks in the accumulation phase?
Post by: Kaspian on July 29, 2016, 08:01:22 AM
It's strange but I agree with both sides here.  The 100%ers are mathematically super-correct.  I'm personally a 60/40 splitter and still in the accumulation phase.  However, initially I was insanely conservative.  Psychologically, I wanted a solid "chunk" of about $150K that I knew wasn't going away before I increased volatility.  Mentally it felt as though I was building a solid foundation to build upon.  Would I have been better off as 100% equities?  Maybe, but maybe not--that $150K in bonds (Canadian investor for the record) returned something like 13-25% annually over the 2007-2009 timeframe.  Over the same period, I was able to then move a good portion of those returns into equities while they were at the bottom.  I know it wouldn't always workout that way, but it did well.  Either way, once I had a sizeable chunk as foundation I was and still am much more comfortable with adding risk.  Should I dial up the equities portion even more now?  Maybe.  Probably.  My portfolio could become unbalanced quite a bit now and it wouldn't really phase me.  But my 8-year old Personal Investment Policy states in several places to stick with the plan and not fuck around.  (Also possible I was insanely conservative at the beginning (2004-2006) because I'd figured out for myself that regular mutual funds were bullshit yet hadn't learned of indexing yet.)
Title: Re: 100% stocks in the accumulation phase?
Post by: mathjak107 on July 29, 2016, 08:18:49 AM
your over all plan at the end of the day determines how you do . i have used fidelity managed funds for 27 years and did very well .  don't forget there are different index funds with different expenses and turnover . no one gets those returns since your own plan has you  buying in at different points , you add money at different times , rebalance differently , have different sell points and different tax structures .

somethings you will get  better and somethings worse .  but it is not about just the funds , it is about the total  portfolio working as a team .  my portfolio is dynamic , the funds change over time to fit the big picture . funds are used through their sweet spots and then traded for funds that fit better . so the funds may not beat their index's every year but your portfolio can beat indexing over time . 

it reminds me of the guy buying a new car . he pounds the dealer in to the lowest possible price , then beats up the finance guy for the best terms . what a great deal he got .

then a few years later he comes back and trades the car in wholesale .

in the mean time grandma paid more  for the car , a bit more interest but sold the car privately for a better over all deal .

it is very difficult if not impossible to play what if's  between  portfolio's since all the above are variable and like i say somethings you will do right and some wrong .

expenses are only a part of the story , but if the overall portfolio is getting alpha then it is worth every penny .

i have used the fidelity insight newsletter for decades . the growth model since 1987 with 100k in it has beaten the s&p 500 by over 400k . but that is about the only comparison you can make because the funds are all different and some have no index equals . there really is very little comparison you can do because of all the variables . so it isn't like i can say what if i used index funds instead . i can't so comparing is silly .

at the end it is all about  how you are doing overall and not some index in theory .

the biggest factor is how much  your balance is at any point in time . having great years with a small balance is going to be very different then great years when your balance is high .  so the fact an index did well over certain time frames may not help you much if you just started investing and had little invested  compared to if the index lagged when you have your max saved .

folks get to wrapped up in  just one aspect most of the time and miss the results of the bigger picture  .

overall many folks would do better concentrating on their later years tax structure then every penny in expenses . getting your social security taxed forever when a better tax structure could have avoided that is priceless .

what you pay for medicare , any aca subsidy's , rmd's , etc are all tied in to your tax structure .

there are so many aspects to your final plan that anyone of them can be slightly out of whack and the other parameters will make up for it if you do better planning  because none of us will get all those parameters perfect . .

i did well investing but dropped the ball on things i could have done better tax wise but didn't know what  i didn't know so i thought i knew all i needed to .  .
Title: Re: 100% stocks in the accumulation phase?
Post by: Kevin K. on July 29, 2016, 09:00:56 AM
Lots of great discussion here!

I love the range of options and approaches Tyler offers on his site. Two allocations we haven't talked about here are William Bernstein's Coward's Portfolio and Paul Merriman's Ultimate Buy & Hold (with the latter having the distinction of having the highest net CAGR of any of the model portfolios featured). I think they're of interest because they both reflect the truly market-neutral approach recommended by Fama & French, Bernstein himself and the other main players in modern portfolio theory. In part the argument is since we don't know what countries or sectors are going to outperform going forward why not own the total market - of which the U.S. now represents under half of all investable assets? Of course there's a lot more to it than that, including demographic and equity valuation analysis of each country and macroeconomic trends.

I'm old enough myself that my investment time horizon is much shorter than many posters here, but if I were trying to plan for 50+ years in retirement I'd want a truly market-neutral approach.

Regarding mathjak107's point about gold, it applies to a whole lot of other investable asset classes too. The ability to (and history of) broad swaths of the public being able to invest in stocks altogether didn't really get going until the proliferation of mutual funds during the 1970's, while the ability to invest in narrow slices of the stock and bond markets is more recent still.

Here's an article by the principal of one of the top FA firms offering low-cost, fixed-fee access to DFA funds that I think makes a worthwhile "bookend" to Tyler's article about 100% stocks. There's another piece on the same site ("Stocks for the Long Run"?) that may also be of interest, but this particular piece deals really well with variability of returns, the value of truly broad diversification and (last not least) the only sane discussion of what gold can and can't do I've seen.

http://www.evansonasset.com/?Page=18 (http://www.evansonasset.com/?Page=18)
Title: Re: 100% stocks in the accumulation phase?
Post by: mathjak107 on July 29, 2016, 09:09:10 AM
pretty much nothing back then is  what it is today .  but we can still stress test mathematically .  since we  know in order to pass through those 4 worst time frames we need at least a 2% average real return over the first 15 years of a 30 year period .  that is what a 4% safe withdrawal rate boils down to .

so all you need to know is whether you are on track or not and you can apply those results to any investment .. the math will be different going out longer and i have not seen anything longer then 30 years quantified as far as what it takes to hold it . michael kitces did it out to 30 years . he found every failure in the worst cases was because real returns fell below 1% over the first 15 years . no matter how good things turned after that there was just to much spent down already .

so a  2% real return average should give you the clearance you need ,.  by the way the s&p 500 still has not seen that since 2000 .
Title: Re: 100% stocks in the accumulation phase?
Post by: Tyler on July 29, 2016, 09:38:11 AM
pretty much nothing back then is  what it is today .  but we can still stress test mathematically .  since we  know in order to pass through those 4 worst time frames we need at least a 2% average real return over the first 15 years of a 30 year period .  that is what a 4% safe withdrawal rate boils down to .

BTW, there's a calculator for that, too.  Just set the timeframe to 15 years. 

https://portfoliocharts.com/portfolio/rolling-returns/

It's true that we don't have data for all of history for every asset.  But IMHO you can still learn something from working with what we have.  It's about knowledge, not guarantees. 
Title: Re: 100% stocks in the accumulation phase?
Post by: DavidAnnArbor on July 29, 2016, 09:57:04 AM
David Levine, former chief economist at Sanford C. Bernstein & Co., agrees that 100% equities is the way to go.

http://www.nytimes.com/2016/02/13/your-money/how-much-of-your-nest-egg-to-put-into-stocks-all-of-it.html

"Both the historic record and logic argue for stocks over bonds."
Title: Re: 100% stocks in the accumulation phase?
Post by: FIPurpose on July 29, 2016, 10:09:40 AM
I've been thinking a good bit about this lately, and I appreciate the number of people who have been posting here. I like the idea of being higher risk during your accumulation phase, and I think the reasons are twofold.

1. sequence-of-returns don't matter nearly as much. (Though still a little)
2. you're not dependent on your portfolio for income.

However, despite ER folks having such a short accumulation period, we spend rather little time discussing the survivability of withdrawing on those portfolios. Even though mathematically you most likely will come ahead using TSM. During your withdraw phase that is not nearly as correct. I have really been enjoying Tyler's website and calculators. Here are two charts comparing TSM and GB 4% withdraws

Over 30 years not only does GB show 100% success rate, it, at a minimum, doubles your money over 30 years. While I don't know what the success of GB will be going forward, I do know that many mustachians are taking on a lot of risk for their withdraw phases. I would instead suggest that once you've hit your number, stop playing.

Once you've hit your number, it shouldn't be about making the most the fastest. It should be about living a comfortable life with a reliable source of income. That is the benefit of GB or other similar low-volatility portfolios.

I'm still in my 20's and don't plan on fully living off my portfolio for about another 15 years, but even though I've been able to make several fantastic investments over the past couple years. I still have to consider:

1. withdraw survivability.
2. after I die, will my wife be able to maintain and manage that portfolio herself?
3. what beyond my ego would make me want to earn more money faster?
Title: Re: 100% stocks in the accumulation phase?
Post by: arebelspy on July 29, 2016, 11:45:23 AM
While I don't know what the success of GB will be going forward, I do know that many mustachians are taking on a lot of risk for their withdraw phases. I would instead suggest that once you've hit your number, stop playing.

I 100% agree with the sentiment.

The issue is, you'll have to hit a lot LARGER number to then utilize decades of a portfolio that underperforms (for the benefit of less volatility).

If you love your job, and accumulate way more than necessary, then yes, you've won the game and can stop playing with risk, and take a low-volatility, lower returning portfolio.

If you don't like your job though, or have other things you want to FIRE to do, and you acquire "enough" under a higher returning portfolio though, one could argue you've "won the game" at that point, and stop playing (i.e. working for money).  In that case, a portfolio that doesn't return enough is fatal.

There's always trade offs. If you can't stomach volatility, and want to sacrifice some returns for less of it, great.  But you're trading your time to build up a larger portfolio to handle that (e.g.--look at the first charts I posted in the thread, maybe 4 or 5 replies in.  Say you need 1MM.  Look at when TSM tends to hit it, and when GB hits it.)

The other thing is, you've once again (as people have done a few times) switched the conversation from accumulation to draw down.  There are tangible draw backs to having a portfolio like GB in draw down (e.g. lower returns = need larger stache = longer working time, as above), but this thread is about in the accumulation phase (where, again, you have the drawback of lower returns=longer working time).  Either way though, GB, while it has many, many merits, isn't a free lunch.  And one can look at "winning the game" either way.

1. withdraw survivability.
2. after I die, will my wife be able to maintain and manage that portfolio herself?
3. what beyond my ego would make me want to earn more money faster?

Sure, and I can argue why all these point to TSM.

1. Agreed.  And typically higher returns, if you can ride out the volatility, lead to more survival.
2. Agreed. And if she can handle volatility, simplicity (i.e. TSM) is a virtue.
3. Maybe you don't like your job?  Maybe you have other things you want to do in FIRE?  Maybe you can use the money to some good (help a sick family member, donate money to charity, etc. etc.--hell your own blog is FI with a purpose...what is that purpose?)?  Ego has nothing to do with it (are you broadcasting how much you have on a billboard or something?), but there's lots of good that can be done with more, especially if that more can be gained at minimal cost (having a different AA, no real extra time or work required).
Title: Re: 100% stocks in the accumulation phase?
Post by: Tyler on July 29, 2016, 12:02:38 PM
The issue is, you'll have to hit a lot LARGER number to then utilize decades of a portfolio that underperforms (for the benefit of less volatility).

That's actually not true.  Less volatile portfolios can support higher withdrawal rates, which means you don't have to save as much to maintain the same amount of retirement income as a high volatility portfolio.  The images in FIPurpose's post illustrate that pretty well.  The balance between speed of portfolio growth and durability of portfolio withdrawals is what the Financial Independence calculator (https://portfoliocharts.com/2015/10/19/your-ideal-route-to-financial-independence-may-be-off-the-beaten-path/) addresses.
Title: Re: 100% stocks in the accumulation phase?
Post by: mathjak107 on July 29, 2016, 12:05:12 PM
but keep in mind , that would be higher draw rates from the less volatile portfolio  GIVEN EQUAL RETURNS . that is why fixed income which is not volatile can only support 2% safe withdrawal rates out to 30 years  and 100% stocks can support 4%  . that is a 100% increase in your pay check between the two .

given two assets , with the same return , the more volatile one would have to keep more powder dry .

but that is not the case here since 100% equity's over the long haul can support a higher draw rate over 25% equity's as an example

Title: Re: 100% stocks in the accumulation phase?
Post by: Tyler on July 29, 2016, 12:27:31 PM
but keep in mind , that would be higher draw rates from the less volatile portfolio  GIVEN EQUAL RETURNS .

I understand it's unintuitive, but that's also not completely true.  Portfolios with lower returns can have higher withdrawal rates if the volatility is low enough.  Think of it this way -- if you could purchase 30-year TIPS that paid a guaranteed 4% every year adjusted for inflation, you could hold it to maturity and be 100% guaranteed to support your 4% WR.  The stock market has to average over 7% real to compensate for the volatility.  Different portfolios play in the spectrum in between. 

But that's off topic, and there are other threads for retirement talk. 
Title: Re: 100% stocks in the accumulation phase?
Post by: mathjak107 on July 29, 2016, 12:34:37 PM
you would still  have a higher draw from equity's and cash then 100%  tips .

looking at the sweet spots on the efficient frontier :

 the ideal mix for tips is 33% stock/ 67% TIPS   vs 64% stocks /34% cash    .

the tips support a slightly higher draw rate but the value of the portfolio at the end is reduced compared to 64% stock /34% cash .

for every 1k you started with , the 64% stock model ended with 2,551.00  left at the end as a balance  , the tips portfolio a bit over 1250.00  so you could take substantial raises over time in the non tip model .  this is why i say be careful , to really get the whole story you need to look at draw plus balance not draw alone .

for more volatile portfolio's the suggested glide path for taking a raise is every three years draw another 10% plus the normal inflation adjusting if your portfolio is above 50% more from where you started . that avoids the problem of having to keep so much dry powder if sequences and outcomes are better then worst case .

(https://photos.smugmug.com/photos/i-vvhWQ5r/0/O/i-vvhWQ5r.jpg)



http://www.retireearlyhomepage.com/safetips.html
Title: Re: 100% stocks in the accumulation phase?
Post by: bryan on July 29, 2016, 12:40:29 PM
what's interesting to me about the OP is that it seems to be not very controversial to have one portfolio before you FIRE and another after you FIRE. Maybe having some transitional states in between...

yet, to my knowledge no online tools/calcs are able to run the numbers for such cases. Best you can do is open multiple tabs in multiple windows and do a sort of piecewise exercise.
Title: Re: 100% stocks in the accumulation phase?
Post by: Tyler on July 29, 2016, 02:00:05 PM
what's interesting to me about the OP is that it seems to be not very controversial to have one portfolio before you FIRE and another after you FIRE. Maybe having some transitional states in between...

yet, to my knowledge no online tools/calcs are able to run the numbers for such cases. Best you can do is open multiple tabs in multiple windows and do a sort of piecewise exercise.

I'm working on it.  ;) 

Mathjak's example illustrates the conundrum.  Different portfolios can support very different withdrawal rates, and the percent stock does not tell the whole story.  Different portfolios also support different average end values, which as we've discussed can also vary by the timeframe you're talking about.  And a portfolio that is superior for one priority may be inferior for the other.  It's a complicated problem, and there are no easy answers suitable for all investors.  That's why it's important to take the time to understand the tradeoffs and make the best decision for you personally. 

Like I said in the article, I do believe that if you take the time to find a dependable, efficient, and sustainable portfolio that works for you in accumulation, switching to something entirely different at retirement probably won't seem so appealing. 
Title: Re: 100% stocks in the accumulation phase?
Post by: mathjak107 on July 29, 2016, 02:07:35 PM
the same reasoning is why we are delaying social security . we can take bigger draws day 1 by delaying because ss combined with our own investing allows higher draw rates because it has no sequence risk .

in the case of ss though if you live long enough you get a bigger balance as well as the bigger draw . you can take that bigger draw  early on from day 1 while delaying too .

we use bob clyatts dynamic spend down method . it works well for us . it lets us spend a bit more when we are up but restricts the cuts to a max of 5% if we are down .

it tests out at 100% beyond 40 years .
Title: Re: 100% stocks in the accumulation phase?
Post by: arebelspy on July 29, 2016, 02:19:28 PM
what's interesting to me about the OP is that it seems to be not very controversial to have one portfolio before you FIRE and another after you FIRE. Maybe having some transitional states in between...

Oh, I could rant about this, too.  :)

I think for the disciplined investor, having two different portfolios is a mistake.  It's a psychological crutch, like many things we do in investing.

It's accepted, but that doesn't mean I think it's optimal, or something i'd practice personally.

(Others obviously agree--GCC, for example, with the 100% equities in ER, and I think he'd, now, advocate the same for before.)
Title: Re: 100% stocks in the accumulation phase?
Post by: mathjak107 on July 29, 2016, 02:27:24 PM
that is where we disagree . the answer is it depends on individual situations .

my pre retirement portfolio was all about growing richer .  my retirement portfolio is all about not growing poorer . we want the minimum amount of volatility that we can get down to and still maintain our income and legacy goals .


 i used the fidelity insight growth model all my accumulation years , that was always 90-100% equity's and a beta that ranged from 10% less then the s&p to 10% more .

today in retirement i use their income and preservation model for 2/3's of our money , beta is .33 and i use 1/3 the growth and income model , beta .69.


the combo has us right where we want to be and we can still see 40k swings in one day . a few weeks ago that is the drop we saw in one day  , it was an insane amount of dollars  .

others may still want to tolerate high volatility and growth , others may meet goal with just something like the income model .

Title: Re: 100% stocks in the accumulation phase?
Post by: arebelspy on July 29, 2016, 02:33:38 PM
the answer is it depends on individual situations .

Of course. 

But in most situations, your investment time horizon isn't the X years to ER, it's the total years you have left.
Title: Re: 100% stocks in the accumulation phase?
Post by: mathjak107 on July 29, 2016, 02:40:57 PM
for us it was about winning the game . getting to retirement with enough money to carry us through at a lifestyle we want .

now that we won the game we don't have to keep playing and tolerating drops in one session  that represent what folks make in a year .

now we want as little dependence on the whims of markets and rates as we can get down to .

if it was up to my wife we would be doing an integrated strategy .

spia's for income , life insurance for heirs and some of our own investing for growth and inflation protection with as little left to chance anymore as she could get .


i have to say , i have been a hardcore , high risk investor my whole life but her thoughts do interest me .
Title: Re: 100% stocks in the accumulation phase?
Post by: FIPurpose on July 29, 2016, 02:50:42 PM
what's interesting to me about the OP is that it seems to be not very controversial to have one portfolio before you FIRE and another after you FIRE. Maybe having some transitional states in between...

Oh, I could rant about this, too.  :)

I think for the disciplined investor, having two different portfolios is a mistake.  It's a psychological crutch, like many things we do in investing.

It's accepted, but that doesn't mean I think it's optimal, or something i'd practice personally.

(Others obviously agree--GCC, for example, with the 100% equities in ER, and I think he'd, now, advocate the same for before.)

I agree for ER people. I know I was a little off topic with talking about a draw down portfolio, but if a lot of people on this forum are only accu. for about 15% of their investing life (10 years acc. and 50-60 retired) then the question you want to ask is not what's the best portfolio for accumulation but what is the best portfolio for longevity and safe cash flow.

For people who work 30 years w/ 30 year retirement, that's a very different horizon. Those are 2 separate long-term goals which would be why most retirement funds at vanguard or fidelity work a smooth transition from an aggressive growth strategy to a higher bond mix strategy close to draw down.

But the accumulation phase is such a small window for an ER'er, it might be better to start with the portfolio you want in actual retirement.
Title: Re: 100% stocks in the accumulation phase?
Post by: mathjak107 on July 29, 2016, 02:54:57 PM
age you retire has a lot to do with allocations . don't forget we retired at more traditional ages . if we retired in our 40's we would have to have stayed a lot more aggressive longer .
Title: Re: 100% stocks in the accumulation phase?
Post by: arebelspy on July 29, 2016, 02:56:31 PM
what's interesting to me about the OP is that it seems to be not very controversial to have one portfolio before you FIRE and another after you FIRE. Maybe having some transitional states in between...

Oh, I could rant about this, too.  :)

I think for the disciplined investor, having two different portfolios is a mistake.  It's a psychological crutch, like many things we do in investing.

It's accepted, but that doesn't mean I think it's optimal, or something i'd practice personally.

(Others obviously agree--GCC, for example, with the 100% equities in ER, and I think he'd, now, advocate the same for before.)

I agree for ER people. I know I was a little off topic with talking about a draw down portfolio, but if a lot of people on this forum are only accu. for about 15% of their investing life (10 years acc. and 50-60 retired) then the question you want to ask is not what's the best portfolio for accumulation but what is the best portfolio for longevity and safe cash flow.

For people who work 30 years w/ 30 year retirement, that's a very different horizon. Those are 2 separate long-term goals which would be why most retirement funds at vanguard or fidelity work a smooth transition from an aggressive growth strategy to a higher bond mix strategy close to draw down.

But the accumulation phase is such a small window for an ER'er, it might be better to start with the portfolio you want in actual retirement.

I agree, but I would argue it's more important for ER people not to choose an overly conservative portfolio that under-performs after decades, because their portfolio needs to last them so much longer (versus someone retiring at a much older age).
Title: Re: 100% stocks in the accumulation phase?
Post by: mathjak107 on July 29, 2016, 02:59:24 PM
being to conservative has sent more failed retirements to the failed retirement graveyard then being to aggressive .  the longer you spend in retirement the greater the risk of running out of money before you run out of time .

if you think it sucks working or finding a job at 60 , try it at 80
Title: Re: 100% stocks in the accumulation phase?
Post by: FIPurpose on July 29, 2016, 03:20:21 PM
Yep I'm on board MMM style ER's should probably use 1 portfolio. Something Tyler mentioned before was the Coward's portfolio 55 stock - 40 short treas. - 5 REIT. That provides a good blend of return and marginal safety. There is definitely more than one portfolio that can accomplish this, but like many have said before on this thread: "Find something that works and you're comfortable with then stick with it."

The Coward's Portfolio (CP) on the 30 year backtest provided a median final value only 9% smaller than the TSM port. and a minimum value that was 88% higher.

I don't have anything against 100% TSM. You will be rewarded greatly for investing long-term with it, but I believe there are portfolios that can provide much greater lower volatility for a relatively low reward trade-off.

Good luck in your decision OP.
Title: Re: 100% stocks in the accumulation phase?
Post by: arebelspy on July 29, 2016, 03:26:31 PM
The Coward's Portfolio is interesting.  The name is quite off putting.  Needs to be catchier. The hedger's portfolio.  Something like that.  ;)
Title: Re: 100% stocks in the accumulation phase?
Post by: Shane on July 29, 2016, 08:23:38 PM
the answer is it depends on individual situations .

Of course. 

But in most situations, your investment time horizon isn't the X years to ER, it's the total years you have left.

^This.

Right now, during retirement, DW and I are holding about 5% cash in a savings account and 95% VTSAX, because our time horizon for investing is 40+ years!

Thinking of the accumulation phase and the withdrawal phase of retirement as two discrete things makes no sense to me. When someone starts saving and investing at, say, age 25, even if he's only planning on working 10 years and ERing at age 35, from the beginning he needs to be thinking about the fact that the money he's saving may need to sustain him and his family for 70+ years. In that case, IMO, the only rational choice is to invest in TSM.

I'm 50 years old, stopped working a little over a year ago and am planning on a 40+ year retirement. During the accumulation phase my wife and I always held 100% equities. I absolutely could care less about volatility. The dollar value of each share of VTSAX that I own does not affect me in any way, except when I sell shares. Obviously, when share prices drop significantly, we will be flexible and try to minimize the number of shares we sell for a couple of years, hustle a little bit, maybe make some money, maybe come up with some creative ways to spend less while still enjoying a high standard of living, but we're not going to panic.

I've watched the share prices of the equities I was holding plummet 3 times in my life: 1987, 2000 and 2008. The first time, I was young, and didn't know any better, so I sold all my stocks after the market crashed in October of '87. After that, I learned, and in 2000 and 2008, even though there was a lot more money in my accounts, I didn't sell anything, and a few years later my account balances were 2-3x what they had been before the crashes. Obviously, the fact that I kept buying stocks during that time, helped a lot.

I agree with ARS that how conservative you are in retirement depends on how much money you've got saved. If you've got way more than you need, then I guess it might make sense for some people to dial back their portfolios to be less volatile and try to preserve what they've got as much as possible. For many of us, though, ER is more of a continuation of the accumulation phase. Many of us will either make money and/or find creative ways to live on less during the early years of our retirements, in hopes that our 100% stock portfolios will continue to grow, even without our continuing to dump our paychecks into them.

Recently, I had my free investment consultation from Personal Capital. The investment advisor was like, "So, when you're 90 years old, your portfolio is still going to be 100% stocks?" My answer was, "Yes." He said, "That would be really risky!"

I told him, "I'm sorry, but I disagree." What risk could there be to my portfolio being 100% equities when I'm 90+ years old? If the stock market drops 50%, so what? I've still got the other 50% of my money, which will be more than enough to continue to draw 3-4% of the starting amount/year, or more, until we die.

All the charts from Tyler's site I've looked at in this thread only go back to 1972, so it's basically just one 40+ year period. Using FIREcalc and cFIREsim, we can look back at ~100 forty year periods and analyze how various AA's of bonds, stocks and cash would've performed. I trust those numbers more than just one 40 year period for GB.
Title: Re: 100% stocks in the accumulation phase?
Post by: steveo on July 29, 2016, 09:47:54 PM
Yep I'm on board MMM style ER's should probably use 1 portfolio. Something Tyler mentioned before was the Coward's portfolio 55 stock - 40 short treas. - 5 REIT. That provides a good blend of return and marginal safety. There is definitely more than one portfolio that can accomplish this, but like many have said before on this thread: "Find something that works and you're comfortable with then stick with it."

The Coward's Portfolio (CP) on the 30 year backtest provided a median final value only 9% smaller than the TSM port. and a minimum value that was 88% higher.

I don't have anything against 100% TSM. You will be rewarded greatly for investing long-term with it, but I believe there are portfolios that can provide much greater lower volatility for a relatively low reward trade-off.

Good luck in your decision OP.

This is why I think asset allocation can work really well.
Title: Re: 100% stocks in the accumulation phase?
Post by: steveo on July 29, 2016, 09:48:46 PM
Thinking of the accumulation phase and the withdrawal phase of retirement as two discrete things makes no sense to me.

I completely agree with this. I don't see the difference.

I agree with ARS that how conservative you are in retirement depends on how much money you've got saved. If you've got way more than you need, then I guess it might make sense for some people to dial back their portfolios to be less volatile and try to preserve what they've got as much as possible. For many of us, though, ER is more of a continuation of the accumulation phase. Many of us will either make money and/or find creative ways to live on less during the early years of our retirements, in hopes that our 100% stock portfolios will continue to grow, even without our continuing to dump our paychecks into them.

I don't really want to go back to work. I might but I don't think I'll do that. I may though want to spend a little more at times. I basically though agree with this point. My account balance doesn't matter to me in that I don't care if people have more than me. I am though interested in safety. Safety in my situation will probably require a lot of growth assets rather than defensive assets. If I get to the point where I have too much I may consider dialling down the stock percentage within my portfolio.
Title: Re: 100% stocks in the accumulation phase?
Post by: Radagast on July 29, 2016, 10:13:44 PM
Previously I made some comments which I realize were off topic, because the topic is clearly "accumulation phase."

I feel that for anyone who can stand to watch large losses on a computer screen, 100% equities is appropriate for accumulation. I have a little double standard here because I keep 8% of my tax sheltered accounts in very long duration treasury bonds, but I admit there is only about a 50% chance of them being useful. In fact I will take it a step farther and say that 100% Total US stock market is not risky enough for an accumulator. Ideally I would suggest the most volatile corners of the stock market, which not by coincidence frequently have the highest returns. Small cap stocks, small cap value, international small cap, emerging markets, all of these are appropriate additions. After eliminating unacceptable funds I might even recommend sorting your available funds by standard deviation, eliminating the remaining unacceptable funds, and invest in the funds which are most volatile. <-- Use this with caution. My reasoning for thinking this is as follows:

https://www.portfoliovisualizer.com/backtest-portfolio?s=y&timePeriod=4&startYear=1985&firstMonth=1&endYear=2016&lastMonth=12&endDate=07%2F29%2F2016&initialAmount=1000&annualOperation=0&annualAdjustment=1000&inflationAdjusted=true&annualPercentage=0.0&frequency=2&rebalanceType=4&showYield=false&reinvestDividends=true&symbol1=VFITX&allocation1_1=100&symbol2=VEIEX&allocation2_2=100
Above is a comparison of Vanguard's emerging market (VEIEX) and intermediate term treasury bond (VFITX) funds from 1995 (inception of VEIEX) to 2016 (present). Over this time period VEIEX had a CAGR of 5.82% and standard deviation of 24.23%. The bond fund returned 6.07% annualized and had a standard deviation of 4.77%. Emerging market stocks were an absolutely bad investment, while US treasury bonds made all other investments seem stupid over this period. Clearly the bond fund was a terrible choice for an accumulator, but EM was a good one. Why?

https://www.portfoliovisualizer.com/backtest-portfolio?s=y&timePeriod=4&startYear=1985&firstMonth=1&endYear=2016&lastMonth=12&endDate=07%2F29%2F2016&initialAmount=1000&annualOperation=1&annualAdjustment=1000&inflationAdjusted=true&annualPercentage=0.0&frequency=2&rebalanceType=4&showYield=false&reinvestDividends=true&symbol1=VFITX&allocation1_1=100&symbol2=VEIEX&allocation2_2=100
Above is a comparison of VEIEX and VFITX for a person who contributed $1,000 per month throughout that period. The emerging markets investor ended with $697,000, but the bond investor ended with only $584,000! The higher returning asset did worse by a wide margin! This is possible because VEIEX's repeated fire sales allowed the frequent purchaser to acquire a huge number of shares, which later turned in huge capital gains. Not only does volatility often denote asset classes with higher expected returns, but the mere existence of volatility is a benefit to accumulators in itself. Even if the volatile fund does not give the returns you hoped for, there is a substantial margin for error because of the volatility. It's a double whammy. Don't use this if you can't hold on.

It works in reverse if you are regularly selling.


Title: Re: 100% stocks in the accumulation phase?
Post by: TomTX on July 31, 2016, 07:15:20 AM

This is why I'm not a fan of 100% stocks. When there is a 50% drop and you retired yesterday on a 5 % WR  it's going to hurt. If you can sit back and state well I'm not pulling any money out of stocks for the next 5 years so I'll just wait it out I think that is going to hurt less. What if you are in this situation and then you go back to work. Isn't that what we are trying to avoid ?

Yeah, it will hurt - just not as badly as people seem to think.

You have a $1,000,000 portfolio in TSM and plan on taking out a 5% WR.

Market crash, you have $500,000 in TSM and take out $50k, right? 10% of your stocks sold.

NOPE.

You take out roughly $30k and receive roughly $20k in dividends. (possibly slightly worse if dividends were cut) - only 6% of your stocks were actually sold.
Title: Re: 100% stocks in the accumulation phase?
Post by: mathjak107 on July 31, 2016, 07:48:32 AM
but it is more complex then that since perhaps if you were more conservatively invested  the 1 million would be a lot less as a starting balance   . in which case spending down from the more aggressive model in a down turn  may leave you with a higher balance then the more conservative model after the down turn .

traditionally that is usually how it plays out . the drag on the more conservative portfolio never develops the cushion in up markets that the more aggressive model does
Title: Re: 100% stocks in the accumulation phase?
Post by: Kevin K. on July 31, 2016, 08:50:51 AM
Radagast makes some good points and I'd take it a bit further to point out that if someone is going to go 100% stock or close to it doing so using only U.S. TSM means choosing to ignore everything we've learned from modern portfolio theory and market history. These days slicing and dicing for size and value and having a truly agnostic all-world equity portfolio can be as easy as just signing up with Betterment, or for those averse to paying their .15% fee just implementing the most aggressive allocation of Merriman's Ultimate Buy & Hold:

http://paulmerriman.com/vanguard-tax-deferred-etf-portfolios/ (http://paulmerriman.com/vanguard-tax-deferred-etf-portfolios/)

Tyler's site, great as it is, doesn't allow you to model complex portfolios with uneven allocations to various subequity classes, but that's what the computers at DFA and robo-advisor sites like Betterment are for.

MMM himself has a nice little graph that tells you all you need to know about why TSM as your only stock choice makes little sense:

http://www.mrmoneymustache.com/betterment-vs-vanguard/ (http://www.mrmoneymustache.com/betterment-vs-vanguard/)

Title: Re: 100% stocks in the accumulation phase?
Post by: mathjak107 on July 31, 2016, 08:58:08 AM
a total stock market fund is really not total market .  the s&p 500 is influenced  by just 50 of its top holdings . the total market of 5000 stocks is heavily influenced to the tune of 75-80% s&p 500  which in turn is dominated by just 50 stocks .

for years recently the   mid-caps and small caps were beating the s&p 500 by 5-6% a year . a total market fund saw about a 1% difference .

for best results use an s&p 500 fund and an extended market fund and season to taste
Title: Re: 100% stocks in the accumulation phase?
Post by: DrF on August 04, 2016, 03:49:15 PM
I've been studying up on Tyler's portfolio charts site, and I've completely changed my mind in that I now think one should NOT be 100% stocks during the entire accumulation phase. My previous post (http://forum.mrmoneymustache.com/investor-alley/100-stocks-in-the-accumulation-phase/msg1168669/#msg1168669) merely showed that lower returns did not cause a huge lag on time to FI (basically, you could retire at almost the exact same time with a lower CAGR/IRR). The scenario I described didn't account for sequence of return risk. Using Tyler's Rolling Returns calculator it shows that if you were 100% TSM and started saving in 1997, you wouldn't earn more than 6% per year over the next 10 years for every year up until the last year data are available (2006). If you had FIRED in 1999 or 2000, you would have lost more than 2% per year for the next 10 years. If you were trying to save during this time, or if your final few years of saving your stash were in 2000-2001, then you would have had to extend your working years by much much longer. Tyler's Financial Independence calculator gives a nice pictorial of what would happen during best and worst case scenarios, basically if you started saving 50% of your income in 100% TSM, the absolute least amount of time it would take you (based on historical backtesting) to be FI was 11 years (which is pretty good). But...there is not an insignificant spread in how long it would take you to be FI based on what year you began. The most amount of time it would take you, still saving 50% and 100% TSM, would be 23 YEARS!!!! There are many periods in between representing a large fraction of the time that you would have to continue working much longer if you were 100% TSM. Alternatively, if you were super, super conservative and did the golden butterfly AA, the earliest you would be FI is 12 years (so, only 1 year more than 100% TSM), but the latest you would be FI is 15 years (A WHOLE 7 YEARS FASTER THAN THE WORST 100% TSM). I don't know about you, but when I realized this, it scared the shit out of me. Even the worst rolling 10 year average return using golden butterfly was almost 4% (starting in 1999). Let's say you think golden butterfly is an anomaly of freakishly good backtesting. Then you could substitute in another balanced portfolio of 20% TSM, 20% INTL, 20% TBM, 10% LTT, 10% STT, and 20% REITS, which gives you 12 years to FI (only 1 year slower than 100% TSM) as fastest, and 19 years (4 years faster than 100% TSM) as slowest. Sequence of return risk matters. Don't think it doesn't.

Personally, I'd go 100% TSM the first 40% of my march to FI. Then I'd switch my allocation to something much, much, much more conservative (UNLESS**, there is a huge 2000 or 2008 level market correction, in which case I'd immediately switch my allocation to 100% TSM again). Once I'd reached FI, I'd keep my AA very conservative for the first 5-10 years, each year slowly making more aggressive towards 100% TSM beginning on year 11.

My 2 cents, but it's way better to work 1-4 more years with a very conservative AA, than get caught in the worst return sequence possible and end up having to work 12 ADDITIONAL years.

By the way Tyler, it'd be nice if you had on option on some of your calculators to increase how much you are saving each year (eg, 50% Y1, 55% Y2, 60% Y3, or even a flat 10% increase year over year, to account for people's earnings increasing, but their spending staying the same).

Excellent tools, thanks Tyler!
Title: Re: 100% stocks in the accumulation phase?
Post by: pha999 on September 19, 2016, 09:45:33 PM
when I first started investing at age 18, I was 100% index stock funds. Mind you early in the game, I had very little capital and skin in the game. It wasn't until about age 30 after i accumulated over 650k in invested assets, then I started to divert funds into bond funds and CDs and investments that were not in public equities. In the start when you have very little capital I do not think it matters a whole lot, since your income should be gaining more momentum than the ups and downs of a relatively small portfolio. 
Title: Re: 100% stocks in the accumulation phase?
Post by: TomTX on September 24, 2016, 11:29:32 AM
As I have posted elsewhere, returns on gold are artificially inflated due to the starting date when gold price was unpegged. They are also a very short timeframe compared to stocks or bonds.
Title: Re: 100% stocks in the accumulation phase?
Post by: Shane on September 24, 2016, 01:12:52 PM
To me, owning gold is not really an investment. It's just a way of hoarding money. It's no better than stuffing cash under the mattress, IMO.

I'd much rather own businesses that are producing things and providing valuable services to people who need them than to lock some gold bars up in a safe or bury them in the backyard.

I just think it's a waste to own something that is so useless.

To each his own I guess.