Author Topic: 100% Stocks Practical?  (Read 7565 times)

MasterMyMoneyMinions

  • 5 O'Clock Shadow
  • *
  • Posts: 6
  • Location: Upstate NY
100% Stocks Practical?
« on: December 12, 2016, 05:01:12 PM »
Hey everyone!

I have read a ton of MMM, CurryCracker and the Stock Series. I am 27, out of debt and ready to invest for FIRE. After combing through all of the advice my plan is to stay invested in 100% stocks in a High Dividend Yield passively managed index fund/etf. The specific fund is Vanguards VYM and I am just wondering if anyone has actually retired on 100% stocks (Not counting equity in a home). Here is my thinking behind it and I am looking for someone to seriously debunk this belief or offer an alternative strategy.

1) Return on 100% stocks beats out a mix of stocks and bonds in the long run.
2) By sacrificing a fraction of my return (High Dividend vs Total Stock)  I can stick with my strategy because in times of volatility I will not be selling stocks and rather be living off of the dividend, thus allowing me to stick with my strategy and allowing me a smaller FIRE #.
3) Being able to stick to my strategy long term is more important than finding the absolute best strategy and changing.

Interest Compound

  • Pencil Stache
  • ****
  • Posts: 657
Re: 100% Stocks Practical?
« Reply #1 on: December 12, 2016, 05:53:36 PM »
Hey everyone!

I have read a ton of MMM, CurryCracker and the Stock Series. I am 27, out of debt and ready to invest for FIRE. After combing through all of the advice my plan is to stay invested in 100% stocks in a High Dividend Yield passively managed index fund/etf. The specific fund is Vanguards VYM and I am just wondering if anyone has actually retired on 100% stocks (Not counting equity in a home). Here is my thinking behind it and I am looking for someone to seriously debunk this belief or offer an alternative strategy.

1) Return on 100% stocks beats out a mix of stocks and bonds in the long run.
2) By sacrificing a fraction of my return (High Dividend vs Total Stock)  I can stick with my strategy because in times of volatility I will not be selling stocks and rather be living off of the dividend, thus allowing me to stick with my strategy and allowing me a smaller FIRE #.
3) Being able to stick to my strategy long term is more important than finding the absolute best strategy and changing.

Lots of issues with your strategy, but I'll start with the low-hanging fruit. So you're purposely putting your portfolio at higher risk (by buying only dividend stocks), with the hope of tricking yourself into thinking you're actually safer, so you don't sell low during a crash? Not a good strategy. If you can't handle the risk of 100% stocks, the answer isn't:

     "Then buy a more risky subset of 100% stocks."

the answer is:

     "Buy bonds."

The Dividend vs Total Return argument has been beaten to death on these forums. Total Return won.

Dividends are mathematically equivalent to selling stock, before you factor in taxes. After you factor in taxes, dividends are much less efficient:



If you are limiting your portfolio to only dividend payers, you're adding risk, for no expected reward, resulting in a less efficient risk-adjusted portfolio.

If you want a monthly paycheck from your investments, login to Vanguard, and tell them to send a monthly paycheck from your investments:



Seriously, this is a horrible idea.

4a757374696e

  • 5 O'Clock Shadow
  • *
  • Posts: 1
Re: 100% Stocks Practical?
« Reply #2 on: December 12, 2016, 06:38:35 PM »
You might like reading this post made by the wise person above me.

Classical_Liberal

  • Handlebar Stache
  • *****
  • Posts: 1164
  • Age: 44
Re: 100% Stocks Practical?
« Reply #3 on: December 12, 2016, 07:18:55 PM »
Congrats on being debt free!  It's an awesome step, one that most will never know!

I understand your enthusiasm and your perceived need to get everything in order straight away and let it ride passively forever.  Take a moment and think about how much time you spent to become competent at your profession.  Probably, at a very minimum, a full year or two of full time work, right? 

If you plan to retire early and live off of savings forever, it's probably worth it to spend at least 1/10th of that time learning how to invest your money and why certain strategies work best for certain goals, at certain times in your life.  There are many good reasons to do this, but the most important... When shit hits the fan and things aren't going the way you hope, are you going to stick with your plan simply because some dude or lady on the internet told you to?  or will you be more likely to hold the course if you understand exactly why you chose your portfolio?

If you have absolutely no interest in learning (you're here, so I doubt it), I would have to agree with IC.  Choose more diversity in your indexing and pick a stock/bond portfolio that aligns with your real risk tolerance. Not your perceived risk tolerance or what someone else says your risk tolerance should be.


MasterMyMoneyMinions

  • 5 O'Clock Shadow
  • *
  • Posts: 6
  • Location: Upstate NY
Re: 100% Stocks Practical?
« Reply #4 on: December 12, 2016, 07:53:15 PM »
I think perhaps showing the articles and resources can help convey my idea better.

1) In terms of the chart of stock sale vs dividends it uses a tax to convey the end result. My refute would be for us FIRE in our 40s if the law stay the same I would be in a <15% tax bracket therefore having 0$ dividend tax.

2) Risk wise I can accept a 70% decrease in my portfolio if I know I am not selling any of my actual shares. I think having an outside view of 2008-2009 while in college if anything has given me confidence in the market (As long as I wont have to sell any of my position

3) I guess my overall question is If I have compromised some of my return for higher dividends (debatable but I believe total stock makes more sense this is because the risk I am willing to take) The questions Im trying to get at is will 100% stocks beat out 20% or 40% bonds in a 60 year time frame even though my portfolio is high yield (3% average) To help support this train of thought

http://www.gocurrycracker.com/path-100-equities/

If your a MMM forum reader you most likely have come across GoCurryCracker as well

waltworks

  • Magnum Stache
  • ******
  • Posts: 3987
Re: 100% Stocks Practical?
« Reply #5 on: December 12, 2016, 08:05:48 PM »
Who cares if you sell shares or collect dividends? Money is fungible. All that matters is total return for the purposes of retirement planning.

You are not making yourself any "safer" by going for dividend paying stocks, as pointed out above. And you are decreasing your returns somewhat. Why bother? If you want to set/forget, peruse the Vanguard Target Retirement funds and pick one that is way out there (so 90/10) or else just buy some total market/total world at whatever ratio you prefer.

You're making it too complicated. Also, based on your question and desire for "safety", I'm not sure 100% equities is your thing.

-W

MasterMyMoneyMinions

  • 5 O'Clock Shadow
  • *
  • Posts: 6
  • Location: Upstate NY
Re: 100% Stocks Practical?
« Reply #6 on: December 12, 2016, 08:12:48 PM »
You might like reading this post made by the wise person above me.

I think we have referenced the same "Path to 100% equities article".

If 100% stocks has a lower chance of failure (running out of money) than a mixed portfolio of bonds and stocks, then to me it makes sense in finding any strategy with 100% stocks is a better alternative. To do this I then have to find a strategy where I am willing to accept the risk and not sell (high dividend)

Lastly, I'll definitely have to look into the VPW method more as I have not read to much into drawing down the portfolio and descending back down the mountain. 

Classical_Liberal

  • Handlebar Stache
  • *****
  • Posts: 1164
  • Age: 44
Re: 100% Stocks Practical?
« Reply #7 on: December 12, 2016, 08:18:18 PM »
Will 100 percent stocks beat 20-40% bonds how?  CAGR? max safe WR? Reducing sequence risk?  a non-zero balance after 60 years?  Reducing inflationary pressures? Plus the 100 percent stocks you reference is a specific subset of 400 or so domestic, large cap, lower growth, value stocks in VYM

Taxes, yes, but will you be in a zero capital gains tax bracket while accumulating?  There is a reason companies do stock buybacks vs pay higher dividends.

I think DGI can be a great component to a successful portfolio, particularly if it keeps you from selling when you shouldn't.  Also better kept tax sheltered if possible.  I just think there are better ways to go about it than VYM.

Telecaster

  • Handlebar Stache
  • *****
  • Posts: 2281
  • Location: Seattle, WA
Re: 100% Stocks Practical?
« Reply #8 on: December 12, 2016, 08:21:10 PM »

3) I guess my overall question is If I have compromised some of my return for higher dividends (debatable but I believe total stock makes more sense this is because the risk I am willing to take) The questions Im trying to get at is will 100% stocks beat out 20% or 40% bonds in a 60 year time frame even though my portfolio is high yield (3% average) To help support this train of thought


The 100% stock portfolio question has been discussed a lot, and it isn't crazy.  Lots of people here have 95% or 100% stock portfolios. 

Here's the part that makes your strategy unattractive:  You're planning on a 3% yield, which for our purposes is equivalent to a 3% "safe" withdrawal rate, instead of the conventional 4% SWR.    So instead of retiring with 25 times annual expenses, you need to retire with 33 times annual expenses.  That means you have to work a non-trivial number of extra years, or have a noticeably reduced lifestyle in retirement.   Those aren't capital offenses, but like I say, unattractive. 

Or you could re-shape your thinking such that you recognize dividends and capital gains are all just part of the total return, and total return is all you care about. 


waltworks

  • Magnum Stache
  • ******
  • Posts: 3987
Re: 100% Stocks Practical?
« Reply #9 on: December 12, 2016, 08:28:10 PM »
If you are going for 3% WR, you have, really, already "failed", because you will be working a LOT longer than you need to - as Arebelspy put it recently, that should be considered an "upfront" failure (you "went back" to work before even retiring!)

-W

MasterMyMoneyMinions

  • 5 O'Clock Shadow
  • *
  • Posts: 6
  • Location: Upstate NY
Re: 100% Stocks Practical?
« Reply #10 on: December 12, 2016, 09:27:28 PM »

3) I guess my overall question is If I have compromised some of my return for higher dividends (debatable but I believe total stock makes more sense this is because the risk I am willing to take) The questions Im trying to get at is will 100% stocks beat out 20% or 40% bonds in a 60 year time frame even though my portfolio is high yield (3% average) To help support this train of thought


The 100% stock portfolio question has been discussed a lot, and it isn't crazy.  Lots of people here have 95% or 100% stock portfolios. 

Here's the part that makes your strategy unattractive:  You're planning on a 3% yield, which for our purposes is equivalent to a 3% "safe" withdrawal rate, instead of the conventional 4% SWR.    So instead of retiring with 25 times annual expenses, you need to retire with 33 times annual expenses.  That means you have to work a non-trivial number of extra years, or have a noticeably reduced lifestyle in retirement.   Those aren't capital offenses, but like I say, unattractive. 

Or you could re-shape your thinking such that you recognize dividends and capital gains are all just part of the total return, and total return is all you care about.

Im going for a portfolio not reaching 0 as the goal. I guess I forgot to mention but the whole plan would be to sell for capital gains to the max that I wont have to pay Federal Income tax and then take the dividend in cash. That would put me at some $12,500 in capital gains a year and $36,000 in dividends on a 1.2M portfolio. This still gives me a 4% withdrawal but still allows me to minimize my withdrawal on down years and live off of dividends while minimizing the age at which I can FIRE away (Not having to save as much up front since its a 3.2% dividend vs 1.8% (total stock market fund). Currently 27, no debt and making roughly 120k Gross per year with a 45-55% on average savings rate.

SeattleCPA

  • Handlebar Stache
  • *****
  • Posts: 1577
  • Age: 60
  • Location: Redmond, WA
    • Evergreen Small Business
Re: 100% Stocks Practical?
« Reply #11 on: December 13, 2016, 08:17:54 AM »
Just to add a handful of minor additional comments MMMM can ponder.

First, you may only think you can handle a 100% stock allocation. I.e., you may look at the data, see that over long periods of time stocks outrun bonds, and so conclude that in the face of a steep decline in stock market values that you're okay staying the course. Your self-assessment may be right. But most people don't behave that way. This point is important because if it turns out that you don't have the fortitude and bail, you will greatly damage your returns.

Second, and related to above point, probably right now your balances are modest relative to the future. What you might decide to do is run with a 60%/40% or 70%/30% or even 80%/20% for the next decade... see how you react in the face of next steep decline in values... and then adjust your bonds percentage up or down. As you surely know, the "hit" you take by holding a percentage in bonds is actually very modest. And it'll be especially modest for you during the first decade or two. It would seem therefore that you might "run with a safety net' for a while until you're surer of your risk tolerance by experiencing a bear market or two.

Third, the dividend-based approach as IC notes (and apologies to you, IC, if my paraphrasing changes your meaning) is one of those deceptively higher risk gambits that probably only seems to work well. David Swensen, the superstar Yale Endowment Fund co-manager -- a guy with an astronomically good multi-decade performance -- says in "Pioneering Portfolio Management" that it's a na´ve strategy and one which beats the market for long-ish chunks of time and then stumbles.

P.S. I hold 30% of my traditional asset portfolio in bonds: 15% in intermediate treasuries and 15% in TIPS.

Rubic

  • Handlebar Stache
  • *****
  • Posts: 1083
Re: 100% Stocks Practical?
« Reply #12 on: December 13, 2016, 09:55:33 AM »
First, you may only think you can handle a 100% stock allocation. I.e., you may look at the data, see that over long periods of time stocks outrun bonds, and so conclude that in the face of a steep decline in stock market values that you're okay staying the course. Your self-assessment may be right. But most people don't behave that way. This point is important because if it turns out that you don't have the fortitude and bail, you will greatly damage your returns.

This point cannot be over-emphasized.

I was unable to convince several people out of selling during the 2008-2009
recession.  I don't think they would have panicked if they weren't 100% in
stocks -- or at least they wouldn't have sold their entire positions.

Even JLCollins bailed in the aftermath of the 1987 Black October crash.

Interest Compound

  • Pencil Stache
  • ****
  • Posts: 657
Re: 100% Stocks Practical?
« Reply #13 on: December 13, 2016, 10:12:49 AM »
First, you may only think you can handle a 100% stock allocation. I.e., you may look at the data, see that over long periods of time stocks outrun bonds, and so conclude that in the face of a steep decline in stock market values that you're okay staying the course. Your self-assessment may be right. But most people don't behave that way. This point is important because if it turns out that you don't have the fortitude and bail, you will greatly damage your returns.

This point cannot be over-emphasized.

I was unable to convince several people out of selling during the 2008-2009
recession.  I don't think they would have panicked if they weren't 100% in
stocks -- or at least they wouldn't have sold their entire positions.

Even JLCollins bailed in the aftermath of the 1987 Black October crash.

I sometimes think most average people would be better off in a 40/60 Vanguard LifeStrategy fund. But I can't bring myself to actually recommend that to anyone unless they're already old and retired/about to retire.

Maschinist

  • 5 O'Clock Shadow
  • *
  • Posts: 24
Re: 100% Stocks Practical?
« Reply #14 on: December 13, 2016, 02:07:29 PM »
If you are going for 3% WR, you have, really, already "failed", because you will be working a LOT longer than you need to - as Arebelspy put it recently, that should be considered an "upfront" failure (you "went back" to work before even retiring!)

-W

Sorry, but I take the opposite position and call everybody delusional and bad at math, who is currently planning with a 4% withdrawal rate for 40 year+ retirement at a time of Shiller CAPE28, S&P500 PE of 26 and 10year bonds @ 2.4%. Thats worse than 1902, 1965 or 1966.

What's the point to throw 130 years of stock market valuation in one pot and claim that a 4% withdrawal rate historically had xx% success rate over 30 years? Off course it had. But during a good amount of this period, the dividend of the whole index alone was 4% or more -->valuations where much lower. When you only look at years with CAPE>20 you get a much higher failure rate and that's what I would personally plan with.

As a second point: The earning potential of people's career is by far the highest near the end of their accumulation period. To go from a 4% withdrawal rate to a 3% rate takes for most hard saving mustaches at this time in their life only 2-3 years. Afterward you have 40+ years complete peace of mind.
Sounds more "clever" and less "failed" to me, than running around in your 50's and begging for a minimum wage job in the middle of a deep recession after being 15+ years "retired".

waltworks

  • Magnum Stache
  • ******
  • Posts: 3987
Re: 100% Stocks Practical?
« Reply #15 on: December 13, 2016, 02:52:48 PM »

mizzourah2006

  • Pencil Stache
  • ****
  • Posts: 535
  • Location: NWA
Re: 100% Stocks Practical?
« Reply #16 on: December 14, 2016, 09:07:45 AM »
If you are going for 3% WR, you have, really, already "failed", because you will be working a LOT longer than you need to - as Arebelspy put it recently, that should be considered an "upfront" failure (you "went back" to work before even retiring!)

-W

I don't get this. How have you already failed?


waltworks

  • Magnum Stache
  • ******
  • Posts: 3987
Re: 100% Stocks Practical?
« Reply #17 on: December 14, 2016, 09:32:38 AM »
If you define retirement "failure" as running out of money and needing to go back to work, then you can just think of your entire working life as "failure".

Think of it this way: you have 80 years of life (or whatever). You want to use as many of those years as possible doing Activity X (sitting on your butt, saving baby narwhals, building stuff for burning man, whatever) which doesn't make you any money, but you need $Y per year to live while you do that activity.

At the end of your life you can sit down and assess. Did you work too long and hence not get to do Activity X as much as you'd like? Did you end up with more money than you needed? Or not?

Working extra years to get SWR down to, say 3% from 4% is seldom rational in this context. In fact going below 5 or 6% WR is probably a bad idea mathematically.

-W

If you are going for 3% WR, you have, really, already "failed", because you will be working a LOT longer than you need to - as Arebelspy put it recently, that should be considered an "upfront" failure (you "went back" to work before even retiring!)

-W

I don't get this. How have you already failed?

ChpBstrd

  • Handlebar Stache
  • *****
  • Posts: 2101
Re: 100% Stocks Practical?
« Reply #18 on: December 14, 2016, 02:33:26 PM »
I'm not a fan of dividends:

1) In a deep recession, those dividends you're counting on will be the first thing to be cut by companies that are bleeding money and facing difficulty rolling over their debts. Your income vaporizes and there are no jobs. Then what?

2) In my experience, the higher the dividend, the higher the beta. Thus, when the next recession hits and the S&P drops 10%, your dividend portfolio might drop 15-20%.

3) Dividends are paid my mature companies with few attractive growth options to invest in. E.g. fossil fuels, obsolete tech like disk drives, utilities, etc. Thus, a dividend portfolio could miss out on decades of economic growth and productivity gains. If management can't find anything better to do with the company's cash than mail it back to the investors (after extracting their salaries of course) then the company is being wound down, not grown.

4) As mentioned earlier, you must pay taxes on dividends paid into a taxable account. You don't get to defer them. Thus your company's earnings are double-taxed: once at the corporate level and again at the investor level.

5)  Would you take out a bank loan to provide yourself income? If your dividend paying stock has any debt, that's exactly what you're doing. Look up their bonds and you might find your 4% dividend came from the issuance (of at least, non-payoff) of debts costing 7-8%. Executives have found they can sustain this trick for years, but it still destroys value.

My exceptions to these rules are preferred stocks and REITs, which are different animals, and then only if kept in a Roth or 401k.

Retire-Canada

  • Walrus Stache
  • *******
  • Posts: 7729
Re: 100% Stocks Practical?
« Reply #19 on: December 14, 2016, 03:45:43 PM »
Sorry, but I take the opposite position and call everybody delusional and bad at math, who is currently planning with a 4% withdrawal rate for 40 year+ retirement at a time of Shiller CAPE28, S&P500 PE of 26 and 10year bonds @ 2.4%. Thats worse than 1902, 1965 or 1966.

Personally I think it's delusional, myopic and poor opportunity cost evaluation to:

1. work extra years at the prime of your life just in case you might have to do some work later.
2. focus on a lower WR as the key to FIRE success when there are so many other way to fail at FIRE that don't involve $ or %.
3. spend your time being afraid about a success rate that's already so high with so many easy ways to make it higher without years of extra work.

About the worst possible thing you can do to yourself is spend extra years at a desk job. Sedentary computer work is our generation's asbestos mining. You are literally taking years off your life. And doing that while burning through years at the prime of your life is stupid. Having your freedom at 40-45 is worth many times more than having your freedom at 60-65.

That said I appreciate that there is a nearly infinite amount of fear available for consumption and that it's always easier to be afraid and stick with the status quo [working] then breaking that cycle and doing something new like FIRE.

Kaspian

  • Handlebar Stache
  • *****
  • Posts: 1535
  • Location: Canada
    • My Necronomicon of Badassity
Re: 100% Stocks Practical?
« Reply #20 on: December 15, 2016, 09:47:30 AM »

3) I guess my overall question is If I have compromised some of my return for higher dividends (debatable but I believe total stock makes more sense this is because the risk I am willing to take) The questions Im trying to get at is will 100% stocks beat out 20% or 40% bonds in a 60 year time frame even though my portfolio is high yield (3% average) To help support this train of thought


The 100% stock portfolio question has been discussed a lot, and it isn't crazy.  Lots of people here have 95% or 100% stock

Yes, discussed a lot here.  (Just do a simple search.) However, it only seems to come up as a topic when that asset class is doing well.  At times like March this year, one could hear crickets.  :/

TheAnonOne

  • Handlebar Stache
  • *****
  • Posts: 1583
Re: 100% Stocks Practical?
« Reply #21 on: December 20, 2016, 03:33:32 PM »
I am 100% VTSAX (more or less, my 401k is a sp500 index fund)

I have been through down markets and find that my regular additions to the account hide the downswings pretty well.

I MAY go to a certain % international at some point but I will be sticking with stocks for the foreseeable future.

So we do exist, will it work out? TBD!!

bacchi

  • Magnum Stache
  • ******
  • Posts: 4631
Re: 100% Stocks Practical?
« Reply #22 on: December 20, 2016, 04:22:51 PM »

3) I guess my overall question is If I have compromised some of my return for higher dividends (debatable but I believe total stock makes more sense this is because the risk I am willing to take) The questions Im trying to get at is will 100% stocks beat out 20% or 40% bonds in a 60 year time frame even though my portfolio is high yield (3% average) To help support this train of thought


The 100% stock portfolio question has been discussed a lot, and it isn't crazy.  Lots of people here have 95% or 100% stock

Yes, discussed a lot here.  (Just do a simple search.) However, it only seems to come up as a topic when that asset class is doing well.  At times like March this year, one could hear crickets.  :/

I don't remember what happened in March but there were plenty of threads during the Brexit plunge about people buying the (potential) lows.

Retire-Canada

  • Walrus Stache
  • *******
  • Posts: 7729
Re: 100% Stocks Practical?
« Reply #23 on: December 20, 2016, 04:44:40 PM »
I don't remember what happened in March but there were plenty of threads during the Brexit plunge about people buying the (potential) lows.



It was a bit earlier than March, but the point is valid.

hodor

  • 5 O'Clock Shadow
  • *
  • Posts: 56
  • Location: Aus
Re: 100% Stocks Practical?
« Reply #24 on: December 20, 2016, 08:26:14 PM »
I think 100% is practical and been heavy on dividend paying stocks wouldn't be an issue from where I sit.

Rubic

  • Handlebar Stache
  • *****
  • Posts: 1083
Re: 100% Stocks Practical?
« Reply #25 on: December 21, 2016, 06:51:57 AM »
I think 100% is practical and been heavy on dividend paying stocks wouldn't be an issue from where I sit.

The graph displays dividend growers against other dividend classifications, but
not simply against the total S&P 500.

The return of the S&P 500 from January 1972 through December 2013
with dividends reinvested was 6005%.

source: https://dqydj.com/sp-500-return-calculator/  (moneychimp gives slightly higher returns)

Interest Compound

  • Pencil Stache
  • ****
  • Posts: 657
Re: 100% Stocks Practical?
« Reply #26 on: December 21, 2016, 08:20:58 AM »
I think 100% is practical and been heavy on dividend paying stocks wouldn't be an issue from where I sit.

This graph is meaningless.

Dividends are just another form of return. Keeping that in mind, this graph shows, "Companies who had a growing return over the last 40 years, had better returns than companies who did not."

How is this information actionable?

Scandium

  • Handlebar Stache
  • *****
  • Posts: 2317
  • Location: EastCoast
Re: 100% Stocks Practical?
« Reply #27 on: December 21, 2016, 09:27:57 AM »
You seem to confuse dividends with bond payments. Do dividend-fans not realize, or know, that dividends are ever cut or eliminated? That never seems to be factored in or even considered. Check some 2008 data.. All of these discussions it seem to be taken for granted that dividends are always maintained through every recession. "But they're so safe!". In the various dividend aristocrats lists the stat is that only something like 30% of the originals are there after 10-20 years. I.e. the rest cut their dividends.

If dividends are so safe and never cut why would anyone buy bonds?

waltworks

  • Magnum Stache
  • ******
  • Posts: 3987
Re: 100% Stocks Practical?
« Reply #28 on: December 21, 2016, 11:07:26 AM »
I think 100% is practical and been heavy on dividend paying stocks wouldn't be an issue from where I sit.

So companies that did well over the last 40 years returned more than ones that didn't do well?

I am *shocked* to hear this!

Let me hop in the DeLorean and get you a list of the best companies for the *next* 40 years real quick...

Seriously, what kind of naif looks at this graph and takes it seriously?

-W

SeattleCPA

  • Handlebar Stache
  • *****
  • Posts: 1577
  • Age: 60
  • Location: Redmond, WA
    • Evergreen Small Business
Re: 100% Stocks Practical?
« Reply #29 on: December 21, 2016, 12:08:17 PM »
I think 100% is practical and been heavy on dividend paying stocks wouldn't be an issue from where I sit.

So companies that did well over the last 40 years returned more than ones that didn't do well?

I am *shocked* to hear this!

Let me hop in the DeLorean and get you a list of the best companies for the *next* 40 years real quick...

Seriously, what kind of naif looks at this graph and takes it seriously?

-W
+1

Indexer

  • Handlebar Stache
  • *****
  • Posts: 1455
Re: 100% Stocks Practical?
« Reply #30 on: December 21, 2016, 05:29:17 PM »
I'm going to sound like a broken record after posters like Interest Compound(great post BTW!).

100% stocks is practical for a very slim population of people. This population is so small I would rather just say they don't even exist for the betterment of the rest of the population because so many investors 'think' they are in this crowd, and they are not. There is also a very big difference between being comfortable with 100% stocks when you are working VS retired.  It is easy to say you are comfortable with a big crash right now when the market has been up for years and when you have an income. Think back to what a big crash feels like. It isn't just your portfolio dropping. It is the new media running 24/7 doom and gloom, it is articles predicting DOW 5,000, it's companies going bankrupt, it's layoffs, it's articles about how this crash is like the great depression again, articles about how this time is different and it will be even worse than the great depression. People will be buying gold again. People who are in your normal investing support group who were also 100% stocks will be telling you they missed the crash and are in cash right now(BTW, they lied, they sold after it dropped). People will make you question whether a 100% stock portfolio was a good idea in the first place, and amplify this feeling when you are actually spending from the portfolio.

People who are comfortable being 100% stocks are the forever bulls. They see every crash as a buying oppurtunity. They don't see down 70%. They see 70% off sale. They pray for crashes so they can buy more shares. They are mad at the market for being so high right now. Why can't it just go down a little so their next contribution can buy more shares? I can tell you most of the people who fit in this crowd wouldn't buy a high dividend fund with the mindset that the dividend will help them keep their cool in a crash. They wouldn't need that reassurance. What if your dividends stop or they start trending so low the dividends alone can't sustain you? Look up VYM from 2007 to 2009. Dividend income was lower in 08 than 07.

60/40 VS 100% stock.  Average return since 1926: 8.8 VS 10.2%. Historical worst year: -26.5 VS -43%. For 1.4% higher annual return you are increasing the worst year downside by 62%! One crash. If you make the wrong move(sell) in one crash with a 100% stock portfolio your FIRE plans are done. From the peak in 07 to the bottom in 09 a pure stock portfolio was down 55%. If that happens in the first year your 4% SWR just turned into an 8% not safe WR. Even if you stay in... will the market recover fast enough? One year of low returns and your 8% WR is now a 10% WR... then 12%... how long can you handle this?  Years? If you have even an ounce of doubt today imagine how you will feel when your livelihood depends on this.


One potential safety net using a 4% SWR:  20X expenses in stocks, 5X expenses in bonds, an 80/20. As the portfolio grows keep 5X expenses in bonds. You could easily end up 90/10 over time. If the market crashes, spend from the bonds to leave the stocks alone. When the market starts to recover decide based on how you felt in the last crash whether you want to add the bonds back. The idea is that the bonds let you get through your first crash, whether that is 1 year away or 5 years away, so that you don't have to worry about sequence of return risk in the first few years. If you make it through that then a 100% stock portfolio has a very high success rate. There have also been studies that back up being a bit more conservative right before and after retirement, and then becoming more aggressive over time. PS, 80/20 has averaged 9.6% returns so you are giving up very little return to do this for the first few years. (Not saying I'm doing this. I just thought it was a good 'fail safe' on your way to 100% stocks in retirement.)

Retire-Canada

  • Walrus Stache
  • *******
  • Posts: 7729
Re: 100% Stocks Practical?
« Reply #31 on: December 21, 2016, 05:46:26 PM »
One potential safety net using a 4% SWR:  20X expenses in stocks, 5X expenses in bonds, an 80/20. As the portfolio grows keep 5X expenses in bonds. You could easily end up 90/10 over time. If the market crashes, spend from the bonds to leave the stocks alone. When the market starts to recover decide based on how you felt in the last crash whether you want to add the bonds back. The idea is that the bonds let you get through your first crash, whether that is 1 year away or 5 years away, so that you don't have to worry about sequence of return risk in the first few years. If you make it through that then a 100% stock portfolio has a very high success rate. There have also been studies that back up being a bit more conservative right before and after retirement, and then becoming more aggressive over time. PS, 80/20 has averaged 9.6% returns so you are giving up very little return to do this for the first few years. (Not saying I'm doing this. I just thought it was a good 'fail safe' on your way to 100% stocks in retirement.)

I'm 100% stocks [although not 100% US stocks] and I have been thinking about what if any changes I'll make to my AA as I get close to FIRE and when I FIRE. The one idea I had is similar to what you suggest above. Determine a minimal FIRE budget probably 2% - 2.5% of initial 'stash and maintain a few years worth of those expenses in bonds/gold/something crash resistant. So I had a fairly reliable low level income to weather a big crash. As you note this portion of the portfolio will start as something like 10%, but it doesn't need to increase relative to the stock portion if the overall portfolio sees significant growth. So this "safe" portion will likely decrease as a % over time.

I haven't decided to do this yet, but it does make sense to me so far. This ^^^ combined with a variable 3% - 5% WR seems like it would solve a lot of the real and psychological risks with limited downside. 

pumpkinlantern

  • 5 O'Clock Shadow
  • *
  • Posts: 76
Re: 100% Stocks Practical?
« Reply #32 on: December 23, 2016, 01:54:50 PM »
I don't think the strategy should be dismissed entirely.

The biggest problem is that in a downturn, dividends can be cut - this is particularly true for poor quality dividend companies.  The likelihood of a dividend cut is lower with a high quality blue chip company, but if you are just buying a high dividend yield fund, you'll be getting good and bad quality companies.  You may still be forced to sell and you will be selling low.

Another potential problem is that if you are 100% invested already, you won't have money to take advantage of the downturn (ideally, you would want to buy more stocks when the prices are low).  This is less of a problem, but it is a lost opportunity.

Although dividends can be a large part of your FIRE strategy, you should probably diversify if you are retired.  At minimum, if you plan to use this strategy, you should hold a decent sized cash buffer that will let you weather out the storm (not entirely unreasonable with the crappy bond rates we currently have - although that trend may start to reverse in the next few years).