Author Topic: 100% Stocks?  (Read 2113 times)

avi148

  • 5 O'Clock Shadow
  • *
  • Posts: 1
100% Stocks?
« on: January 30, 2018, 08:09:16 AM »
Say that my net worth is X.

Say that I put X into index funds that have a dividend yield of 2-3% (This is typical in Europe where I live).

Worst case scenario: There is a recession. Index funds lose 70% of value, dividend yield drops to 1%.

I don't want to eat up my capital unless it's an emergency. So the lower bound for my income is X*0.3*0.01.

Plugging in the numbers, this lower bound is about 150% of my current expenses.

Am I safe to go for 100% stocks? Or should I go for a mix of stocks and bonds? Did I miss something? Are my numbers realistic? I must admit that I find something emotionally disagreeable about bonds, and that this is influencing my decision.

AnswerIs42

  • Stubble
  • **
  • Posts: 174
Re: 100% Stocks?
« Reply #1 on: January 30, 2018, 08:13:04 AM »
That seems incredibly pessimistic to me. In the 2008 recession, while dividends dropped in cash terms, the capital dropped more - so the dividend yield relative to the capital actually increased.

specialkayme

  • Stubble
  • **
  • Posts: 231
  • Location: Mid-South Atlantic

Radagast

  • Handlebar Stache
  • *****
  • Posts: 1700
  • One Does Not Simply Work Into Mordor
Re: 100% Stocks?
« Reply #3 on: January 30, 2018, 08:52:02 AM »
100% stocks is fine in theory when you are starting out. If they crash you just need to keep buying more. Mentally speaking many people find that hard. Once you are within 5 years of retirement bonds will become useful.

In practice I find that I am keeping at least 10% cash/bonds at all times because at first just my checking account and a handful of ancient saving bonds are enough to keep me above that level, and as I gain more money I am starting to glide in bonds.

yachi

  • Bristles
  • ***
  • Posts: 271
Re: 100% Stocks?
« Reply #4 on: January 30, 2018, 11:01:33 AM »
Say that my net worth is X.

Say that I put X into index funds that have a dividend yield of 2-3% (This is typical in Europe where I live).

Worst case scenario: There is a recession. Index funds lose 70% of value, dividend yield drops to 1%.

I don't want to eat up my capital unless it's an emergency. So the lower bound for my income is X*0.3*0.01.

Plugging in the numbers, this lower bound is about 150% of my current expenses.

Am I safe to go for 100% stocks? Or should I go for a mix of stocks and bonds? Did I miss something? Are my numbers realistic? I must admit that I find something emotionally disagreeable about bonds, and that this is influencing my decision.
It looks like you are asking if you can have a withdrawal rate of 0.2% to 0.3% from a portfolio of all stocks.  The answer is Heck Yes!

Let's give it some numbers (using Early Retirement Extreme levels of spending):

Current Yearly Expenses: $8,000
Current Net Worth: $4,000,000
dividends: $80,000 to $120,000
Net Worth after a stock crash: 4,000,000 * 0.3 = $1,200,000
Dividends after a stock crash: 0.01 * $1,200,000 = $12,000

From a 100% stock portfolio of this size, I would be comfortable withdrawing $120,000, or ten times as much as you're looking to withdrawal.  With withdrawals this low, I think a better system would be to keep 5 to 8 years in cash to give you enough to weather any depression.  Then you don't need to worry about what the market does during a crash.  You'll just know that before you're done spending your cash on hand, it will be back to throwing off 10 times the dividends you spend.

yachi

  • Bristles
  • ***
  • Posts: 271
Re: 100% Stocks?
« Reply #5 on: January 30, 2018, 11:24:18 AM »
You're actually safe to go 100% cash-under-mattress if you want.  Assuming expenses increase with inflation of 3.22% per year (the long-term US average) and no income from your investments, you'll only use up 61% of your net worth over 75 years.