Author Topic: Should I change my AA?  (Read 1344 times)

alwaysonit

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Should I change my AA?
« on: September 29, 2016, 11:53:41 PM »
I am 29 and made my AA and investment policy 2 years ago, but I am worth over 400,000 more now so am unsure if I should invest less in stocks.

Below is my situation as of 2 years ago and as of now;

Net worth was 600,000 and is now 1,080,000.

I was a 27 year old professional gambler and the very maximum I can see myself losing in one year is 80,000. As my average expected profit per bet is just shy of 10% and I have 10,000 bets per year it is unlikely for a losing streak like this to happen, let alone continue. I spend 40,000 per year.
Now I am 29 but I can only have about 5,000 bets a year, so gambling is less volatile and also earning less.


For my AA, I knock 100,000 from my net worth and go 60/40 in favour of equities with the remainder. The 100,000 is an emergency fund (it covers 2.5 years of expenses or a maximum loss year plus 6 months expenses).
When I cash out over 10,000 from a gambling account, I will invest it accordingly, bringing my AA back to 60/40 and if I need to withdraw on rebalancing day to take my short term reserves back to 100,000 I will also withdraw accordingly, keeping my AA at 60/40. I will do this regardless of the market.

I will rebalance on the second Tuesday of January, beginning in 2016. If I have between 55% and 65% stocks, I will do nothing. If my portfolio is out of this bound, I will rebalance to 60% stocks 40% bonds. I will also re-evaluate how much the higher bound of 2.5 years of spending money or 6 months of spending money plus maximum possible loss in a year is, as I would expect this to increase with inflation.

This AA and rebalancing has been consistent over the past 2 years until the present.
In my country the life expectancy is 81, so lets say I have 52 years left.
Currently I spend about 30k per year but like to say 40k in case of medical emergency or if I start a relationship or family. With bonds earning close to nothing at the moment, I will call 2 million my magic number where I don't need to take any risk (20/80 is as low as one should go I have read).
With my net worth currently only at 1.08 million, at what monetary or age positions do you recommend I move towards the risk free position? If I decided to stop working now what AA would you recommend?

matchewed

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Re: Should I change my AA?
« Reply #1 on: September 30, 2016, 05:13:43 AM »
Asset allocation is all about personal risk acceptance and anticipated (conservatively) returns. If you meet that criteria then what is there to change?

alwaysonit

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Re: Should I change my AA?
« Reply #2 on: October 01, 2016, 02:02:10 AM »
The richer I become, the less risk I need to take.

Using firecalc.com, at the moment dropping my stake in equities will give me a greater probability of failure, so I will stick with my current AA unless anyone would like to talk me out of it.

MustacheAndaHalf

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Re: Should I change my AA?
« Reply #3 on: October 01, 2016, 07:32:47 AM »
So you have 3 financial categories: your emergency fund, your gambling bankroll, your assets for retirement.  I think it's especially hard for others to draw the line between the cash reserves of your gambling bankroll and your asset allocation for retirement.  There's probably some sophisticated tricks about assuming both gambling and stock market losses won't occur at once, and how to mix the cash with other assets.

If you want to keep an unusually high allocation to stocks near retirement, be prepared to delay retirement if a stock correction hits.  Right before or right after retirement could mean your formerly sufficient retirement assets no longer cut it.  So you might need to keep working if you keep a really high allocation to stocks.

matchewed

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Re: Should I change my AA?
« Reply #4 on: October 01, 2016, 08:16:29 AM »
The richer I become, the less risk I need to take.

Using firecalc.com, at the moment dropping my stake in equities will give me a greater probability of failure, so I will stick with my current AA unless anyone would like to talk me out of it.

Your asset allocation will have an influence on the timing of your plan, how long it takes to FIRE. Changing that now changes that number. So really unless you're okay with adjusting the plan (which is just fine) then there is no need to change until you hit your goal or hit some other trigger outlined in your investment policy statement.