Author Topic: asset allocation (Read 15195 times)

TheGibberingPotato · « **on:** January 04, 2015, 03:02:47 PM »

Since the original post isn't getting an pulls, let me try going with a simplified single question:

Any suggestions on how to decide on asset allocation?

I am currently working, making ~100k/year, am saving ~50% of my income. I have a spouse in a similar situation. We can afford most 'emergencies' that might happen without having to tap into my investments. If one of us got fired, we could live off the other.
We'd like to retire in 5-10 years. Why not go 100% stocks? The biggest thing I feel pulling me is market timing (haven't had a crash in a while, maybe were due) which I know is a big no-no here.

Mr. Captain Cash · « **Reply #1 on:** January 04, 2015, 03:14:39 PM »

170clockshadow,

This is a tough question to answer as it depended upon a lot of variables. Your risk tolerance, your investment portfolio size when you retire, etc, etc.

If you have a high risk tolerance I don't believe there is anything wrong with 100% stock portfolio as it is statistically proven to provide the highest returns. That is the approach I have taken myself.

As for asset class diversification I went; you can view it here. http://www.mrcaptaincash.com/cash-accumulators/

Canadian Equities 22%
US Equities 22%
International Equities 22%
Emerging Markets 22%
Canadian Real E-state 12%

You can view it here. http://www.mrcaptaincash.com/cash-accumulators/

I have had great success with this approach. I won't bother worrying about timing the market if you have available funds save the stress and invest it when you can. Any questions shoot me an email at mrcaptaincash@hotmail.com I'd be happy to help.

mxt0133 · « **Reply #2 on:** January 04, 2015, 03:41:52 PM »

What is your investment time frame for the funds you want to invest? That is one of the most important questions you have to answer when picking investments. Stocks have one of the highest average returns but are also the most volatile, which means you might have to hold those investments for 10-20 year time frames.

You say you want to retire in 5-10 years so that implies you will need access to the funds in the same time frame. If that is your goal then 100% stocks might not be the best approach for you.

TheGibberingPotato · « **Reply #3 on:** January 04, 2015, 05:00:22 PM »

Is the logic here that I need enough in bonds to last me for the years of the next recession when I'd rely on withdrawing investments for income?
In that case, I guess the way to do it is to determine how much money in bonds you need to weather a heavy recession (at least 5 years?)

The part I struggle with is understanding the purpose of the bonds and how to use them.

Yes, my time frame is 'medium' range; my wife and I are planning on retiring in 10 years (though could probably do it in 5 if we were really frugal; the other factor is that we want to work a certain number of years to feel like we made use of our educations).

Looking at the recessions of the early 2000s and 2008, it took the S&P a good 5-10 years to recover to pre-recession levels. Is this a good worst case scenario to envision?

TheGibberingPotato · « **Reply #4 on:** January 04, 2015, 05:02:22 PM »

Quote from: Mr. Captain Cash on January 04, 2015, 03:14:39 PM

170clockshadow,

This is a tough question to answer as it depended upon a lot of variables. Your risk tolerance, your investment portfolio size when you retire, etc, etc.

If you have a high risk tolerance I don't believe there is anything wrong with 100% stock portfolio as it is statistically proven to provide the highest returns. That is the approach I have taken myself.

As for asset class diversification I went; you can view it here. http://www.mrcaptaincash.com/cash-accumulators/

Canadian Equities 22%
US Equities 22%
International Equities 22%
Emerging Markets 22%
Canadian Real E-state 12%

You can view it here. http://www.mrcaptaincash.com/cash-accumulators/

I have had great success with this approach. I won't bother worrying about timing the market if you have available funds save the stress and invest it when you can. Any questions shoot me an email at mrcaptaincash@hotmail.com I'd be happy to help.

Thanks Capt!
I'll look it over and let you know if I have questions.

I am not risk averse at all. The stomach is pretty hardy. I just want to make the most optimized choice.

Mr. Captain Cash · « **Reply #5 on:** January 04, 2015, 05:57:38 PM »

170clockshadow,

Mxt0133 brings up a good point that if you plan on withdrawing from the principle balance of your investment portfolio to fund your retirement investing 100% in stocks might not be the best choice. A great calculator is on www.firecalc.com. You can play around with the numbers to see how a 20-30% drop in your investment portfolio could potentially affect your retirement plans.

I should have clarified that when I reach financial independence I do not plan to withdraw from my investment portfolio other than in the form of dividend distributions. This way the principal balance of my investment portfolio should never be depleted barring the indexes I am invested in do not cut their dividends.

Bonds will help offset the losses suffered in equities during the situations you mentioned in 2000 and 2008. How much you need to have saved in bonds is a tough question to answer as it will depend on portfolio size, withdrawal rate %, if your earning distributions off your investments, etc, etc. Most people do have a portion of there investments portfolio in bonds, GICs, high interest savings accounts, or cash under a mattress to weather temporary market downturns.

Hope that helps

Mr. Captain Cash

mxt0133 · « **Reply #6 on:** January 04, 2015, 08:22:14 PM »

The general idea of having various asset classes that have a low correlation(do not tend to move together) with each other is that it lowers the volatility(price swings) of your portfolio. When you are at the draw down phase, selling assets that are in a bear market can have a big impact on the probability of your portfolio lasting. Having various asset classes and re-balancing periodically forces you to sell high and buy low.

innerscorecard · « **Reply #7 on:** January 04, 2015, 08:32:47 PM »

How well did you handle 2008? Everyone thinks they can go 100% stocks...in a bull market.

Jeremy · « **Reply #8 on:** January 04, 2015, 10:02:52 PM »

We retired 2 years ago in our 30's and are moving from 90% stock towards 100% stock

The reasons for having some bonds in the portfolio are 3 fold
- cash flow
- will increase in value when interest rates fall
- can be sold for cash if stocks are in the crapper (ideally to buy more stock at a discount, not to buy food)

This is all advice for people that retire when they are 65 and have a life expectancy of 15 years

For an early retiree, one with up to 60+ years of retirement ahead of them, bonds have little value

- Cash flow? Cash flow from the S&P500 today is comparable to a 10 year treasury, but with much greater upside potential
- Interest rates will fall? Hard to happen when they are already ~0%
- Stocks go in the crapper? This one could happen, so you need a plan for when (not if) it does
- there is a bout of high inflation? Good-bye bonds

There are a few possible strategies for dealing with a down turn besides bonds, all with one goal: don't sell stocks during a downturn
-Live primarily off dividend income (this is what we do)
-Cut spending during down years (less surf and turf, more tofu)
-Practice geographic arbitrage: when stocks collapse, spend a year in Guatemala instead of Paris (we also do this)
-Have cash or bonds on hand. How much depends on your ideas for the above two strategies

I have a blog post coming on this but I haven't thought it all through completely yet, but this is the essence of it

Mr. Captain Cash · « **Reply #9 on:** January 04, 2015, 10:08:38 PM »

Innerscorecard,

In 2008/2009 I took out a $100,000 leverage loan and invested it into the markets.

I truly believe if you are willing to invest your hard earned money into any company or index fund in the first place, regardless of what the market is doing you should truly believe in the prospects of that asset. When the market loses 20-30% it should be viewed as buy, buy, buy as that asset has now went on sale and you are getting incredible value.

I will say though at that point I did not need my portfolio to support me. I'm sure it will be a different experience and set of emotions when I have achieved financial independence and am relying on my investment portfolio to support my retirement. How I would react then only time will tell.

innerscorecard · « **Reply #10 on:** January 04, 2015, 10:26:28 PM »

Jeremy, Dividends get cut, too. Dividends aren't true fixed income. Obviously you know that already.

Mr. Captain Cash, some people have the superpower of being able to live with volatility and even sleep well. Most people don't. :)

Jeremy · « **Reply #11 on:** January 05, 2015, 03:26:09 AM »

Yes, obviously. Nothing is guaranteed. Dividends aren't fixed and can be stopped, reduced, eliminated. (Similar to our health, our employment, etc...)

Note that bonds aren't really fixed either. There are multiple periods in history with high inflation. 3% bond yield doesn't seem so great when inflation is 6%

That said, we would be hard pressed to find a period in history where an index fund reduced dividends to zero

In 2008, VTI/VTSAX dropped the dividend 3%. In 2009, a further 12%. And then increased it substantially faster than inflation in the following years.

I'd be OK with a few less steaks in 2009

TheGibberingPotato · « **Reply #12 on:** January 05, 2015, 04:59:10 AM »

Quote from: innerscorecard on January 04, 2015, 08:32:47 PM

How well did you handle 2008? Everyone thinks they can go 100% stocks...in a bull market.

I started investing in 2012 in stocks in 2012.

TheGibberingPotato · « **Reply #13 on:** January 05, 2015, 05:03:15 AM »

Well, I am in my early 30s, so closer to your boat.

Quote from: Jeremy on January 04, 2015, 10:02:52 PM

We retired 2 years ago in our 30's and are moving from 90% stock towards 100% stock

The reasons for having some bonds in the portfolio are 3 fold
- cash flow
- will increase in value when interest rates fall
- can be sold for cash if stocks are in the crapper (ideally to buy more stock at a discount, not to buy food)

This is all advice for people that retire when they are 65 and have a life expectancy of 15 years

For an early retiree, one with up to 60+ years of retirement ahead of them, bonds have little value

- Cash flow? Cash flow from the S&P500 today is comparable to a 10 year treasury, but with much greater upside potential
- Interest rates will fall? Hard to happen when they are already ~0%
- Stocks go in the crapper? This one could happen, so you need a plan for when (not if) it does
- there is a bout of high inflation? Good-bye bonds

There are a few possible strategies for dealing with a down turn besides bonds, all with one goal: don't sell stocks during a downturn
-Live primarily off dividend income (this is what we do)
-Cut spending during down years (less surf and turf, more tofu)
-Practice geographic arbitrage: when stocks collapse, spend a year in Guatemala instead of Paris (we also do this)
-Have cash or bonds on hand. How much depends on your ideas for the above two strategies

I have a blog post coming on this but I haven't thought it all through completely yet, but this is the essence of it

GGNoob · « **Reply #14 on:** January 05, 2015, 07:31:25 AM »

If you are considering avoiding bonds all together, consider reading a book like Why Bother With Bonds. The book was free on Amazon a while back and I "bought" it then. I started reading it and haven't finished it. I'm 100% stock for retirement and not sure even this book could convince me to buy bonds. I mention this book because as long as you are educated about why you should have bonds and still feel that you would rather be 100% stocks, then you are probably fine to go that route.

The most important thing is that if you do go 100% stocks, you must stick with your plan! You cannot sell and buy bonds when the market crashes and you lose 60% of your portfolio.

You only mention about going 100% stock and avoiding bonds. But have you decided on your stock allocation? The simplest portfolio would be using 1 fund portfolio with Vanguard Total World Stock Index or a 2 fund portfolio with Vanguard Total Stock Market and Vanguard Total International Stock Market. Usually you would want between 20% and 50% of your stock allocation to be invested in internationally. Vanguard usually would recommend 70% Total US and 30% Total International.

Once you decide on your US/International allocation and have your basic Total US and Total International funds, you could always add more funds to spice it up...Small Cap, Small Cap Value, REITs, Emerging Markets, etc.

Here's my portfolio as a reference:
25% VTI (Vanguard Total Stock Market)
25% VXF (Vanguard Extended Market)
10% VNQ (Vanguard US REIT)
15% VEU (Vanguard All-World Ex-US)
15% VSS (Vanguard All-World Ex-US Small-Cap)
10% VWO (Vanguard Emerging Markets)

My portfolio is heavily tilted towards small/mid cap companies with an extra tilt to REITs and Emerging Markets. 60% of my portfolio is US and 40% is international. Before adding any of these extra funds (outside of the total US and total international), read up and make sure you understand why you are adding them. You need to make sure you understand everything you invest in and know why you are choosing it. That way you'll be able to stick with it during bad times.

webguy · « **Reply #15 on:** January 05, 2015, 08:16:31 AM »

If you're hoping to live off your portfolio then having 100% of it in stocks isn't really wise, as you'd likely need to draw more than 4% of it each year if there was a significant market downturn, which could deplete your portfolio too quickly. If you're looking for high growth from your portfolio over the next 10 years then a large percentage in stocks is the way to go, but in doing so you take on risk. Risk could mean that you portfolio cuts in half for a number of years. If you have a year or so worth of living expenses in cash when you retire - say 50k - then you can use that as a buffer to prevent having to draw down on your stocks much when they're down.

I'd ask the question though; do you need high growth right now? As you're earning a good income then you may not need excessive portfolio growth to get to your FI number, and so it may be unwise to put all your eggs in the stocks basket.

Another idea could be starting at 100% stocks and then changing to bonds at a rate of 3% a year for the next 10 years?..

Year 1: 100/0
Year 2: 97/3
Year 3: 94/6
Year 4: 91/9
Etc...

That way by the time you get to 10 years you have a 70/30 split and a less volatile portfolio to withdraw from.

TheGibberingPotato · « **Reply #16 on:** January 05, 2015, 11:08:21 AM »

Quote from: Logan T on January 05, 2015, 07:31:25 AM

If you are considering avoiding bonds all together, consider reading a book like Why Bother With Bonds. The book was free on Amazon a while back and I "bought" it then. I started reading it and haven't finished it. I'm 100% stock for retirement and not sure even this book could convince me to buy bonds. I mention this book because as long as you are educated about why you should have bonds and still feel that you would rather be 100% stocks, then you are probably fine to go that route.

The most important thing is that if you do go 100% stocks, you must stick with your plan! You cannot sell and buy bonds when the market crashes and you lose 60% of your portfolio.

You only mention about going 100% stock and avoiding bonds. But have you decided on your stock allocation? The simplest portfolio would be using 1 fund portfolio with Vanguard Total World Stock Index or a 2 fund portfolio with Vanguard Total Stock Market and Vanguard Total International Stock Market. Usually you would want between 20% and 50% of your stock allocation to be invested in internationally. Vanguard usually would recommend 70% Total US and 30% Total International.

Once you decide on your US/International allocation and have your basic Total US and Total International funds, you could always add more funds to spice it up...Small Cap, Small Cap Value, REITs, Emerging Markets, etc.

Here's my portfolio as a reference:
25% VTI (Vanguard Total Stock Market)
25% VXF (Vanguard Extended Market)
10% VNQ (Vanguard US REIT)
15% VEU (Vanguard All-World Ex-US)
15% VSS (Vanguard All-World Ex-US Small-Cap)
10% VWO (Vanguard Emerging Markets)

My portfolio is heavily tilted towards small/mid cap companies with an extra tilt to REITs and Emerging Markets. 60% of my portfolio is US and 40% is international. Before adding any of these extra funds (outside of the total US and total international), read up and make sure you understand why you are adding them. You need to make sure you understand everything you invest in and know why you are choosing it. That way you'll be able to stick with it during bad times.

My allocation is roughly as follows:

~40% VTSAX
~10% VFIAX
~15% VSMAX
~10% VSIAX
~10% VIMAX
~15% VASVX (exchanging soon)

I started out with a more random mix based on google searches, a few years ago, before I really knew what I was doing. Later I homed in on low cost index funds. I figured I wanted more exposure to small/mid cap since I had some time until retirement.

I realize I have no exposure to international equity, bonds, or real estate. That is what I am starting to re-think now based on these posts.

TheGibberingPotato · « **Reply #17 on:** January 05, 2015, 11:10:46 AM »

Quote from: webguy on January 05, 2015, 08:16:31 AM

If you're hoping to live off your portfolio then having 100% of it in stocks isn't really wise, as you'd likely need to draw more than 4% of it each year if there was a significant market downturn, which could deplete your portfolio too quickly. If you're looking for high growth from your portfolio over the next 10 years then a large percentage in stocks is the way to go, but in doing so you take on risk. Risk could mean that you portfolio cuts in half for a number of years. If you have a year or so worth of living expenses in cash when you retire - say 50k - then you can use that as a buffer to prevent having to draw down on your stocks much when they're down.

I'd ask the question though; do you need high growth right now? As you're earning a good income then you may not need excessive portfolio growth to get to your FI number, and so it may be unwise to put all your eggs in the stocks basket.

Another idea could be starting at 100% stocks and then changing to bonds at a rate of 3% a year for the next 10 years?..

Year 1: 100/0
Year 2: 97/3
Year 3: 94/6
Year 4: 91/9
Etc...

That way by the time you get to 10 years you have a 70/30 split and a less volatile portfolio to withdraw from.

You make a good point, do I really need that growth given the risk it brings.

To be honest, I have not determined exactly how much money my wife and I will need in retirement. This is something we'll be working on figuring out.

Jeremy · « **Reply #18 on:** January 05, 2015, 06:36:27 PM »

Quote from: 17oclockshadow on January 05, 2015, 11:08:21 AM

I realize I have no exposure to international equity, bonds, or real estate. That is what I am starting to re-think now based on these posts.

By investing in US stocks, you have a great deal of international exposure. US companies do a lot of business outside the US

Quote from: 17oclockshadow on January 05, 2015, 11:10:46 AM

Quote from: webguy on January 05, 2015, 08:16:31 AM
If you're hoping to live off your portfolio then having 100% of it in stocks isn't really wise, as you'd likely need to draw more than 4% of it each year if there was a significant market downturn, which could deplete your portfolio too quickly. If you're looking for high growth from your portfolio over the next 10 years then a large percentage in stocks is the way to go, but in doing so you take on risk. Risk could mean that you portfolio cuts in half for a number of years. If you have a year or so worth of living expenses in cash when you retire - say 50k - then you can use that as a buffer to prevent having to draw down on your stocks much when they're down.

I'd ask the question though; do you need high growth right now? As you're earning a good income then you may not need excessive portfolio growth to get to your FI number, and so it may be unwise to put all your eggs in the stocks basket.

Another idea could be starting at 100% stocks and then changing to bonds at a rate of 3% a year for the next 10 years?..

Year 1: 100/0
Year 2: 97/3
Year 3: 94/6
Year 4: 91/9
Etc...

That way by the time you get to 10 years you have a 70/30 split and a less volatile portfolio to withdraw from.

You make a good point, do I really need that growth given the risk it brings.

To be honest, I have not determined exactly how much money my wife and I will need in retirement. This is something we'll be working on figuring out.

I have a different viewpoint, and find 100% stocks to be a very wise position. A 70/30 split at age 40 is not a great 60 year retirement base

If you use a tool like http://www.cfiresim.com, or read the papers that birthed the 4% rule, you will find that
a) bonds reduce long term success rate but help with retirement lengths of 15 years +/-. At 30 years old, stocks are your friend
b) everything has risk. bonds have risk. stocks have risk. You can't avoid risk by purchasing one instead of the other. You might be able to reduce volatility by buying bonds (at the cost of growth), so you trade short term volatility risk for long term "I don't have enough money when I'm 90" risk
c) The 4% rule doesn't say don't spend more than 4% in any given year, only in year 1. Often withdrawal rates of 7% worked for 30 year retirements. Spending more than 4% during down years can be perfectly OK, but good to have spending reduction strategies such as those I outlined above (one of which could be bonds, but probably not the best one)

You absolutely need to figure out your spending target, as that defines all else.

Eric · « **Reply #19 on:** January 05, 2015, 07:08:47 PM »

This is a pretty good discussion on 100% stocks or not. We're a varied group.

http://forum.mrmoneymustache.com/investor-alley/asset-allocation-100-stocks-for-how-long/

Kaspian · « **Reply #20 on:** January 06, 2015, 11:31:09 AM »

We get a lot of posts on this forum that sound like, "I'm going 100% US equities. That's what I'm doing regardless. Please present your futile arguments why this isn't a good idea. " (Sorry, yeah--jaded.) Please Google "recency bias". And you have to seriously ask whether you want to be an investor or a gambler.

Mr. Captain Cash · « **Reply #21 on:** January 07, 2015, 07:44:25 AM »

Kaspian,

Recency bias can be a cruel mistress as it is well documented that whether it is Canadian, US, International, or Emerging equities some will outperform the others for a period of time but not forever. That is why out of the list mentioned my allocation in my investment portfolio is 22% of the four listed.

I like that quote "if you want to be an investor or a gambler!"

Mr. Captain Cash

Indexer · « **Reply #22 on:** January 07, 2015, 07:55:03 AM »

Easiest way to pick an AA, do it the way goldilocks picks her soup. Look at the picture.

Source: https://personal.vanguard.com/us/insights/investingtruths/investing-truth-about-risk (This is actually a great article about asset allocation.)

The very bottom number is the worst year. Start on the far right. If the number at the bottom happened right now... in 2015... how would you feel? How would you feel if it happened in the next five years? If you poop your pants or you can't achieve your goals with that number move to the left. Ask yourself the same questions. Still got an upset stomach... move to the left.

"I wouldn't like it, but I know I wouldn't freak out, I could still achieve my goals, and I could keep a long term focus." When that describes how you feel you are good to go.

Personally I'm 100% stock with my long term money, but if the market dropped 43% I would be as happy as a complanypants who just learned Escalades were on sale!!!

Quote

I realize I have no exposure to international equity, bonds, or real estate. That is what I am starting to re-think now based on these posts.

Well you do have real estate exposure. VTSAX has property management companies in it... the same ones in the Vanguard REIT index. Decide how much you need in bonds using the picture I posted. For international you do need that. Sometimes international does better than the US and vice versa. Some people argue big US companies in the SP 500 have international offices. True, but why wouldn't you want to be more diversified? How can you own Ford, but not Toyota, Honda, BMW, and Hyundia? How can you have Apple, but not Samsung and call yourself diversified? Personally I like 70% domestic, 30% international.

innerscorecard · « **Reply #23 on:** January 07, 2015, 09:50:54 AM »

Indexer, very good chart. It shows that an expected return is really a range of returns. When you are in the asset with the higher expected returns going forward (in a vacuum), you also increase the chance of earning very low returns going forward.

RapmasterD · « **Reply #24 on:** January 07, 2015, 10:53:43 AM »

Quote from: Indexer on January 07, 2015, 07:55:03 AM

Easiest way to pick an AA, do it the way goldilocks picks her soup. Look at the picture.

Source: https://personal.vanguard.com/us/insights/investingtruths/investing-truth-about-risk (This is actually a great article about asset allocation.)

The very bottom number is the worst year. Start on the far right. If the number at the bottom happened right now... in 2015... how would you feel? How would you feel if it happened in the next five years? If you poop your pants or you can't achieve your goals with that number move to the left. Ask yourself the same questions. Still got an upset stomach... move to the left.

"I wouldn't like it, but I know I wouldn't freak out, I could still achieve my goals, and I could keep a long term focus." When that describes how you feel you are good to go.

Personally I'm 100% stock with my long term money, but if the market dropped 43% I would be as happy as a complanypants who just learned Escalades were on sale!!!

Quote
I realize I have no exposure to international equity, bonds, or real estate. That is what I am starting to re-think now based on these posts.

Well you do have real estate exposure. VTSAX has property management companies in it... the same ones in the Vanguard REIT index. Decide how much you need in bonds using the picture I posted. For international you do need that. Sometimes international does better than the US and vice versa. Some people argue big US companies in the SP 500 have international offices. True, but why wouldn't you want to be more diversified? How can you own Ford, but not Toyota, Honda, BMW, and Hyundia? How can you have Apple, but not Samsung and call yourself diversified? Personally I like 70% domestic, 30% international.

Yup. Great chart and I look forward to reading the article. This likely explains why a lot of people are comfortable with a 60-40 or 70-30 allocation. From an average return standpoint, they don't think they're missing too much by gaining 9.1% versus 10%, for the 70-30 allocation. And they sleep better at night knowing the bonds CUSHION that worst possible year by a bit.

But so much has to do with how big your portfolio is now, AND how much you need to live on in retirement. Let's say you guys want to live on exactly how much you're making now (most folks on this thread would face punch you for that). You're saving 50% so let's assume 100k/year. At a 4% SWR I thinks you need $2.5 million. Disagree egregiously with my assumptions. That's OK. But make your own.

In your shoes if you have a relatively small portfolio, I'd probably go with 100% and set my horizon at 10-15 years versus 5-10 years. But if you're already sitting on a couple of million, then I'd rethink that.

P.S. Here is the PDF for the entire Vanguard four article series, which includes the aforementioned article and chart. LINK: http://www.vanguard.com/pdf/s700.pdf

Kaspian · « **Reply #25 on:** January 07, 2015, 12:16:24 PM »

A one asset is surely not a prudent investment strategy. (You can ask all the people who thought their homes were great investments in 2006.) Here's another chart.

forummm · « **Reply #26 on:** January 07, 2015, 12:30:24 PM »

Thanks for the discussion. Part of my strategy (still 5+ years out from FIRE) involves the fact that I have a "bare bones" budget (to survive) and a "for fun" budget (travel, etc) in my retirement fund plans. I'm planning on a 100% stock allocation, except I'm toying with the idea of having maybe a year of "bare bones" expenses in cash. If the market loses 40% in a year, we go bare bones and just spend the cash. If the downturn lasts a long time, DW or I can always go back to work at some point to reinflate the stash. Our bare bones budget would be close to a minimum wage job salary anyway, so we could keep food on the table if any work was available at all (and would have a cushion to last a really long time even we had another Great Depression scenario).

As for 100% (highly diversified) stocks and the stomach for volatility, I'm comfortable with that. I calculated that I lost 4 months of after-tax salary on Monday and Tuesday. It hurt a little. And I laughed about it a little. But I wasn't too worried. I know that's not the same as having your portfolio drop 40% when you don't have a job anymore. But knowing that I can live incredibly inexpensively (and won't have any debt or mortgage and no/low taxes at that point) is a huge comfort. To me the risk of huge downswings is better than having to work X more years to inflate the stash by enough more to live for 50+ years at a much lower yield because of owning a lot of bonds--and still having my stash drop by 25% some years anyway.

Kaspian · « **Reply #27 on:** January 07, 2015, 01:41:26 PM »

Quote from: forummm on January 07, 2015, 12:30:24 PM

at a much lower yield because of owning a lot of bonds

Did you see the chart above which shows all the years which bonds outshined equities? Winners rotate. Rebalancing means you reap gains from them all over time. But people can convince themselves of anything given a good recency bias, I guess.

frugalman · « **Reply #28 on:** February 15, 2015, 04:54:21 PM »

Thanks to all the participating board members for thoughts on asset allocation. I have a rare situation compared to most board members - I am retiring later this year, with relatively small invested assets (about $300,000). But with a paid for home and no debt and a side $50,000 travel fund, I'm in pretty good shape. I'll be 65 3/4 years old, and am going to hold off drawing social security until I am 66 in early 2016.

Income: $4,365/mo (includes $1,000/mo asset draw, $2,680 social security, $650 pension and $35 rewards card).
Expenses: $2,365/mo
Savings during retirement: $2,000/mo
Zero taxes (yes, it is quite possible, and I have the spreadsheets to prove it).
When dear wife starts her social security 4 years later, that will add $1,340/mo income, increasing our savings rate to $3,340/mo.

I've decided to allocate to 100% stocks, probably VTSAX, and just take out $12,000/year with no annual inflation adjustment. I will have one exception: any year that VTSAX is below $270,000 (a 10 percent loss) I will forgo any withdrawals for that year, until it is back to $300,000 again at the beginning of another year's cycle. As Go Curry Cracker has stated before, we'll eat beans instead of steak, and make other adjustments. We will STILL have a savings rate of at least $1,000/mo. And if necessary, I can do part time work to fill in the missing $12,000 draw.

I just thought I'd share my plan, and see if anyone can see any holes in it. Thanks!

GGNoob · « **Reply #29 on:** February 15, 2015, 05:06:51 PM »

Quote from: frugalman on February 15, 2015, 04:54:21 PM

Thanks to all the participating board members for thoughts on asset allocation. I have a rare situation compared to most board members - I am retiring later this year, with relatively small invested assets (about $300,000). But with a paid for home and no debt and a side $50,000 travel fund, I'm in pretty good shape. I'll be 65 3/4 years old, and am going to hold off drawing social security until I am 66 in early 2016.

Income: $4,365/mo (includes $1,000/mo asset draw, $2,680 social security, $650 pension and $35 rewards card).
Expenses: $2,365/mo
Savings during retirement: $2,000/mo
Zero taxes (yes, it is quite possible, and I have the spreadsheets to prove it).
When dear wife starts her social security 4 years later, that will add $1,340/mo income, increasing our savings rate to $3,340/mo.

I've decided to allocate to 100% stocks, probably VTSAX, and just take out $12,000/year with no annual inflation adjustment. I will have one exception: any year that VTSAX is below $270,000 (a 10 percent loss) I will forgo any withdrawals for that year, until it is back to $300,000 again at the beginning of another year's cycle. As Go Curry Cracker has stated before, we'll eat beans instead of steak, and make other adjustments. We will STILL have a savings rate of at least $1,000/mo. And if necessary, I can do part time work to fill in the missing $12,000 draw.

I just thought I'd share my plan, and see if anyone can see any holes in it. Thanks!

You should probably start a new thread for this.

Mr. Captain Cash · « **Reply #30 on:** February 15, 2015, 05:44:58 PM »

Frugalman,

I assume you are being forced to withdraw the $1000 a month out of your investment portfolio? If you are being taxed on the $1000 withdrawal it would make more sense, to leave the $1000 VTSAX in place. Instead of taking the $1000 out getting taxed, and then reinvesting $2,000 a month to get taxed at a later date once you withdraw it again.

From the information you have provided. I agree that you are in good shape. Congratulations on reaching FI!

Mr. Captain Cash

okonumiyaki · « **Reply #31 on:** February 15, 2015, 06:48:42 PM »

I think it depends on how much money you have.

As Bernstein put it, when you have won the game, stop playing.

My parents retired early (51) and put the money they absolutely needed into index linked gilt ladder (a TIPS ladder in US terms) designed to give them an inflation guaranteed floor income of about 30,000 USD a year (from bonds maturing & interest) The rest was in the stock market.

With hindsight, would they have ended up much richer if all was in the stock market? Yes. But that wasn't the issue. They had won the game, so took most of their winnings off the table.

If you are going for FIRE without much safety margin, sure, all shares might make more sense.

DavidAnnArbor · « **Reply #32 on:** February 17, 2015, 10:51:27 PM »

A nice thing to consider is that if you do retire in ten years or sooner, and you live on a low enough income that you're in the 15% tax bracket, then when you sell stock funds from taxable account and incur long term capital gains you won't have to pay any federal income taxes on those gains. Also read up on the strategy that some use to convert into a Roth IRA from traditional IRA all with low enough income to keep the federal tax bill zero.

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