Author Topic: 100% Stocks or 90/10?  (Read 17411 times)

TheBuddha

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100% Stocks or 90/10?
« on: April 24, 2015, 12:12:42 AM »
I was thinking of doing 100% equities in my (newly-opened) Roth IRA but I had a weird thought: would 90/10 maybe perform better?

I'm new to all of this, but from what I understand about rebalancing a portfolio, it lets you "lock in" some gains by always selling some of the winners to buy the losers.

Would 10% bonds serve as a repository for some of the stock gains? Example: If the market crashed after I rebalanced, I'd probably be glad I'd sold some of the stock and locked it in.

Does that make any sense? Or would 100% stocks always be better in the long run?

MDM

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Re: 100% Stocks or 90/10?
« Reply #1 on: April 24, 2015, 12:16:55 AM »
I was thinking of doing 100% equities in my (newly-opened) Roth IRA but I had a weird thought: would 90/10 maybe perform better?
Maybe.  Maybe not.

Quote
I'm new to all of this, but from what I understand about rebalancing a portfolio, it lets you "lock in" some gains by always selling some of the winners to buy the losers.
Would 10% bonds serve as a repository for some of the stock gains? Example: If the market crashed after I rebalanced, I'd probably be glad I'd sold some of the stock and locked it in.
Yes, you would be glad in that example.  If the market continued up after you rebalanced, you would be unhappy because you sold some of the stock and lost the continue appreciation.

Quote
Does that make any sense?
Yes.
Quote
Or would 100% stocks always be better in the long run?
Maybe.  Maybe not.

Mighty-Dollar

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Re: 100% Stocks or 90/10?
« Reply #2 on: April 24, 2015, 04:00:57 AM »
Having 10% in bonds doesn't reduce your upside by much. I would diversify. 90 / 10 is what Warren Buffet recommends.

Here's Jim Cramer's recommendations...
Younger than 30 - No reason to own bonds
In your 30's: 10% - 20% bonds
In your 40's: 20% - 30% bonds
In your 50's: 30% - 40% bonds
60 to retirement: 40% - 50% bonds

mrpercentage

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Re: 100% Stocks or 90/10?
« Reply #3 on: April 24, 2015, 04:35:34 AM »
Locking in the gains by switching to bonds is a strategy I'm playing with now. Warren buffet most certainly knows better. You have to get timing right and you are messing with taxes if it's not a retirement account. Strategy is 100% oct-apr 50/50 summer. Can't tell you results yet

SaintM

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Re: 100% Stocks or 90/10?
« Reply #4 on: April 24, 2015, 07:00:54 AM »
There are plenty of stocks that serve as "bond proxies."  These are often utilities, telecom, energy companies paying large and increasing dividends supported by ample positive cash flow.

Would you rather own a 10-year bond guaranteed to only pay 2% per year with no appreciation or a diverse set of companies that pay 4-6% per year.  Historically, the stocks' dividends increase every year at a rate equal to or greater than inflation, and the price appreciates in line with the market.

halfshellmeijin

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Re: 100% Stocks or 90/10?
« Reply #5 on: April 24, 2015, 07:18:09 AM »
According to "The Intelligent Asset Allocator" 90/10 does out perform in risk and reward compared o 100% stock. That is due to the rebalancing of the portfolio that you mentioned, allowing you to sell high and buy low.

OurFirstFire

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Re: 100% Stocks or 90/10?
« Reply #6 on: April 24, 2015, 07:42:36 AM »
Having 10% in bonds doesn't reduce your upside by much. I would diversify. 90 / 10 is what Warren Buffet recommends.

Here's Jim Cramer's recommendations...
Younger than 30 - No reason to own bonds
In your 30's: 10% - 20% bonds
In your 40's: 20% - 30% bonds
In your 50's: 30% - 40% bonds
60 to retirement: 40% - 50% bonds

It turns out I agree with Jim's rules!  But with a caveat:  A Mustachian of any age is at least a 50 year old Cramerian, because Jim uses age as a proxy for how many years until retirement, which Mustachians do not.  So I am a 33 year old at a 60/40 split (if you use a broad definition of "stocks" and "bonds").

Plus, when you use the magic of rebalancing, a 60/40 split doesn't give up much in returns over the long run in exchange lower volitility.  A simple example from Betterment can be found at https://www.betterment.com/resources/investment-strategy/betterment-historical-performance/:
60/40 split: 114.4% return for the past 11 years
100/0 split: 116.3% return for the past 11 years

Sure, you are out 2% over those 11 years, but it also would have been a lot less painful if you chose to retire at the start of 2008.



TheAnonOne

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Re: 100% Stocks or 90/10?
« Reply #7 on: April 24, 2015, 09:07:47 AM »
Having 10% in bonds doesn't reduce your upside by much. I would diversify. 90 / 10 is what Warren Buffet recommends.

Here's Jim Cramer's recommendations...
Younger than 30 - No reason to own bonds
In your 30's: 10% - 20% bonds
In your 40's: 20% - 30% bonds
In your 50's: 30% - 40% bonds
60 to retirement: 40% - 50% bonds

It turns out I agree with Jim's rules!  But with a caveat:  A Mustachian of any age is at least a 50 year old Cramerian, because Jim uses age as a proxy for how many years until retirement, which Mustachians do not.  So I am a 33 year old at a 60/40 split (if you use a broad definition of "stocks" and "bonds").

Plus, when you use the magic of rebalancing, a 60/40 split doesn't give up much in returns over the long run in exchange lower volitility.  A simple example from Betterment can be found at https://www.betterment.com/resources/investment-strategy/betterment-historical-performance/:
60/40 split: 114.4% return for the past 11 years
100/0 split: 116.3% return for the past 11 years

Sure, you are out 2% over those 11 years, but it also would have been a lot less painful if you chose to retire at the start of 2008.

What about over the last 50 years? (A period closer to the time you will be retired)



BlueHouse

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Re: 100% Stocks or 90/10?
« Reply #8 on: April 24, 2015, 10:39:31 AM »
Having 10% in bonds doesn't reduce your upside by much. I would diversify. 90 / 10 is what Warren Buffet recommends.

Here's Jim Cramer's recommendations...
Younger than 30 - No reason to own bonds
In your 30's: 10% - 20% bonds
In your 40's: 20% - 30% bonds
In your 50's: 30% - 40% bonds
60 to retirement: 40% - 50% bonds

It turns out I agree with Jim's rules!  But with a caveat:  A Mustachian of any age is at least a 50 year old Cramerian, because Jim uses age as a proxy for how many years until retirement, which Mustachians do not. So I am a 33 year old at a 60/40 split (if you use a broad definition of "stocks" and "bonds").

Plus, when you use the magic of rebalancing, a 60/40 split doesn't give up much in returns over the long run in exchange lower volitility.  A simple example from Betterment can be found at https://www.betterment.com/resources/investment-strategy/betterment-historical-performance/:
60/40 split: 114.4% return for the past 11 years
100/0 split: 116.3% return for the past 11 years

Sure, you are out 2% over those 11 years, but it also would have been a lot less painful if you chose to retire at the start of 2008.
I'm not sure I agree with the section I bolded above.  Rather than using age as a proxy to the number of years to retirement, why not view it as the number of recoverable years left should something catastrophic happen?  So if a mustachian retires at age 30 and something catastrophic happens to the market, he can go back to work and he has many years to recover that portfolio.  The wise advice here would be to leave a higher percentage in equities, no?  But if a mustachian retires at age 50, there just aren't enough years to recover and the likelihood of going back to work is lower. 

I think a younger retired mustachian would be better off using Cramer's percentages without alteration.

Scandium

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Re: 100% Stocks or 90/10?
« Reply #9 on: April 24, 2015, 11:05:26 AM »

GGNoob

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Re: 100% Stocks or 90/10?
« Reply #10 on: April 24, 2015, 11:17:20 AM »
https://www.portfoliovisualizer.com/

You can play around here as well. The difference in returns is not much. So if it makes you feel better, go 10% bonds. Most Boglehead's would say no less than 20% bonds. But not all of them want to retire early. Personally, I do 100% stocks.

TheBuddha

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Re: 100% Stocks or 90/10?
« Reply #11 on: April 24, 2015, 12:54:13 PM »
90 / 10 is what Warren Buffet recommends.

I didn't know that! Makes me feel smart :)


There are plenty of stocks that serve as "bond proxies."  These are often utilities, telecom, energy companies paying large and increasing dividends supported by ample positive cash flow.

Good point I will re-think what the 10% should be. I do have plenty of dividend stocks already though, most of my Roth is in Schwab SCHD high-dividend ETF.   


According to "The Intelligent Asset Allocator" 90/10 does out perform in risk and reward compared o 100% stock. That is due to the rebalancing of the portfolio that you mentioned, allowing you to sell high and buy low.

Thanks for that info, I feel more comfortable that I'm on the right track now.


Dodge

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Re: 100% Stocks or 90/10?
« Reply #12 on: April 24, 2015, 01:26:00 PM »
A bond is a contractual agreement, a stock is a percentage stake in a company.  Stocks are inherently riskier, never confuse the two.  The main purpose of bonds in your portfolio is to reduce risk.  If you want 90/10 stocks/bonds, then go 90/10 stocks/bonds.  Not 90/10 stocks/stocks...

Jack

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Re: 100% Stocks or 90/10?
« Reply #13 on: April 24, 2015, 01:34:16 PM »
My IRAs are in index funds (as opposed to ETFs), so they need to be 100% stock for the simple fact that the balances are too low to hit the minimum to buy into a second fund. (In other words, 10% of each IRA's total value is less than $3000.)

I could fix that by switching to ETFs, but then again, I don't mind the 100% stock AA for now so I can't be bothered.

Having 10% in bonds doesn't reduce your upside by much. I would diversify. 90 / 10 is what Warren Buffet recommends.

Here's Jim Cramer's recommendations...
Younger than 30 - No reason to own bonds
In your 30's: 10% - 20% bonds
In your 40's: 20% - 30% bonds
In your 50's: 30% - 40% bonds
60 to retirement: 40% - 50% bonds

It turns out I agree with Jim's rules!  But with a caveat:  A Mustachian of any age is at least a 50 year old Cramerian, because Jim uses age as a proxy for how many years until retirement, which Mustachians do not.  So I am a 33 year old at a 60/40 split (if you use a broad definition of "stocks" and "bonds").

Not necessarily: a Mustachian planning to retire in 5 years at 35 is not equivalent to a 60-year-old planning to retire at 65 because the Mustachian's money has to last a lot longer. Because of that, the Mustachian is more reliant on gains both to keep from depleting his principal and to stay ahead of inflation, which suggests he would benefit from a more aggressive asset allocation.

skyrefuge

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Re: 100% Stocks or 90/10?
« Reply #14 on: April 24, 2015, 02:22:35 PM »
I was thinking of doing 100% equities in my (newly-opened) Roth IRA but I had a weird thought: would 90/10 maybe perform better?

The only time rebalancing will improve a portfolio's performance is when the classes being rebalanced have the same expected return. So if you expect bonds to perform as well as stocks, then yes, 90/10 would improve your returns (50/50 would improve them even more in that case). If you expect stocks to perform better than bonds over the long term (which most people do), then adding bonds and rebalancing will decrease your raw performance, since you'll be moving money from stocks to bonds a lot more often than you'll be going the other way.

Still, holding 100% stocks is something very few people actually do (mostly newbies who have only ever seen the stock market go up, or experts who really understand what they're doing). People hold bonds because watching their wealth crash and soar and dive gives them a shitty feeling, and they're willing to sacrifice some returns in order to reduce that shitty feeling.

In other words, it might be a good idea for you to hold some bonds anyway. Rather than being some brilliant or "weird" idea you just discovered, holding bonds is a total normal, standard thing that almost all investors do. As seen here: http://www.bogleheads.org/wiki/Asset_allocation

There are plenty of stocks that serve as "bond proxies."

Have you never looked at what bond performance is actually like?  That's the only way I can imagine how you would even make such a statement. Here are some of those utilities/telecom/energy dividend-growth companies charted against Vanguard's Total Bond Market fund (VTBLX):



Which one of those jagged-seismograph readings do you see as "proxy" for the stable, steady dark blue climb of VTBLX? A Sesame Street-watching three-year old playing "one of these things is not like the other" would be giggling at you for having such a hard time finding the one that stands out.

MOD EDIT: Forum Rule #1.
« Last Edit: April 24, 2015, 02:44:57 PM by arebelspy »

SaintM

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Re: 100% Stocks or 90/10?
« Reply #15 on: April 24, 2015, 02:36:08 PM »
MOD EDIT: Forum Rule #1.
« Last Edit: April 24, 2015, 02:44:43 PM by arebelspy »

Eric

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Re: 100% Stocks or 90/10?
« Reply #16 on: April 24, 2015, 02:38:20 PM »

brooklynguy

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Re: 100% Stocks or 90/10?
« Reply #17 on: April 24, 2015, 03:41:39 PM »
I didn't see the content of reply # 15 before it was removed, but if the stricken-through portion of reply # 14 is all there was in that post, I see no violation of Forum Rule # 1 there.  It was obviously a light-hearted (and extremely funny, and partly for that reason extremely effective) way of making the point that there are differences between the referenced asset classes that become obvious upon a conscious comparison of their volatility and total returns (with the implication being that the line on the chart representing bonds is so obviously different than the rest that even a three-year old could identify it as the outlier if asked to look at the chart and do so, not that the asset classes are so self-evidently different that even a three-year old should know better than to equate them in the first place).

Don't mean to fan any flames -- of course "jerkiness" is in the eye of the beholder, but I just don't see it here and believe it would be in the best interest of the forum for the moderators to construe the Forum Rules narrowly in the spirit of maintaining their traditional light touch on the moderator levers.

arebelspy

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Re: 100% Stocks or 90/10?
« Reply #18 on: April 24, 2015, 03:46:24 PM »
Given what Eric posted immediately afterwards, and the fact that the poster in question was upset enough to rage delete his account immediately afterwards (combined with the fact that 99% of the time we leave the content intact, with the strikethrough feature, but this time the whole post was straight up removed, which should give you a hint), maybe you can give the moderators the benefit of the doubt that what was posted was in violation of the forum rules?  :)
« Last Edit: April 24, 2015, 03:48:25 PM by arebelspy »
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brooklynguy

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Re: 100% Stocks or 90/10?
« Reply #19 on: April 24, 2015, 03:51:56 PM »
Fair enough, and I don't mean to be a backseat moderator.

Maybe I was just subconsciously worried about my own virtual-self-preservation, given that I (jokingly) called for the banishment, tarring and feathering, and beheading of other forum members over the course of the last few days.

Sorry to interfere; I'll get off my soapbox.

arebelspy

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Re: 100% Stocks or 90/10?
« Reply #20 on: April 24, 2015, 04:03:10 PM »
No worries, it's a valid concern.  Criticizing those in power should be done loudly and often.  If nothing else it forces us to reflect on our role.  In this case though, I'm okay with the moderating that happened.  :)
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TheBuddha

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Re: 100% Stocks or 90/10?
« Reply #21 on: April 24, 2015, 09:02:30 PM »
Rather than being some brilliant or "weird" idea you just discovered, holding bonds is a total normal, standard thing that almost all investors do.

(Really?)

The weird idea wasn't holding bonds in general... it was specifically that 90/10 might outperform 100/0. Obviously with 90% stocks I'm willing to take a lot of risk, so the bonds are not there to reduce volatility (help me sleep at night), but rather as a repository for some of the stock gains. Which I'm not sure would actually happen or not. Which is why I asked.


 

matchewed

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Re: 100% Stocks or 90/10?
« Reply #22 on: April 25, 2015, 06:08:54 AM »
Rather than being some brilliant or "weird" idea you just discovered, holding bonds is a total normal, standard thing that almost all investors do.

(Really?)

The weird idea wasn't holding bonds in general... it was specifically that 90/10 might outperform 100/0. Obviously with 90% stocks I'm willing to take a lot of risk, so the bonds are not there to reduce volatility (help me sleep at night), but rather as a repository for some of the stock gains. Which I'm not sure would actually happen or not. Which is why I asked.

It's both(ish). Stocks are more volatile but generally give higher returns. Bonds give a smoother ride but generally give lower returns. However there could be time periods where bonds outperform stocks, there just aren't that many historically speaking. So assuming the future looks much like the past with a higher bond percentage in that small range you'd just have a smoother ride upwards with probably a slightly smaller end point.

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Re: 100% Stocks or 90/10?
« Reply #23 on: April 25, 2015, 07:58:14 AM »
I have been investing since 1992, not to say that gives me any special wisdom!  But here is my point.  I have read many finacial bloggers who are considering going 100% stocks simply because that is the better performing asset class and they are going for FIRE.  While there is some validity to that logic - do not underestimate the impact of seeing your portfolio dive 50% in a strong bear market.  If you have not lived through the 2008 crash with a significant sized portfolio then you probably do not know how you will react.

Right now the problem with bonds for me is that the historical returns of 60/40 stock/bond portfolios may not mean anything going forward because that history includes 30 yrs of generally declining interest rates and a bull market in bonds.  What is the right answer?  Damned if I know! But 100% stocks sounds better in the middle of a 7 year old bull market that is for sure!

What do people think about using separate index funds for bonds, one that is corporate higher yeild (not junk) and one that is short term government for a bond allocation?  Say 70% stocks, 15% Corp Bonds and 15% Short Term government for now?

The Happy Philosopher

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Re: 100% Stocks or 90/10?
« Reply #24 on: April 25, 2015, 09:26:09 AM »
The thing that scares me the most about using historical returns to project future expectations (with regards to bonds) is the fact that we have been in a 30+ year bull market for bonds and we have extremely low historical interest rates. I'm torn between my belief in the efficient market theory and the concept of valuation matters. I just have a hard time imagining a 60/40 or 50/50 portfolio returns the next 30 years being anything like the past 30.  I  worry that someone retiring in the near future with a sizable bond allocation could expose his/herself to massive sequence of return risk if interest rates rise. Thoughts?

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Re: 100% Stocks or 90/10?
« Reply #25 on: April 25, 2015, 09:41:23 AM »
  I  worry that someone retiring in the near future with a sizable bond allocation could expose his/herself to massive sequence of return risk if interest rates rise. Thoughts?

We are currently at 20% long term and 10% short term bonds (42 y.o.), and I plan to stay there till the FIRE is burning strong.

If interest rates increase, then I understand that there will be capital loss, but only if I sell, which I won't till I'm nearly dead.  With rising interest rates, the dividends will increase to make up for the loss.
« Last Edit: April 25, 2015, 09:49:42 AM by Heckler »

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Re: 100% Stocks or 90/10?
« Reply #26 on: April 25, 2015, 09:57:23 AM »
The thing that scares me the most about using historical returns to project future expectations (with regards to bonds) is the fact that we have been in a 30+ year bull market for bonds and we have extremely low historical interest rates. I'm torn between my belief in the efficient market theory and the concept of valuation matters. I just have a hard time imagining a 60/40 or 50/50 portfolio returns the next 30 years being anything like the past 30.  I  worry that someone retiring in the near future with a sizable bond allocation could expose his/herself to massive sequence of return risk if interest rates rise. Thoughts?
I have much the same concerns, so if you find the answer please let me know.. I'm currently reading Ferri's asset allocation book, and have some others on my to do list. I will probably newev
The thing that scares me the most about using historical returns to project future expectations (with regards to bonds) is the fact that we have been in a 30+ year bull market for bonds and we have extremely low historical interest rates. I'm torn between my belief in the efficient market theory and the concept of valuation matters. I just have a hard time imagining a 60/40 or 50/50 portfolio returns the next 30 years being anything like the past 30.  I  worry that someone retiring in the near future with a sizable bond allocation could expose his/herself to massive sequence of return risk if interest rates rise. Thoughts?
I have much the same concerns, so if you find the answer please let me know.. I'm currently reading Ferri's asset allocation book, Bogle's stuff and have some others on my to do list. Trying to learn more about this. I think in the end I will trust blind indexing and start adding some more bonds in the next few years as I approach late 30s.

Where is dodge with his chart of bond prices in the 70s when rates started rising..? Spoiler: they did not plummet

Dodge

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Re: 100% Stocks or 90/10?
« Reply #27 on: April 25, 2015, 11:18:22 AM »
(Hehe, you know me so well!)

Everyone knows (well almost everyone) not to market time the stock market.  The bond market is no different.  You might not see it, but this is market timing.  Ignore the noise, the news reports, and the doomsday articles.  You can't guess where the market will go next.  Let's review what happened to bonds the last time interest rates soared:



Interest rates spiked pretty high from 1975 through 1981 (the peak).  Let's see what happened to intermediate term bonds during this time (orange line):



A $10,000 deposit grew almost 60%!

Now let's look at another point on the chart, the two decades from 1950-1970, where interest rates tripled from their record low.  What happens to bonds then?



Unfortunately Morningstar's Intermediate bonds graph doesn't start until 1955, so I added "High Yield Bonds", a category which should be more negatively impacted by a rise in interest rates.  Looking at the chart, we see:
  • High Yield Bonds more than tripled during this time.  With a $10,000 deposit growing to $31,775.33
  • Intermediate Bonds more than doubled during this time, despite not starting until about 1955.  A $10,000 deposit grew to $23,435.50

Furthermore, even if interest rates do cause bonds to fall (which hasn't happened any of the other times), you'll end up better off after a few years:


Source: https://www.youtube.com/watch?v=F_boP9bu5Bw&list=PLdpkIg5_Ms4At-DZbPbkxujh2EGOnOu6H&index=9

Look at how steep the new slope is.  And this is with a 30 year maturity.  If you're invested in Vanguard's Total Bond Index Fund, your average maturity date is 7.8 years.  This makes your "Point of indifference" about 2.5 years.  After that, you are better off with the higher interest rates.

This is why we say ignore the noise.

skyrefuge

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Re: 100% Stocks or 90/10?
« Reply #28 on: April 25, 2015, 11:21:15 AM »
Rather than being some brilliant or "weird" idea you just discovered, holding bonds is a total normal, standard thing that almost all investors do.

(Really?)

The weird idea wasn't holding bonds in general... it was specifically that 90/10 might outperform 100/0.

Ok! I tend to err on the side of caution when people post and say "I'm new to all this", because there genuinely are people who post questions here who have never heard of bond investments or asset allocation (particularly if Mr. Money Mustache is their first exposure to investing, since he rarely mentions bonds).

But yeah, if you want to convince yourself, I think it's a useful exercise to invent a sequence of both stock and bond returns that you expect in the future, and work through the math with a 100%-stock portfolio vs. a 90/10 portfolio-with-rebalancing, and see what happens.

DavidAnnArbor

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Re: 100% Stocks or 90/10?
« Reply #29 on: April 25, 2015, 04:51:05 PM »
One could choose to buy I-Bonds from treasurydirect.gov which won't go down in value, essentially these are savings bonds linked to the inflation rate. However this might be moot after reading Dodge's post about how bonds will actually recover after a period of time after interest rates increase.

aspiringnomad

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Re: 100% Stocks or 90/10?
« Reply #30 on: April 25, 2015, 07:31:44 PM »
If you own real estate, then is it correct to add that toward your asset allocation as a bond-like instrument? I would assume so, which would mean that anyone here who owns their home and/or investment properties should probably keep all other investments in equities, no?

arebelspy

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Re: 100% Stocks or 90/10?
« Reply #31 on: April 25, 2015, 07:34:48 PM »
Pretty hard to rebalance quickly and easily from real estate to equities when the latter falls and your AA is out of whack.  (I.e. there's a liquidity problem.)
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Re: 100% Stocks or 90/10?
« Reply #32 on: April 26, 2015, 08:05:17 AM »
90 / 10 is what Warren Buffet recommends.

I didn't know that! Makes me feel smart :)


I've only seen him recommend that for his wife's inherited money after he dies. So unless your portfolio is on the order of a billion dollars and you are in your 70's, his advice may not necessarily apply to you.

He does recommend index funds for everyone.

aspiringnomad

  • Pencil Stache
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  • Posts: 776
Re: 100% Stocks or 90/10?
« Reply #33 on: April 26, 2015, 08:25:06 AM »
Pretty hard to rebalance quickly and easily from real estate to equities when the latter falls and your AA is out of whack.  (I.e. there's a liquidity problem.)

Maybe a strong case for having a HELOC. But I imagine most people's AA would be out of whack if  they factor in real estate. Mine would be.