Author Topic: Dumping the whole pot into VTSAX. Please tell me why I'm wrong.  (Read 16998 times)

Merdox

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Dearest Mustachians,

I'm a fairly new Mustachian; I started my Vanguard accounts just a few months ago and I'd like some criticism from you far wiser finance experts. I started by splitting between VTSAX and VTIAX, but I soon began dumping all of my monthly contributions into VTSAX because that already has international exposure worked into it. While 100% stocks is risky, my thinking is that because I'll presumably be holding forever and will keep a recession fund, I'll be fine keeping it simple and doubling down on VTSAX indefinitely, leaving bonds and other complexities out of the mix. I was surprised, however, to find that many of you finance sages have complex portfolios with many different flavors of AA.

What am I missing? For a little background, I'm 30 and am currently making a good income, hoping to hit Mustachian FI in about 5-7 years. My age and income plus the fact that interest rates are currently low is how I justified keeping bonds out of the mix for now, but lately I'm questioning why, with a decent safety margin, I'll ever need anything other than VTSAX. Fire away!

tj

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Re: Dumping the whole pot into VTSAX. Please tell me why I'm wrong.
« Reply #1 on: March 01, 2015, 02:01:36 PM »
It is insane to be 100% stocks with such a short time horizon. If you planned to work another 20- 30 years, I would say it makes sense.

kaizen soze

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Re: Dumping the whole pot into VTSAX. Please tell me why I'm wrong.
« Reply #2 on: March 01, 2015, 02:32:03 PM »
Modern portfolio theory attempts to maximize your portfolio's utility (defined as a function of risk and return) rather than either minimizing risk or maximizing return.  100% stock allocation gives you the best possible return, and 100% bonds gives a lower possible rate of return at a lower risk (and a CD or savings account gives you even lower return for even less risk).  But because bonds and stock returns are somewhat uncorrelated, some combination of the two gives you a higher rate of return than bonds, but at a risk level that is lower than either 100% allocation, and thus provides more utility than either would by itself.  Adding additional asset classes allows you to increase utility further.  If you knew for sure that future results would be just like past results, you'd hold 100% stocks.  But then, if you knew that, then you'd just pick the single best performing single stock and put everything into that. 

This guy's book does a much better job of explaining than I ever could:

http://www.amazon.com/About-Asset-Allocation-Second-Edition/dp/0071700781

edit: see http://en.wikipedia.org/wiki/Efficient_frontier
« Last Edit: March 01, 2015, 02:34:11 PM by kaizen soze »

Dodge

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Re: Dumping the whole pot into VTSAX. Please tell me why I'm wrong.
« Reply #3 on: March 01, 2015, 02:49:35 PM »
Dearest Mustachians,

I'm a fairly new Mustachian; I started my Vanguard accounts just a few months ago and I'd like some criticism from you far wiser finance experts. I started by splitting between VTSAX and VTIAX, but I soon began dumping all of my monthly contributions into VTSAX because that already has international exposure worked into it. While 100% stocks is risky, my thinking is that because I'll presumably be holding forever and will keep a recession fund, I'll be fine keeping it simple and doubling down on VTSAX indefinitely, leaving bonds and other complexities out of the mix. I was surprised, however, to find that many of you finance sages have complex portfolios with many different flavors of AA.

What am I missing? For a little background, I'm 30 and am currently making a good income, hoping to hit Mustachian FI in about 5-7 years. My age and income plus the fact that interest rates are currently low is how I justified keeping bonds out of the mix for now, but lately I'm questioning why, with a decent safety margin, I'll ever need anything other than VTSAX. Fire away!

The dozen large companies in NY state are closely linked to the global economy, why shouldn't I just buy them? GE often follows movements in the S&P 500, why not just own one stock?

If Samsung beats Apple in the multi-billion smartphone business, how much will it help me that Apple also sells phones in South Korea?  Why would I want to own Chevy and Ford and skip Honda and Toyota, or BMW and Mercedes, if you could own them all at low cost?

It is nonsense to think that correlation is always so strong, or that correlation alone is an excuse to not own all stocks in a market. Indexing makes sense globally as much as it makes sense domestically.  The currency risk does not outweigh the diversification benefits.  Here's an example of what can go wrong during retirement, when you're 100% US stocks, vs 56/24/20 US Stocks/International Stocks/US Bonds:



In this catastrophe scenario, the 100% stocks portfolio would have dropped to 0, while the 3 fund portfolio would have still had $556,833 (80% of the starting value).  Also, the obligatory 25 year Japan chart:


AlexK

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Re: Dumping the whole pot into VTSAX. Please tell me why I'm wrong.
« Reply #4 on: March 01, 2015, 02:49:53 PM »
I think it is OK and preferable to dump it all into VTSAX now and leave it there forever. All of my stache that is not RE is in stocks, I don't own a bond. What convinced me is running CFIREsim, it has a feature to compare allocations. It shows that 20-30% bonds has very little influence on success rate. Also just look at this graph:
http://www.aaii.com/files/images/articles/9298-figure-1.jpg

There are plenty of smart people who will say you need bonds, and maybe I will be one of than after a big crash, but as I see it now they are a way to smooth out the bumps which make us nervous in exchange for less growth.


Dodge

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Re: Dumping the whole pot into VTSAX. Please tell me why I'm wrong.
« Reply #5 on: March 01, 2015, 02:50:06 PM »
Dearest Mustachians,

I'm a fairly new Mustachian; I started my Vanguard accounts just a few months ago and I'd like some criticism from you far wiser finance experts. I started by splitting between VTSAX and VTIAX, but I soon began dumping all of my monthly contributions into VTSAX because that already has international exposure worked into it. While 100% stocks is risky, my thinking is that because I'll presumably be holding forever and will keep a recession fund, I'll be fine keeping it simple and doubling down on VTSAX indefinitely, leaving bonds and other complexities out of the mix. I was surprised, however, to find that many of you finance sages have complex portfolios with many different flavors of AA.

What am I missing? For a little background, I'm 30 and am currently making a good income, hoping to hit Mustachian FI in about 5-7 years. My age and income plus the fact that interest rates are currently low is how I justified keeping bonds out of the mix for now, but lately I'm questioning why, with a decent safety margin, I'll ever need anything other than VTSAX. Fire away!

You might shave a few months off your FI date, but you're risking adding years if things don't go your way with 100% stocks.

To highlight this, let's model a family saving $2,333 a month, with a FIRE goal of $800,000.  Based on Vanguard's portfolio allocation model, they can expect to receive 10.2% with 100% stocks, and 9.6% with 80/20 stocks/bonds.



After 12 years of investing, what's the difference?
  • 100% Stocks - $666,000
  • 80/20 stocks/bonds - $638,000

Things are looking good!  Now let's put some real market data in there, and let's assume their income drops and they are unable to add anything else to their portfolio.  It doesn't matter why, job loss/starting a business/getting a less stressful job since they are so close to FIRE...whatever.  Let's see what this would look like if this family were unlucky enough to be at this stage in the years 1999 -2015, where the total bond market has outperformed the stock market:



Blue line is the total stock market, orange line is the total bond market, and the green line is intermediate bonds.  I included those for Mr. Bogle, as he prefers those to the total bond market (that's another topic).

Looking at the numbers, the 100% stock portfolio hits the $800,000 number in 2012:



While the 80/20 portfolio hits it in 2007:



That's a 5 year difference.  I can already hear the complaints, "But why didn't they add anything to the portfolio?  That will never happen to me!  If that happened to me I would've added 20% bonds to my portfolio immediately..etc."  The reason I didn't show what it looks like when they keep contributing $2,333 a month...is because there's no difference.  If you're still interested, this is what it looks like:



This is what it looks like for every starting point, usually it looks like a month or two difference from reaching the $800,000 goal.  You might shave a few months off your FI date, but you're risking adding years if things don't go your way with 100% stocks.  Note, this example only covers the accumulation phase, the consequences are much worse if you're trying to stay 100% stocks after retiring.  Click the "Monte Carlo" button on the right on CFiresim and you'll see 100% stocks can look pretty bad:



This can be devastating and may well be the difference between the poor house and some degree of comfort. Do you really want to trade that in exchange for "more money if stocks do well", a situation in which you're already in good shape?

Dodge

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Re: Dumping the whole pot into VTSAX. Please tell me why I'm wrong.
« Reply #6 on: March 01, 2015, 02:53:31 PM »
I think it is OK and preferable to dump it all into VTSAX now and leave it there forever. All of my stache that is not RE is in stocks, I don't own a bond. What convinced me is running CFIREsim, it has a feature to compare allocations. It shows that 20-30% bonds has very little influence on success rate. Also just look at this graph:
http://www.aaii.com/files/images/articles/9298-figure-1.jpg

There are plenty of smart people who will say you need bonds, and maybe I will be one of than after a big crash, but as I see it now they are a way to smooth out the bumps which make us nervous in exchange for less growth.

While CFiresim is an amazingly fantastic tool, I'm afraid it might be leading some people towards a bad allocation.  CFiresim uses the Shiller GS10 (10 year government treasuries) data to calculate bond returns, which I understand is the only option as we don't have long term data for much else.  This data, unfortunately, greatly understates bond returns when comparing to a portfolio anyone here might have.

Here is a 100% bond chart in CFireSim, from 1995-2014:



Ending value is $20,092

Let's compare that to Vanguard's Total Bond Index fund, and I'll throw in Vanguard's Intermediate Bond Index Fund, since that's what Mr. Bogle recommends (that's another topic).  And to try and match the GS10 fund, I've added Vanguard's Intermediate Treasury fund, and the Intermediate Government fund:



Vanguard Total Bond Index Fund: $32,398
Vanguard Intermediate Bond Index Fund: $37,670
Vanguard Intermediate Treasury Fund: $34,042
Intermediate Government Fund: $27,065

Considering my CFiresim numbers are already showing 100% stocks aren't ideal, something tells me things would tilt a lot more in that direction if CFiresim could use a more standard measurement for bond returns.

dilinger

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Re: Dumping the whole pot into VTSAX. Please tell me why I'm wrong.
« Reply #7 on: March 01, 2015, 02:59:59 PM »
I do 90% VTSAX, 10% VBTLX.  I'm doing this to take advantage of rebalancing.  When stocks are expensive, more of my money goes into bonds.  When the market crashes and stocks are on sale, rather than wishing I had more money available to buy stocks, I can rebalance by selling bonds and picking up really cheap stocks.  I suppose I could keep the money handy in cash, gold, real estate, or something else, but VBTLX is growing and paying neat little reliable dividends.

I ran some scenarios using examples prices (not accounting for dividends or taxes) over the past few crashes, and my 90/10 split came out ahead of 100% stocks in every example that didn't immediately start post-crash.

There's also a psychological aspect to it.  When the next major crash comes, if I'm 100% stocks, I might be able to ignore that feeling in the pit of my stomach and stay the course.  However, I'm just as likely to panic and make some stupid move.  Having a portfolio mix gives me a target to aim for.  Sitting and waiting around doesn't work for me, but being able to take action by selling some bonds and buy stock gives me the feeling that there's some benefit coming out of a bad situation.  It gives me something to do, other than cursing MMM for recommending index funds. :)

AlexK

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Re: Dumping the whole pot into VTSAX. Please tell me why I'm wrong.
« Reply #8 on: March 01, 2015, 03:15:33 PM »
Dodge thanks for pointing out the CFIREsim bond limitation.

The Monte Carlo method has no place in this type of simulation, as it makes predictions far worse than reality by putting year 1929 after 2008, after 2001, etc. It's about as realistic as the upper bound of the Monte Carlo method. Try calculating the maximum value of 1$ over 100 years with Monte Carlo. Dr Evil would be impressed.

Would you recommend to the OP a vanguard target retirement fund instead?

I'm still staying away from bonds but I have 60% of stache in paid off rental properties which are bond-like.
« Last Edit: March 01, 2015, 03:58:28 PM by AlexK »

Workinghard

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Re: Dumping the whole pot into VTSAX. Please tell me why I'm wrong.
« Reply #9 on: March 01, 2015, 03:27:46 PM »
And thanks, Dodge, for sharing the graphs and information!


Dodge thanks for pointing out the CFIREsim bond limitation.

Would you recommend to the OP a vanguard target retirement fund instead?

I'm still staying away from bonds but I have 60% of stache in paid off rental properties which are bond-like.

rugorak

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Re: Dumping the whole pot into VTSAX. Please tell me why I'm wrong.
« Reply #10 on: March 01, 2015, 03:29:25 PM »
I am doing the same as the OP. Perfectly fine strategy as long as you are flexible and not afraid of short term losses.

I think this may help explain things better than I could - http://jlcollinsnh.com/2014/06/10/stocks-part-xxiii-selecting-your-asset-allocation/

arebelspy

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Re: Dumping the whole pot into VTSAX. Please tell me why I'm wrong.
« Reply #11 on: March 01, 2015, 04:40:38 PM »
If you have the stomach to not change what you are doing based on what the market is doing, I think a very high equities allocation is ideal for a long term ER - after all, your time horizon isn't the next 5-7 working years, but the next 50+ years of your life.
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Retire-Canada

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Re: Dumping the whole pot into VTSAX. Please tell me why I'm wrong.
« Reply #12 on: March 01, 2015, 06:13:10 PM »
I do 90% VTSAX, 10% VBTLX.  I'm doing this to take advantage of rebalancing.  When stocks are expensive, more of my money goes into bonds.  When the market crashes and stocks are on sale, rather than wishing I had more money available to buy stocks, I can rebalance by selling bonds and picking up really cheap stocks.  I suppose I could keep the money handy in cash, gold, real estate, or something else, but VBTLX is growing and paying neat little reliable dividends.

Good point. Thanks for posting.

-- Vik

thepokercab

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Re: Dumping the whole pot into VTSAX. Please tell me why I'm wrong.
« Reply #13 on: March 01, 2015, 07:03:02 PM »
I'm also age 30, and also 100% in equities right now, specifically in VTSAX, but i'm still fairly early on in the acquisition phase of my FIRE journey.

When i first started researching investing, i got a bit caught up in all of the variables; bonds vs stocks, international vs domestic, small cap vs large cap, value vs  growth.  Oh, but I need a healthy dose of Emerging Markets too!  Oh, shit I forgot about REITs, etc..   My first instinct was to make things super complicated by coming up with a 12-fund portfolio filled with various ETFs.  But, after a while, I just decided to set up a direct deposit into VTSAX and call it good (VTI in my HSA)  Super easy and I hardly ever think about. 

At some point, as I accumulate a bigger stash and get closer to FI, i'll look to introduce a bond element.  But that's a ways away. 

tj

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Re: Dumping the whole pot into VTSAX. Please tell me why I'm wrong.
« Reply #14 on: March 01, 2015, 07:37:49 PM »
If you have the stomach to not change what you are doing based on what the market is doing, I think a very high equities allocation is ideal for a long term ER - after all, your time horizon isn't the next 5-7 working years, but the next 50+ years of your life.

It has nothing to do with stomach. if you retire at 37 you may be forced to sell in a down market because your wage income is signiicantly lower. That seems needlessly risky.

beee

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Re: Dumping the whole pot into VTSAX. Please tell me why I'm wrong.
« Reply #15 on: March 01, 2015, 07:39:24 PM »
I do 90% VTSAX, 10% VBTLX.  I'm doing this to take advantage of rebalancing.  When stocks are expensive, more of my money goes into bonds.  When the market crashes and stocks are on sale, rather than wishing I had more money available to buy stocks, I can rebalance by selling bonds and picking up really cheap stocks.  I suppose I could keep the money handy in cash, gold, real estate, or something else, but VBTLX is growing and paying neat little reliable dividends.

Good point. Thanks for posting.

-- Vik

+1 for this.
I plan to do 90 stocks (1/3 for us, cad, intl) and 10 bonds (currently I am transferring money from another brokerage, it was 75/25 there).
I want bonds for rebalancing purposes. So, I feel that I am actually doing something :)

Indexer

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Re: Dumping the whole pot into VTSAX. Please tell me why I'm wrong.
« Reply #16 on: March 01, 2015, 07:41:14 PM »
Dodge thanks for pointing out the CFIREsim bond limitation.

The Monte Carlo method has no place in this type of simulation, as it makes predictions far worse than reality by putting year 1929 after 2008, after 2001, etc. It's about as realistic as the upper bound of the Monte Carlo method. Try calculating the maximum value of 1$ over 100 years with Monte Carlo. Dr Evil would be impressed.

If you ran 100,000 simulations of 100 coin flips there might be 1 simulation that had heads coming up 100 times in a row, and another that had tails coming up 100 times in a row.  However the vast majority of the simulations would be between .45% and .55% heads vs tails.  Monte Carlo is doing the same thing.  It sounds like you think Monte Carlo is using the exact returns from exact years in history only in different orders.  I don't know of any Monte Carlo simulations that do that. 

You might have formed that thought because CFireSim uses "EXACT" historical returns for particular years for its other simulations but the Monte Carlo simulator is using means and standard deviations.  Now on that note it does have some really 'low' means which is going to cause its returns to be pretty low.  Mean return for stocks: 6.4   Standard Deviation:  16   Mean bond returns:  1.8%  Standard Deviation:  5.1%   Constant inflation:  3%.   Just to double check I even ran a few Monte Carlo single simulation trials using only years 1980 through 2010.  I did by pure chance have a few crashes in 2007-2009, but not one simulation had a crash in 2000, and all the data sets were different.  Its running means and standard deviations, not historical numbers.  Just so I had a control group I switched back to 'historical' data and got a crash in 2000 and 2008 100% of the time. 

If you raise stocks to 8% and bonds to 3% the numbers start to look a lot better. 


For VTSAX:  Why not combine the total international for some more diversification?   I can't knock being 100% stocks as I am too, but I also like to be diversified beyond just 1 country.

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Re: Dumping the whole pot into VTSAX. Please tell me why I'm wrong.
« Reply #17 on: March 01, 2015, 10:45:19 PM »
but lately I'm questioning why, with a decent safety margin, I'll ever need anything other than VTSAX. Fire away!

To each their own, but usually when I question the basis of my asset allocation, I review this chart of the major constituents of a simple three fund portfolio:

Sometimes US stocks out perform, something International stocks out perform, sometimes stocks are in the shitter for a while and for all I know I might need the money. Sometimes the asset classes are correlated, sometimes they aren't. I don't have a crystal ball..
(To answer any questions, that is a total return chart.. and I just picked maximum time period available)

arebelspy

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Re: Dumping the whole pot into VTSAX. Please tell me why I'm wrong.
« Reply #18 on: March 01, 2015, 10:56:27 PM »
If you have the stomach to not change what you are doing based on what the market is doing, I think a very high equities allocation is ideal for a long term ER - after all, your time horizon isn't the next 5-7 working years, but the next 50+ years of your life.

It has nothing to do with stomach. if you retire at 37 you may be forced to sell in a down market because your wage income is signiicantly lower. That seems needlessly risky.

Selling some and rebalancing should be a part of your plan.  Of course there will be times you are selling in a down market regardless.  It's not "needlessly risky" - ever early retiree will have to - at some point - sell in a down market (unless they worked way longer than necessary and have a TIPS only portfolio or something).  You have to ride it out.  If you can do that, and can adjust your spending, you'll be fine.
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AlexK

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Re: Dumping the whole pot into VTSAX. Please tell me why I'm wrong.
« Reply #19 on: March 01, 2015, 11:27:37 PM »
Dodge thanks for pointing out the CFIREsim bond limitation.

The Monte Carlo method has no place in this type of simulation, as it makes predictions far worse than reality by putting year 1929 after 2008, after 2001, etc. It's about as realistic as the upper bound of the Monte Carlo method. Try calculating the maximum value of 1$ over 100 years with Monte Carlo. Dr Evil would be impressed.

If you ran 100,000 simulations of 100 coin flips there might be 1 simulation that had heads coming up 100 times in a row, and another that had tails coming up 100 times in a row.  However the vast majority of the simulations would be between .45% and .55% heads vs tails.  Monte Carlo is doing the same thing.  It sounds like you think Monte Carlo is using the exact returns from exact years in history only in different orders.  I don't know of any Monte Carlo simulations that do that. 

You might have formed that thought because CFireSim uses "EXACT" historical returns for particular years for its other simulations but the Monte Carlo simulator is using means and standard deviations.  Now on that note it does have some really 'low' means which is going to cause its returns to be pretty low.  Mean return for stocks: 6.4   Standard Deviation:  16   Mean bond returns:  1.8%  Standard Deviation:  5.1%   Constant inflation:  3%.   Just to double check I even ran a few Monte Carlo single simulation trials using only years 1980 through 2010.  I did by pure chance have a few crashes in 2007-2009, but not one simulation had a crash in 2000, and all the data sets were different.  Its running means and standard deviations, not historical numbers.  Just so I had a control group I switched back to 'historical' data and got a crash in 2000 and 2008 100% of the time. 

If you raise stocks to 8% and bonds to 3% the numbers start to look a lot better. 


For VTSAX:  Why not combine the total international for some more diversification?   I can't knock being 100% stocks as I am too, but I also like to be diversified beyond just 1 country.

The CFIREsim Monte Carlo option doesn't work like that but the Vanguard one does: https://retirementplans.vanguard.com/VGApp/pe/pubeducation/calculators/RetirementNestEggCalc.jsf

The Vanguard expected return bugle is so spread out so much it is useless (I could end up with anywhere from zero to $100 trillion). So do I save some more or buy a volcano island for my evil headquarters?

CFIREsim Monte Carlo sim is much simpler and runs with a user supplied mean gain and standard deviation. I don't see that method as useful either because if you run enough simulation with any input you can always get one that fails (better keep saving). So it doesn't match historical returns, which is really all we've got to work with.

This is why when using CFIREsim to plot success% vs stock to bond ratio, you get a different curve with real returns in real order vs Monte Carlo. For my stache and spending above 60% equities the line is flat at 100% when using real returns but when using Monte Carlo there is a dip above 90% equities. Dodge said the CFIREsim bond data is overly conservative so that could change things.


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Re: Dumping the whole pot into VTSAX. Please tell me why I'm wrong.
« Reply #20 on: March 02, 2015, 07:18:55 AM »
It is insane to be 100% stocks with such a short time horizon. If you planned to work another 20- 30 years, I would say it makes sense.

Well, 'retirement' for me means trading in my suit-and-tie for some sweatpants and doing concept design/illustration, which I hope will bring in even a very modest income. And if we're in another Great Recession in 5 years, I'm taking for granted that I can still work if need be, so that flexibility is part of my safety margin.

HOWEVER, at the risk of revealing my incredible ignorance, I will confess that I was previously operating under the presumption that the market was down much less long than it actually was during the last recession (I had around one year in my head for some reason, but a quick search shows that it took the S&P around 4-5 years to catch up to its 2007 levels). With that in mind, I may modify my intentions as follows: keep it all bonds for now while I'm earning and have a lot of flexibility and while interest rates are low, and when interest rates rise start to work a little VTBLX into the mix. Thoughts?

Considering the unemployment rates for all kinds of graphic designers etc I think your income might be extremely modest.. (My wife tried to freelance and almost broke even after taxes..)

Anyway, your bond market timing sounds good on paper, but I'm not so sure it'll work out like that. I.e. will raising rates cause a market drop? So then you're selling stocks low to buy more expensive bonds. I'm almost 100% equities myself at this point (~20 years to FIRE though), and more and more I'm thinking of adding bonds now while 'times are good', rather than waiting till it's too late.

This is another interesting table:
http://paulmerriman.com/2014-new-site/fine-tuning-your-asset-allocation-2014/
I'm not totally clear on the datasources. It appears to use intermediate govt bonds?
« Last Edit: May 11, 2015, 07:06:42 AM by Scandium »

rugorak

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Re: Dumping the whole pot into VTSAX. Please tell me why I'm wrong.
« Reply #21 on: March 02, 2015, 10:37:11 AM »
Selling some and rebalancing should be a part of your plan.  Of course there will be times you are selling in a down market regardless.  It's not "needlessly risky" - ever early retiree will have to - at some point - sell in a down market (unless they worked way longer than necessary and have a TIPS only portfolio or something).  You have to ride it out.  If you can do that, and can adjust your spending, you'll be fine.
+1 to this.

GGNoob

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Re: Dumping the whole pot into VTSAX. Please tell me why I'm wrong.
« Reply #22 on: March 02, 2015, 05:43:24 PM »
I'm not going to tell you to include bonds, but I think you should include international stocks. Read this article: http://www.rickferri.com/blog/investments/foreign-stocks-for-the-long-run/

brooklynguy

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Re: Dumping the whole pot into VTSAX. Please tell me why I'm wrong.
« Reply #23 on: March 03, 2015, 07:10:50 AM »
You might shave a few months off your FI date, but you're risking adding years if things don't go your way with 100% stocks.

Dodge, although your stamina is admirable, when the same question keeps popping up I think the better approach is to simply point people to the threads with the previous discussion rather than restating your lengthy positions from those threads verbatim (or at least provide the links in addition to restating your previous posts).  That way the nuances and competing viewpoints don't get drowned out.  As I've said before (such as here), it's not really accurate to view this as having the effect of "delaying your FI date."  As arebelspy said above, and as I said in the linked thread (where I was responding to an identical post to the one you made above), the OP's investment time horizon is not the 5-7 years in which he or she is hoping to achieve FI, but the multiple decades that constitute the remainder of his or her life.

Wolf359

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Re: Dumping the whole pot into VTSAX. Please tell me why I'm wrong.
« Reply #24 on: March 03, 2015, 08:02:38 AM »
Dearest Mustachians,

I'm a fairly new Mustachian; I started my Vanguard accounts just a few months ago and I'd like some criticism from you far wiser finance experts. I started by splitting between VTSAX and VTIAX, but I soon began dumping all of my monthly contributions into VTSAX because that already has international exposure worked into it. While 100% stocks is risky, my thinking is that because I'll presumably be holding forever and will keep a recession fund, I'll be fine keeping it simple and doubling down on VTSAX indefinitely, leaving bonds and other complexities out of the mix. I was surprised, however, to find that many of you finance sages have complex portfolios with many different flavors of AA.

What am I missing? For a little background, I'm 30 and am currently making a good income, hoping to hit Mustachian FI in about 5-7 years. My age and income plus the fact that interest rates are currently low is how I justified keeping bonds out of the mix for now, but lately I'm questioning why, with a decent safety margin, I'll ever need anything other than VTSAX. Fire away!

The purpose of bonds in a modern portfolio is capital preservation and diversification, not return.  The fact that interest rates are low are not a reason to avoid them. 

However, one of the times that the bond allocation can be low is when you're young and your balances are low.  Losing 50% of a $20,000 portfolio isn't a big deal psychologically (especially if you're saving $18,000 a year).  Losing half of a $500,000 portfolio when you're saving $18,000 a year is a big blow that can affect your decision-making.

Youth makes up for a lot.  If you fail to meet your FI goal, you just work a little longer until you do.  For someone in their 50's, making up the lost ground can be harder, especially if you can't find another job or the same pay. 

The thought that stocks are less risky over time is actually a fallacy.  It's true that they're less volatile over the long term.  But the risk is that stocks may not provide the expected return over time. 

Here's the logic:
Statement 1: Stocks generally don't lose money over a 10 year period. (true.) 
Statement 2: Stocks have averaged 7-8% return historically over long periods. (true.) 
Statement 3: Stocks will provide me an 7-8% return over the next 10 years. (Unknown.  Stocks don't move in a straight line with predictable returns.  That's bonds.)

So, starting out it may be okay to have a small or non-existent bond component, but I would establish one and gradually increase it as your assets or your age increases. 

thriftyc

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Re: Dumping the whole pot into VTSAX. Please tell me why I'm wrong.
« Reply #25 on: May 10, 2015, 09:34:06 PM »
If you have the stomach to not change what you are doing based on what the market is doing, I think a very high equities allocation is ideal for a long term ER - after all, your time horizon isn't the next 5-7 working years, but the next 50+ years of your life.

The problem arises though if one is trying to withdraw funds from a 100% all stock portfolio during a hard downturn-might be very difficult to recover from that. Personally, I love buying stocks that are on sale by re-balancing. That along with peace of mind is great reason to hold some bonds.

Shane

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Re: Dumping the whole pot into VTSAX. Please tell me why I'm wrong.
« Reply #26 on: May 11, 2015, 02:29:09 AM »
OP,

As long as you're flexible and don't need to withdraw a certain, fixed amount from your portfolio every year, 100% VTSAX should be fine. I'm doing the same thing as you.

Having bonds in a portfolio so that you can rebalance and buy more stocks during a downturn in the stock market, is one way to do it, but it's not the only way.

I'm planning on cutting back spending and/or finding some fun part time work that will earn me enough money to at least max out our Roth IRAs for a couple of years the next time the stock market tanks.

In all of the simulations I've run on cFIREsim, if during the really bad years of market downturns you just cut withdrawals from your portfolio in half, things turn out fine.

If you haven't read it yet, you may find this article interesting:

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

And here's another good one by Jeremy at gocurrycracker.com. It's about how a little flexibility in ER would've made it possible to make it through the worst retirement years ever without even having to go back to work:

http://www.gocurrycracker.com/the-worst-retirement-ever/

Good luck!

ThatGuy

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Re: Dumping the whole pot into VTSAX. Please tell me why I'm wrong.
« Reply #27 on: May 13, 2015, 10:06:23 PM »
I recently asked a similar question, I find the posts by Dodge as well as others interesting.  Thanks for the great information everyone.

Jeremy

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Re: Dumping the whole pot into VTSAX. Please tell me why I'm wrong.
« Reply #28 on: May 16, 2015, 07:53:56 AM »
While CFiresim is an amazingly fantastic tool, I'm afraid it might be leading some people towards a bad allocation.  CFiresim uses the Shiller GS10 (10 year government treasuries) data to calculate bond returns, which I understand is the only option as we don't have long term data for much else.  This data, unfortunately, greatly understates bond returns when comparing to a portfolio anyone here might have.

Here is a 100% bond chart in CFireSim, from 1995-2014:

(chart removed)

Ending value is $20,092

Let's compare that to Vanguard's Total Bond Index fund, and I'll throw in Vanguard's Intermediate Bond Index Fund, since that's what Mr. Bogle recommends (that's another topic).  And to try and match the GS10 fund, I've added Vanguard's Intermediate Treasury fund, and the Intermediate Government fund:

(chart removed)

Vanguard Total Bond Index Fund: $32,398
Vanguard Intermediate Bond Index Fund: $37,670
Vanguard Intermediate Treasury Fund: $34,042
Intermediate Government Fund: $27,065

Considering my CFiresim numbers are already showing 100% stocks aren't ideal, something tells me things would tilt a lot more in that direction if CFiresim could use a more standard measurement for bond returns.

I believe the Morningstar charts are not inclusive of inflation, while the default cFIREsim chart is

Non-inflation adjusted dollars from cFIREsim for 100% bonds with 10k start value (1995-2014) results in a 2014 ending value of ~$32k, similar to the total bond index fund



If cFIREsim is "wrong" then I would reach a different conclusion.  It isn't steering people towards a bad allocation, it is leading everybody with bonds in their portfolio to work too long


Dodge

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Re: Dumping the whole pot into VTSAX. Please tell me why I'm wrong.
« Reply #29 on: May 16, 2015, 01:10:11 PM »
While CFiresim is an amazingly fantastic tool, I'm afraid it might be leading some people towards a bad allocation.  CFiresim uses the Shiller GS10 (10 year government treasuries) data to calculate bond returns, which I understand is the only option as we don't have long term data for much else.  This data, unfortunately, greatly understates bond returns when comparing to a portfolio anyone here might have.

Here is a 100% bond chart in CFireSim, from 1995-2014:

(chart removed)

Ending value is $20,092

Let's compare that to Vanguard's Total Bond Index fund, and I'll throw in Vanguard's Intermediate Bond Index Fund, since that's what Mr. Bogle recommends (that's another topic).  And to try and match the GS10 fund, I've added Vanguard's Intermediate Treasury fund, and the Intermediate Government fund:

(chart removed)

Vanguard Total Bond Index Fund: $32,398
Vanguard Intermediate Bond Index Fund: $37,670
Vanguard Intermediate Treasury Fund: $34,042
Intermediate Government Fund: $27,065

Considering my CFiresim numbers are already showing 100% stocks aren't ideal, something tells me things would tilt a lot more in that direction if CFiresim could use a more standard measurement for bond returns.

I believe the Morningstar charts are not inclusive of inflation, while the default cFIREsim chart is

Non-inflation adjusted dollars from cFIREsim for 100% bonds with 10k start value (1995-2014) results in a 2014 ending value of ~$32k, similar to the total bond index fund



If cFIREsim is "wrong" then I would reach a different conclusion.  It isn't steering people towards a bad allocation, it is leading everybody with bonds in their portfolio to work too long

Thanks Jeremy!  I completely forgot about the inflation adjustment, very good analysis.

a1smith

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Re: Dumping the whole pot into VTSAX. Please tell me why I'm wrong.
« Reply #30 on: May 16, 2015, 02:00:04 PM »
In my opinion, cFIREsim uses too few iterations when doing a Monte Carlo simulation because the answer varies so much when you run the simulation multiple times with the same parameters.  If more iterations were performed the number of failures would vary much less since you have a better estimate of the sample mean and variance.  My guess is that the website doesn't want to bog down doing 10x more iterations but right now I won't use Monte Carlo simulation with cFIREsim.