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?
