Author Topic: If you can handle volatility and a 15+ year timeline, invest in 100% stocks?  (Read 28614 times)

intotherealworld

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I am 25, have just graduated, and have a secure well paying job.

My plan for financial independence by 35

 - Invest in a world index of 100% stocks

 - Dollar cost average a minimum of 65% of my income into the fund (10.5 years until independence)

 - Expect volatility (and enjoy knowing I'm buying on sale when the market crashes)

 - In around 10 years consider moving some funds to a more diversified, lower volatility allocation. If the market has crashed around this time happily wait enough years before doing this so I don't lock in large losses

 - At 35 end up financially independent, hopefully in a job I enjoy, considering part time work.

Financial.Velociraptor

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I went FIRE in 2012 at the tender age of 40.  I'd be a nervous wreck without my bond allocation.  Your mileage may vary.

intotherealworld

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I went FIRE in 2012 at the tender age of 40.  I'd be a nervous wreck without my bond allocation.  Your mileage may vary.

Thanks,

I definitely intend to own bonds at some stage. But I figure I have a long enough horizon that I can ride out a large market crash before starting that stage.

I imagine I will start looking at diversifying into bonds in around 8 years time, and I'm happy to wait an extra 5+ years if the circumstances are unfavourable.

webcat86

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I work in a financial advice company. General advice there, internally, is if you're more than 5 years away from needing the money go 100% equities. At your age (and mine at 29) definitely 100% equities if you can handle the volatility

FIRE47

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In theory perhaps but as I've found out recently (bear market in Canada) you don't know your real risk tolerance by completing a questionnaire or looking at bar graphs. Until you lose real money and even then until you are a few years in and things drop in a day more than you save in a month you won't know. Ive personally come to believe that the human aspect is the most important one to manage, and until you really know I'd go 10-15% bonds at least. 

Heckler

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Im 30% bonds at 42, but have seen greater cooling factors by holding a globally diversified unhedged portfolio.

My performance (measured in CAD):
Bonds: 0%
Canada: -11%
US: +10%
EAFE: +10%
EM: -17%

With a 30/25/25/17/3 allocation, my total balance is slowly rising, none of the doom and gloom of the past year.
« Last Edit: January 30, 2016, 10:45:42 AM by Heckler »

webcat86

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In theory perhaps but as I've found out recently (bear market in Canada) you don't know your real risk tolerance by completing a questionnaire or looking at bar graphs. Until you lose real money and even then until you are a few years in and things drop in a day more than you save in a month you won't know. Ive personally come to believe that the human aspect is the most important one to manage, and until you really know I'd go 10-15% bonds at least.

Yes that's the problem. Human behaviour is contrary to market performance and what we should do in the situation.

samburger

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you don't know your real risk tolerance . . . Until you lose real money and even then until you are a few years in and things drop in a day more than you save in a month you won't know

Yep, this. My 'stache got large enough just in time for the current (US) market hiccup to really feel like something. I checked my balance a few days ago and saw $7,000 had evaporated. Evaporated! I invested $5,000 in January and my net worth went down.

Intellectually, I knew this would happen--and I know it's nothing compared to a real bear market--but I wasn't prepared for how scary it is to see your money vanish.

I'm in 100% equities right now. I'm going to stop looking at my balance and see how that feels. If it's too much, I may have to start buying something to smooth out the volatility.

rmendpara

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I am 25, have just graduated, and have a secure well paying job.

My plan for financial independence by 35

 - Invest in a world index of 100% stocks

 - Dollar cost average a minimum of 65% of my income into the fund (10.5 years until independence)

 - Expect volatility (and enjoy knowing I'm buying on sale when the market crashes)

 - In around 10 years consider moving some funds to a more diversified, lower volatility allocation. If the market has crashed around this time happily wait enough years before doing this so I don't lock in large losses

 - At 35 end up financially independent, hopefully in a job I enjoy, considering part time work.

You may accelerate portfolio growth slightly by going 100/0 equities/bond instead of a somewhat more conservative 90/10, but timing can be a real issue.

If you end up retiring at the equivalent of 2005, you may feel like things are great... only to see your portfolio flat on a price basis in 2010 (Dow chart ~10k).

It's easy to think at age 25 (or any age when you think about your risk tolerance), "Hey, I'd be fine if my 50k portfolio went down by 20%, that's only 10k and I'll add so much back in just a few months anyway". Things are different when you have a $1mm+ portfolio and a 20% pullback seems to wipe out $200k+ in nominal value. If you have enough liquidity, then you'll be fine, but otherwise you may be challenged.

I don't know your income or projected needs, so tough to say. If you want to spend 40k and plan to have a $2m portfolio, then you're probably going to be more than fine even if the value gets cut by 50% since the dividends will fund your spending, however, you'll have to have a realistic plan to figure out how much volatility you can really handle...

MustacheAndaHalf

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Until you lose real money and even then until you are a few years in and things drop in a day more than you save in a month you won't know.
Want to reinforce this point: for OP this is the big risk.

With $0 invested, everyone can buy and hold.  When the market goes up, everyone is a great investor: "a rising tide raises all boats".  It only gets interesting when you have to ride through months like January while being aware of the market.  If you ignored it, great, but some months you won't.

Again to OP, I wouldn't necessarily assume your risk tolerance is 100% equities... If you're really set on your goal and it's more important than short-term losses, you might stick it out.  If you have to sell, remember you can sell 1/5th of stocks to buy bonds, instead of selling all stocks to buy bonds.

turketron

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I'm 29 and probably won't be close to FI for another 10 years at minimum, nor have I really set a specific date for RE. Currently I'm pretty much 100% stocks as I had up until now been able to look at my NW and finances objectively without any emotion. That being said this has been the first major downturn since I've really started paying attention to my NW, and I gotta say, it's been rough, and I can now see why people panic and pull out. I'm confident I'll be able to ride it out without making any adjustments but it's definitely a shitty feeling.

nobodyspecial

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If the only reason to hold bonds is to sell them to buy stocks on sale during a recession, and bonds are yielding less than cash in some bank's special offers - why am I holding bonds?

If the idea is to have a stable income without having to sell in a downturn then why am I buying bonds which pay half of the same company's dividends?
 

bridget

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I'm similar to you in terms of age, job stability, and timeline, and this is my plan. I suppose it's true that I won't actually be able to handle volatility in the future as well as I hope now, but I've internalized the logic of the buy and hold pretty solidly. It seems odd to me to purposefully make a plan that assumes I will not be able to stick to my plan. I have about $120k in investments [very close to 100% stocks] now, and being 15% down in September and January didn't bother me too much. I know $1M would feel different, but I'm an adult who can make reasoned decisions, even in the face of strong emotional or psychological cues.

As a note, I'm not wedded to the idea of fully retiring from paid work at a certain date or age. I'm more interested in accumulating my FU/scale back money by my mid-thirties, ala jlcollinsnh. It sounds like you're in a similar position (wanting to have the ability to "consider part time work"). I think that will make it easier to stick to the plan, since we won't be in a position where we *must* pull a full years' worth of spending from investment accounts when the big 35 rolls around. If it's nose diving, I can stay at work for awhile and let what I've got sit for awhile longer, or switch to part-time and withdraw half of what I'm convinced is safe long-term.

Abe

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If a specific retirement age isn't a set goal, you can probably stay 100% in equities with the understanding that your volatility dampner is more work, but that option may disappear with a big recession. My wife and I are 30, have ~$250k in stocks and have jobs that are very stable. We are essentially 100% in stocks because of the stability of our jobs (and redundancy of having two incomes). If it were just me, I'd probably have more bonds and work longer to compensate for lower returns. As our savings exceed what we need for retirement, I'll start pushing more into bonds.
« Last Edit: January 31, 2016, 01:58:43 PM by Abe »

Tyler

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If the only reason to hold bonds is to sell them to buy stocks on sale during a recession, and bonds are yielding less than cash in some bank's special offers - why am I holding bonds?

If the idea is to have a stable income without having to sell in a downturn then why am I buying bonds which pay half of the same company's dividends?
 

Bond interest and "something other than stocks" are not the only reasons to hold bonds.  Bonds also change value with interest rates and can have capital gains (and losses) just like stocks.  Because they are not completely correlated with stocks (some are more than others), they can sometimes greatly increase in value even when stocks tumble. 

It's also important to be specific about exactly which bonds you're talking about.  Short term treasuries, long term treasuries, and corporate bonds are all very different and can't all be lumped together.  Some bonds reduce portfolio volatility by being themselves very stable, while others reduce portfolio volatility by being just as volatile as stocks but moving in the opposite direction.  Not just any bond will necessarily help, but the right bond in the right portfolio can make a noticeable positive difference not only in volatility but also in returns.


Michread

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Dh and I have been investing for 25+ yrs at 90/10.  In 2008, we stopped investing in our taxable investments for about one year so we would have more cash but we never changed our retirement AA.  But this is because we have very stable income and low debt (mortgage paid in 11 yrs on 15 yr note), our home was new when we purchased it (no big surprises to fix/maintain). In all that time, we only had/have enough cash to pay the monthly bills with a little cushion.

We are STILL at 90/10 and spouse plans to retire in 2017 (I'm already retired)!  Yes, this year, 2016 we will change our AA slowly.

I recommend Vanguard Healthcare for a portion of your investments - it's been good to us!

intotherealworld

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Thank you everyone for such thoughtful replies :)

intotherealworld

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...I'm an adult who can make reasoned decisions, even in the face of strong emotional or psychological cues....

As a note, I'm not wedded to the idea of fully retiring from paid work at a certain date or age. I'm more interested in accumulating my FU/scale back money by my mid-thirties, ala jlcollinsnh. It sounds like you're in a similar position (wanting to have the ability to "consider part time work"). I think that will make it easier to stick to the plan, since we won't be in a position where we *must* pull a full years' worth of spending from investment accounts when the big 35 rolls around. If it's nose diving, I can stay at work for awhile and let what I've got sit for awhile longer, or switch to part-time and withdraw half of what I'm convinced is safe long-term.

Exactly :)

faramund

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First off, I'm a 100% stock investor.. So given that..

For me, I started investing back in 2000, with around $700, over time that's built to a fairly large sum, and over that time, I've seen my share of market pullbacks. But the thing is, I've also seen my share of market recoveries.

So, when I saw my first pullbacks, it was small amounts of money, so emotionally, it was easier to handle. And now that the pullbacks 'temporarily' cost me much more more money, because I have seen these in the past, they are easy to intellectually handle them.

In summary, I think its very good to start off with small 100% stock investments and watch what happens over time. So yes, I think the OP's plan is a good one.

In contrast, when I hear about people who have had their (large) investments outside of shares, and want to change their investments to be 100% in stocks - I'm always in two minds.. intellectually, I think that's best, but if people do such a change, and then there's a drop, there's a (large) risk, that they'll emotionally pull all their money out of stocks, and swear off it for a very long time (forever), thinking that its some sort of rigged form of gambling.

jim555

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It kinda is gambling, but with a tilt in your favor, IF history repeats.

Schaefer Light

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In theory perhaps but as I've found out recently (bear market in Canada) you don't know your real risk tolerance by completing a questionnaire or looking at bar graphs. Until you lose real money and even then until you are a few years in and things drop in a day more than you save in a month you won't know. Ive personally come to believe that the human aspect is the most important one to manage, and until you really know I'd go 10-15% bonds at least.

Yes that's the problem. Human behaviour is contrary to market performance and what we should do in the situation.
Simple solution.  Don't pay any attention to the stock market.  Just keep investing with the knowledge that you're doing the right thing regardless of what the market does on any given day/week/year.  And if you happen to see that the market is down, try to invest even more.

AdrianC

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So, when I saw my first pullbacks, it was small amounts of money, so emotionally, it was easier to handle. And now that the pullbacks 'temporarily' cost me much more more money, because I have seen these in the past, they are easy to intellectually handle them.

Once you get substantial investment gains built up it's also easier to handle pullbacks - I think of our gains as "playing with the house's money".

JustGettingStarted1980

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I have a column in my Net Worth Spreadsheet that calculates "Lifetime Equity Gains". Its definitely playing with house money, so no worries with 10-20% dips.

Timing matters, I'm not so sure I would see it the same way if I lump summed my way into the market at the peak.

Scandium

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In theory perhaps but as I've found out recently (bear market in Canada) you don't know your real risk tolerance by completing a questionnaire or looking at bar graphs. Until you lose real money and even then until you are a few years in and things drop in a day more than you save in a month you won't know. Ive personally come to believe that the human aspect is the most important one to manage, and until you really know I'd go 10-15% bonds at least.

Yes that's the problem. Human behaviour is contrary to market performance and what we should do in the situation.
Simple solution.  Don't pay any attention to the stock market.  Just keep investing with the knowledge that you're doing the right thing regardless of what the market does on any given day/week/year.  And if you happen to see that the market is down, try to invest even more.

Yes I don't understand this "people will sell in a downturn" thing. Obviously I've heard that people do so it must be real. But I hate selling stocks that are down, even when I'm supposed to. I was moving some old accounts to vanguard and had to liquidate, and I really wanted to wait for it to "recover" back to positive, or I was liquidating some crappy funds and had the same thing happen. I don't want to sell stuff that's down, I have the opposite reaction! My 401k has lost 1/2 years worth of contributions last month. The idea of selling any of it makes me uncomfortable, even if I was supposed to. In retirement I can imagine myself stopping eating and cutting the power to my house, waiting for market recovery..

Rubic

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Yes I don't understand this "people will sell in a downturn" thing. Obviously I've heard that people do so it must be real.

Unfortunately I've had direct experience with this situation.  People suffer from loss aversion and panic, because obviously the market will soon head straight for zero and they better get out NOW.  :-(

Believe it or not, they comfort themselves with the idea that at least they didn't lose everything (I guess it was possible the entire sum of all US industries would fail?) and they can always get back in when the market is "safe".


live4soccer7

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First post here!! Just wanted to say I really like the activity in this forum and especially this particular topic as I'm 28 and looking at doing the same thing, 100% equity allocation. Self-employed with a SEP fund and ROTH over at vanguard, but am having a tough time choosing which funds to go with.

soccerluvof4

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First post here!! Just wanted to say I really like the activity in this forum and especially this particular topic as I'm 28 and looking at doing the same thing, 100% equity allocation. Self-employed with a SEP fund and ROTH over at vanguard, but am having a tough time choosing which funds to go with.



Nice handle! live4soccer7

live4soccer7

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Haha, thanks!

zephyr911

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I have real estate now and pensions at 60, and TSP/IRA are somewhere around #5 on our list of FIRE income sources, so I will probably never have much in the way of bonds. IRAs are 100% stocks, TSP is 90% stock, and no plans to change that.

live4soccer7

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Mind sharing what your equity allocation looks like?

gimp

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I'm 25, long term outlook - 100% stock as well.

live4soccer7

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You guys/gals with 100 equity. Are you invested in index funds? What equity classes?

webcat86

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You guys/gals with 100 equity. Are you invested in index funds? What equity classes?

I am. Vanguard life strategy, emerging markets and small cap, and a black rock global property tracker.

I also have an emergency cash fund and a mortgage, so my "100% stocks" only refers to not having bonds

JR

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In theory perhaps but as I've found out recently (bear market in Canada) you don't know your real risk tolerance by completing a questionnaire or looking at bar graphs. Until you lose real money and even then until you are a few years in and things drop in a day more than you save in a month you won't know. Ive personally come to believe that the human aspect is the most important one to manage, and until you really know I'd go 10-15% bonds at least.

That happened to us in January, we invested about $5,000 and our total portfolio value is still much lower than when the month started. Still doesn't bother us though and we will continue to invest 100% stocks for the foreseeable future.

zephyr911

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Correction on my TSP, there's more in bonds than I thought.
10% G (govt bonds)
20% F (fixed income index)
35% C (common stock index)
25% S (small cap index)
10% I (international stock index)
That's my current allocation, and total shares are within 1-2% by category.

IRAs:
HASI / PEGI / GLBL (appx 70/20/10)
« Last Edit: February 03, 2016, 10:20:34 AM by zephyr911 »

dude

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Im 30% bonds at 42, but have seen greater cooling factors by holding a globally diversified unhedged portfolio.

My performance (measured in CAD):
Bonds: 0%
Canada: -11%
US: +10%
EAFE: +10%
EM: -17%

With a 30/25/25/17/3 allocation, my total balance is slowly rising, none of the doom and gloom of the past year.

For what time period are you recording a +10% return on the EAFE?  That fund has been a dog for years (esp. as compared to the S&P 500).

https://www.msci.com/resources/factsheets/index_fact_sheet/msci-eafe.pdf


bearkat

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At 26, I personally have no intellectual issues with 100% equity, but a total of 20% in bonds, alts, and REITs helps the misses sleep at night. I do like it when she gets her beauty rest :)

If your house price is falling, is that a sign to hurry up and move/sell it before the value falls to ZERO?

tj

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You guys/gals with 100 equity. Are you invested in index funds? What equity classes?

At the moment I am 100% VT - Vanguard Total World Stock Market in my taxable account.

PathtoFIRE

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I'd recommend adding 10% bonds, not necessarily for the protection (research shows it will protect in those long time periods with the worst equities return but is definitely a drag if we happen to have a better than average stretch), but to get the experience of having bonds, and seeing how they can be negatively correlated at times. I don't know much, but I know that bonds are strange animals, and appear simpler than equities initially but are actually in many ways much more complex. Just like the argument above about going heavy equities early on to get a taste of the volatility with what will in retrospect be small amounts of money, you could also make the argument that it's better to get a taste of what bonds are like early, especially if you plan on using some later.

MasterStache

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I had some bonds, probably roughly 5%. Converted them to equities with the latest downturn. I'm only 5 years forom FIRE. The biggest challenge for me was to stop looking at the market everyday. And stop looking at my portfolio balance every day, week, even month. I know the market is down, but I have no ideal how much, or what my balances are. I just keep tossing more in.

BarkyardBQ

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I had some bonds, probably roughly 5%. Converted them to equities with the latest downturn. I'm only 5 years forom FIRE. The biggest challenge for me was to stop looking at the market everyday. And stop looking at my portfolio balance every day, week, even month. I know the market is down, but I have no ideal how much, or what my balances are. I just keep tossing more in.

I could never do this, for the few times contributions have been missed by an employer... I'd have to check at least biweekly after payday to make sure they go in.

PathtoFIRE

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I could never do this, for the few times contributions have been missed by an employer... I'd have to check at least biweekly after payday to make sure they go in.

Maybe email notifications from your 401k custodian on deposits is a possibility?

Kaspian

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The key phrase that keeps coming up here is, "if you can handle it..."  Most people can't.  I'd like to say I could, but I know from experience that's a lie.  (And I'm a far more logical than emotional person to begin with.)

It's easy to pretend bravery when there aren't any holes in the boat and no sharks in the water.  What most people say and what they actually do are two completely different things.

BarkyardBQ

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I could never do this, for the few times contributions have been missed by an employer... I'd have to check at least biweekly after payday to make sure they go in.

Maybe email notifications from your 401k custodian on deposits is a possibility?

Not for all 5 accounts. :/

live4soccer7

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Thank all for the information/input. I am quite stoked to get things underway.

What are thoughts on value vs growth stocks for large, medium, small caps?

SevenSeas

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An 80 stocks/20 bonds allocation will probably return more than 100% stocks! Because of diversification. That means when stocks plummet, you will rebalance your account to keep the 80/20 allocation. Because stocks fell, your portofolio looks more like 70/30 stocks/bonds now. Which means you will sell some bonds to buy CHEAP stocks. The market will recover, and you will be ahead of the 100% stocks portofolio. And now you rebalance again to buy some cheap bonds and so on.

There are portofolios that try to diversify as much as possible. Yale, Harvard use extremely diversified portofolios: they even buy lumber damn it :)

It's counterintuitive - because stocks have the highest return rates. But they also have huge volatility. And you can profit from that volatility using diversification.
A stock/bonds mix - at worse - will get you similar returns and MUCH less volatility.

There are some who have gold and cash in their portofolio for this reason alone. Diversification. If the market volatility is high - these permanent portofolio guys will be AHEAD of the 100% stocks portofolio EVEN THOUGH they have 50% of assets that DO NOTHING.
I'm not one of the permanent portofolio guys - but before going all in on stocks - I would read about diversification more.

I'm something like 17% bonds, 5% REITs and the rest stocks (60% US, 40% international). I'm also increasing my bond allocation as I approach my retirement date. (about 2% per year)
« Last Edit: February 04, 2016, 08:04:07 AM by SevenSeas »

aperture

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An 80 stocks/20 bonds allocation will probably return more than 100% stocks! Because of diversification. That means when stocks plummet, you will rebalance your account to keep the 80/20 allocation. Because stocks fell, your portofolio looks more like 70/30 stocks/bonds now. Which means you will sell some bonds to buy CHEAP stocks. The market will recover, and you will be ahead of the 100% stocks portofolio. And now you rebalance again to buy some cheap bonds and so on.

There are portofolios that try to diversify as much as possible. Yale, Harvard use extremely diversified portofolios: they even buy lumber damn it :)

It's counterintuitive - because stocks have the highest return rates. But they also have huge volatility. And you can profit from that volatility using diversification.
A stock/bonds mix - at worse - will get you similar returns and MUCH less volatility.

There are some who have gold and cash in their portofolio for this reason alone. Diversification. If the market volatility is high - these permanent portofolio guys will be AHEAD of the 100% stocks portofolio EVEN THOUGH they have 50% of assets that DO NOTHING.
I'm not one of the permanent portofolio guys - but before going all in on stocks - I would read about diversification more.

I'm something like 17% bonds, 5% REITs and the rest stocks (60% US, 40% international). I'm also increasing my bond allocation as I approach my retirement date. (about 2% per year)

+1
I am 80/20 stocks/bonds in total US index at Vanguard and have a half-paid off mortgage on our house.  Presently, I am learning as much as about asset allocation.  A great resource is from a fellow MMM forum member, Tyler's brilliant website http://portfoliocharts.com.  Read the articles - look a the portfolios and the calculators. 

Best wishes, Ap.

Retire-Canada

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It's counterintuitive - because stocks have the highest return rates. But they also have huge volatility. And you can profit from that volatility using diversification.

Yes! Excellent point that gets overlooked.

tj

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To some extent. If you're re-balancing into bonds in a bull market, then you are leaving some growth on the table.

beltim

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It's counterintuitive - because stocks have the highest return rates. But they also have huge volatility. And you can profit from that volatility using diversification.

Yes! Excellent point that gets overlooked.

It's a point that gets repeated a lot that is not, in general, true: