Author Topic: Including bonds during the growth period...  (Read 3009 times)

Late_Bloomer

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Including bonds during the growth period...
« on: August 27, 2015, 10:21:35 PM »
...Currently I'm not doing this and want to get some more educated opinions on whether I should add them now or later. I just started heavily this year so haven't built much wealth yet. I have a 14 year run planned. During this growth period, I am doing a 70/20/10 all stock (large cap/mid cap/international). Is this enough diversification while the account is growing, or do you think it's too volatile (without bonds)?

My thought process is telling me to grow as much as I can, but still diversify, and when I get near the end of the 14 year run and retire, I will then change over to a more preservation styled 40/60 stock/bond allocation. It's not that I'm uncomfortable with my choice thus far, I'm just not sure, or rather, ignorant of what will happen when I change the portfolio suddenly to heavy bond, light stocks at retirement. Would I need to worry that my collective amount will take a huge hit from the change, or should I simply add the stocks now at a more conservative 80/20 stock/bond split and ride with that until retirement? Is converting from stocks to bonds or vice versa a dramatic change to the portfolio balance depending on how much you've accumulated at the time of conversion?

YoungInvestor

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Re: Including bonds during the growth period...
« Reply #1 on: August 28, 2015, 05:09:08 AM »
It shouldn't change the total amount at all:

Let's say you have 100k, and are 100% stocks and want to go 80/20. You'll sell 20k of your stocks and buy 20k of bonds, keeping the same total balance.

If you got up to 1M at retirement (800k stocks/200k bonds) and want to go 40/60, you'd sell half your stocks and buy bonds, again keepibg the same value.

Excluding transaction costs and possible spreads, of course, but they shouldn't matter for such infrequent trades.

forummm

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Late_Bloomer

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Re: Including bonds during the growth period...
« Reply #3 on: August 28, 2015, 10:28:47 AM »
Thank you for the clarification.  I will stick with my current plan. Now I feel much more confident about the future. 

Scandium

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Re: Including bonds during the growth period...
« Reply #4 on: August 28, 2015, 10:41:24 AM »
http://www.cfiresim.com/input.php
With 4% SWR, 30 year retirement, success rate is:
80/20 stock/bonds: 93%
40/60 stock/bonds: 83%

Anything above 40% bonds seems unwise to me.

Monkey Uncle

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Re: Including bonds during the growth period...
« Reply #5 on: August 29, 2015, 04:10:23 AM »
Yeah, 40/60 stock/bond is way too conservative for someone retiring at 55.  60/40 would be better, but I might even do 70/30.  (but see last paragraph below for an alternative point of view.)

That said, you might want to consider the risks of staying 100/0 until you retire.  Remember that the S&P returned nothing from 2000 to 2013.  And the return from 2000 - 2009 was something like negative 50%.  I may not have the numbers exactly right, but the point is that equities can return nothing or less than nothing for long periods of time.  Personally, I might want to mitigate that risk a little bit by holding 20-30% in bonds during the last decade or so of the accumulation period.

I recall a recent study that suggested the optimal AA for long-term portfolio survivability involves reducing the stock component during the last years of the accumulation period, keeping it at something like 50/50 or 40/60 for the first years of retirement, then increasing again later in retirement.  The idea is that sequence of return risk is greatest during the few years on either side of the retirement date.  Once you pass through that bottleneck, increased growth increases the probability of long term portfolio survival.  I wish I could remember how to find that study.  Someone posted a link to it in one of the threads in the Investor Alley, but that's all I remember.

brooklynguy

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Re: Including bonds during the growth period...
« Reply #6 on: August 29, 2015, 05:18:40 AM »
I wish I could remember how to find that study.

You may be thinking of Pfau and Kitces' "rising equity glide path" study, available here:

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2324930

fb132

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Re: Including bonds during the growth period...
« Reply #7 on: August 29, 2015, 05:18:45 AM »
I keep 10% in bonds just for the rebalancing (Buy Low, sell High), but I wouldn't argue with you either if you stick with 100% equities.

Monkey Uncle

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Re: Including bonds during the growth period...
« Reply #8 on: August 29, 2015, 07:38:27 AM »
I wish I could remember how to find that study.

You may be thinking of Pfau and Kitces' "rising equity glide path" study, available here:

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2324930

Yep, that's the one.

Late_Bloomer

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Re: Including bonds during the growth period...
« Reply #9 on: August 29, 2015, 10:50:11 AM »
Monkey Uncle wrote:
Quote
I might want to mitigate that risk a little bit by holding 20-30% in bonds during the last decade or so of the accumulation period.

I just haven't been sure when to exactly add bonds. I think I will keep an eye on it for these first 5 years. If I stay even, or positive, I will keep it the way it is. If I see that in 5 years I have not only lost gains, but lost principle, I will include bonds to counter some of that for the remainder of the growth period. I don't mind no gains, I just get a little scared knowing I can lose principle. If the market hasn't returned anything in the past 13 years, I might as well just put it in a savings account and guarantee my money.