I made an investment policy 2 years ago;
http://forum.mrmoneymustache.com/investor-alley/rate-or-slate-my-investement-policy!/msg420728/#msg420728In summary, I am a 29 year old professional gambler worth 1.075 million. I take 100,000 emergency fund from what I'm worth and use the remainder as my net worth for calculations. My AA is 60% equities (VWRL) and 40% safe deposits. Now I am updating this with the following assumptions, all which are conservative. Constructive criticism is encouraged.
A long term inflation rate of 2%, as this is a government target and also what is generally predicted.
Long term real returns of 4% on my equities (Vanguard all world). I think this is on the conservative side of realism.
Long term real returns of -1% on my safe investments. Again this is conservative, currently its about -0.5%.
I will live until 101 years old.
Using an annuity formula, if I retire now (which I will assume as my income is uncertain, again conservative), I can withdraw 0.94% of my safe investments and 4.25% of my equities per year and it will expire in 72 years.
This brings the following formula, where x is my equity split and W is my net worth;
W[0.0425x + 0.0094(1-x)] = 40,000, which breaks down to
W[0.0331x +0.0094] = 40,000
My original investment policy said I will never go over 60% stocks while I dont have a fixed income and, sticking with this policy, the above formula shows that based on my assumptions I should stay at 60% stocks until I hit at least a net worth of 1,367,000.
My net worth amount where I can safely drop my stock allocation will then be:
1.45 mil 0.55%
1.55 mil 0.5%
1.65 mil 0.45%
1.75 mil 0.4%
1.9 mil 0.35%
2.07 mil 0.3%
2.25 mil 0.25 %
2.5 mil 0.2%, which I will never go lower than.
Of course all of these assumptions are open to revision, but I will never revise them during a bear market or correction in case my emotions get involved.