Author Topic: Never reallocating away from 100% equity with age?  (Read 16610 times)

Dodge

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Re: Never reallocating from 100% equity with age?
« Reply #50 on: July 17, 2014, 11:08:06 AM »
I use Vanguard's retirement nest egg calculator:
This data supports the idea that when you're in retirement, and withdrawing from the nest egg, some bonds provide a higher success rate, when compared to 100% stocks.

I wonder what data they are using and assumptions they are making for the percentages they return, since their success rates seem wildly different than what you would get using a FIRE sim.

After using cFiresim for a while, I came to the same conclusion as the OP in this thread.  100% stocks seems to work best for someone with a long time-line (60 years or so).  It seems the main difference between the other fire sims, and the Vanguard retirement nest egg calculator, is that Vanguard's is a Monte Carlo, using data randomly from all available years.  That can result in some wildly different results, sometimes significantly different (both positively and negatively) than when using historical data.  I'm sure the Monte Carlo included at least one simulation where there was a bear market unlike the world has yet seen.

I'm not sure if this means we should trust Vanguard's data more, or cFiresim's data more.

While I'm currently targeting 100% stocks, and based on prior experience am sure I can handle another 2008 when it comes, I want to make sure there isn't any data out there showing a better success rate for someone with a 50-60 year timeline than 100% stocks...

This chart of Japan from the bogleheads forum comes to mind...

« Last Edit: July 17, 2014, 11:21:07 AM by Dodge »

GGNoob

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Re: Never reallocating away from 100% equity with age?
« Reply #51 on: July 17, 2014, 01:18:36 PM »
I haven't read any Dave Ramsey books, but a friend of mine has and says Dave recommends 100% stocks. Anyone know if thats forever or just when you are building your portfolio?


secondcor521

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Re: Never reallocating away from 100% equity with age?
« Reply #52 on: July 17, 2014, 01:43:21 PM »
To the OP's question, I think I know the basic answer.

For longer retirement periods, heavier equity allocations will result in better survivability because stocks provide the long term antidote to the eroding power of inflation.  For shorter retirement periods, adding some bonds will result in better survivability because they dampen the volatility which helps avoid the scenario of withdrawing from a temporarily ~40% depleted portfolio that then can't bounce back.

And by the way, it has been done before....long before.  See the chart under the heading "Optimal Asset Allocation" here:

http://retireearlyhomepage.com/restud1.html

(His studies were done using FIREcalc and a slightly older data set with a different inflation series, but the basic picture remains the same, I think.)

If you're 100% stocks your whole life, you might end up in a situation where adding bonds may increase your portfolio survivability, but you won't care because your natural withdrawal rate will be so low that it doesn't matter for you, so you might as well invest for the next generation and be, as the OP mentions, the richest person in the graveyard.

In fact this is precisely what I have done and it is so far working the way I expected...I'm 100% stocks and FI/OMY at age 45.  Using the above graph and my planning horizon of 40 years, my optimal AA is something like 77/23, but even at 100/0 my 100% SWR is 4.08%, and my natural WR (what I spend naturally without caring about FI or SWRs) is around 3.8% and falling.
« Last Edit: July 17, 2014, 05:35:45 PM by secondcor521 »

secondcor521

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Re: Never reallocating away from 100% equity with age?
« Reply #53 on: July 17, 2014, 06:20:19 PM »
I haven't read any Dave Ramsey books, but a friend of mine has and says Dave recommends 100% stocks. Anyone know if thats forever or just when you are building your portfolio?

I'm not a DR acolyte but I like listening to him on the radio.

DR doesn't get into early retirement or investing in general very often, but when he does, I seem to recall him sharing the general themes of:

1.  Money you need sooner than 5 years goes in money market accounts.  Money you need five or more years down the road goes into 100% stocks.
2.  The stocks should be split equally between four types of mutual funds - growth, aggressive growth, international, and one other I can't recall offhand.
3.  He's also a big believer in debt-free ownership of real estate.
4.  He thinks an 8% WR is safe, based on the logic of 12% long term market return minus 4% inflation.

The above are what I hear him generally saying on the radio...I am in varying degrees of agreement with these points.

He's actually got a web site and everything if you ever want to find out what he thinks about things.  Or you can call his show, get his books from the library, or pay to attend one of his events or join his forums.

GGNoob

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Re: Never reallocating away from 100% equity with age?
« Reply #54 on: July 17, 2014, 07:55:14 PM »
He's actually got a web site and everything if you ever want to find out what he thinks about things.  Or you can call his show, get his books from the library, or pay to attend one of his events or join his forums.

Thanks for that info. I actually don't agree much  at all with most of DR's advice. I have listened to some of the radio shows and they are alright. I feel like his advice is better for people who know nothing and care to know nothing about managing their own finances (like how he says cash only because he assumes most can't pay off their credit cards monthly). I was just curious if he said 100% stocks through retirement, since if that was the case, I would think a lot of people would be doing it.

milesdividendmd

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Re: Never reallocating away from 100% equity with age?
« Reply #55 on: July 17, 2014, 08:24:02 PM »
Haha. Growth, AND aggressive growth!



Scandium

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Re: Never reallocating away from 100% equity with age?
« Reply #56 on: July 18, 2014, 08:27:51 AM »

4.  He thinks an 8% WR is safe [citation needed], based on the logic of 12% [citation needed] long term market return minus 4% inflation.


secondcor521

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Re: Never reallocating away from 100% equity with age?
« Reply #57 on: July 18, 2014, 01:15:51 PM »

4.  He thinks an 8% WR is safe [citation needed], based on the logic of 12% [citation needed] long term market return minus 4% inflation.


I don't really want to turn this into a DR thread nor myself into a DR defender.  As I said originally, I like listening to DR on the radio and I like and agree with many things he says.  I don't agree with the 8% SWR, although I do agree with (and use in my own planning) similar numbers on return and inflation.

But if I google for "8 percent withdrawal retirement site:daveramsey.com" and "12 percent return site:daveramsey.com" I get some articles on his site.  You can google and read them for yourself.

foobar

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Re: Never reallocating away from 100% equity with age?
« Reply #58 on: July 18, 2014, 01:26:38 PM »

4.  He thinks an 8% WR is safe [citation needed], based on the logic of 12% [citation needed] long term market return minus 4% inflation.


http://www.daveramsey.com/newsletters/online/edition/investing-newsletter-aug0211?ectid=1108.1elpinvnl_ov

You might want to learn to use google if you would like to see citations for well know info. DR might have some redeeming points but his investing advice is bad.  But I am sure he is making good money of his ELP that exploits the financially ignorant

Leisured

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Re: Never reallocating away from 100% equity with age?
« Reply #59 on: July 19, 2014, 01:58:55 AM »
What matters is not volatility in stock prices, but volatility in dividends. Dividends ar much more stable. I looked at my dividend record since 2002 from six Australian blue chips, and dividends fell 5% in 2005, and 18% in 2010. All other years dividends were stable or rising. Warren Buffet has often said that he does not care much about stock prices, unless he wants to buy. So long as companies are well run and pay dividends, do not be too worried about stock prices. The prices of exchange traded funds and listed investment companies will fluctuate, but they usually have a portfolio of many companies, and the dividends from many companies should not fluctuate much.

Khan

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Re: Never reallocating away from 100% equity with age?
« Reply #60 on: July 21, 2014, 01:19:46 AM »
What matters is not volatility in stock prices, but volatility in dividends. Dividends ar much more stable. I looked at my dividend record since 2002 from six Australian blue chips, and dividends fell 5% in 2005, and 18% in 2010. All other years dividends were stable or rising. Warren Buffet has often said that he does not care much about stock prices, unless he wants to buy. So long as companies are well run and pay dividends, do not be too worried about stock prices. The prices of exchange traded funds and listed investment companies will fluctuate, but they usually have a portfolio of many companies, and the dividends from many companies should not fluctuate much.

False. You should not focus on dividends to the exclusion of any other strategy. Don't take me wrong, I'm a big fan of good dividend companies, but you should not hitch your carriage to the dividend exclusive club. You miss out on plenty of good companies, like Google. If you also focus on dividend aristocrats(5+ years) or other requirements, you miss out on other good companies like Shell(cuts dividend regularly), or several stocks that were taken down in 2007-2009(GE, BAC, F).
http://seekingalpha.com/article/2319735-dividends-dont-matter-in-retirement-either

milesdividendmd

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Re: Never reallocating away from 100% equity with age?
« Reply #61 on: July 21, 2014, 02:26:08 AM »

What matters is not volatility in stock prices, but volatility in dividends. Dividends ar much more stable. I looked at my dividend record since 2002 from six Australian blue chips, and dividends fell 5% in 2005, and 18% in 2010. All other years dividends were stable or rising. Warren Buffet has often said that he does not care much about stock prices, unless he wants to buy. So long as companies are well run and pay dividends, do not be too worried about stock prices. The prices of exchange traded funds and listed investment companies will fluctuate, but they usually have a portfolio of many companies, and the dividends from many companies should not fluctuate much.

False. You should not focus on dividends to the exclusion of any other strategy. Don't take me wrong, I'm a big fan of good dividend companies, but you should not hitch your carriage to the dividend exclusive club. You miss out on plenty of good companies, like Google. If you also focus on dividend aristocrats(5+ years) or other requirements, you miss out on other good companies like Shell(cuts dividend regularly), or several stocks that were taken down in 2007-2009(GE, BAC, F).
http://seekingalpha.com/article/2319735-dividends-dont-matter-in-retirement-either

+1

But I would make a more forceful argument.

Now is likely a particularly bad time to buy dividend stocks. They have outperformed the broad stockmarket in the past because they were undervalued.   In the current interest rate environment the opposite is true.

Click below to see evidence of this dynamic .

http://www.mebfaber.com/wp-content/uploads/2013/10/Picture1.png



Leisured

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Re: Never reallocating away from 100% equity with age?
« Reply #62 on: July 22, 2014, 04:48:31 AM »
The OP considered moving away from equities as the investor gets older. Khamjar and milesdividendmd seem to have misunderstood what I wrote. A young investor is concerned about capital growth, and less with dividends, but a retired investor, like me, partly depends on dividends, and wants a fairly stable dividend income stream which at least keeps pace with inflation. Well managed equities can deliver. Market price is less important then dividends for an older investor. It depends how old you are.

Jack

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Re: Never reallocating away from 100% equity with age?
« Reply #63 on: July 22, 2014, 08:25:13 AM »
The OP considered moving away from equities as the investor gets older. Khamjar and milesdividendmd seem to have misunderstood what I wrote. A young investor is concerned about capital growth, and less with dividends, but a retired investor, like me, partly depends on dividends, and wants a fairly stable dividend income stream which at least keeps pace with inflation. Well managed equities can deliver. Market price is less important then dividends for an older investor. It depends how old you are.

Assume you own a stock that gives a 4% dividend and has zero growth. Assume somebody else owns a stock that gives zero dividend but grows 4%. If that other person sells 4% of their holdings each year, they have exactly the same income as you and exactly the same net asset value as you (give or take taxes).

Dividends vs. growth makes no mathematical difference; what matters is total return.