Author Topic: Revisiting the asset allocation question - The case for 100% stocks  (Read 54047 times)

steveo

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Re: Revisiting the asset allocation question - The case for 100% stocks
« Reply #50 on: November 18, 2015, 02:10:59 PM »
The problem is, there is no "additional cash."  Your returns are the same regardless of your withdrawal method.  So by taking out more from your AA into a lower returning asset when returns are high, you are decreasing the chance of your portfolio lasting.

I'm not sold on this point. Its a little similar to rebalancing and I think there is a chance that it could increase your returns. You cash out a little during the good times and have some buffer during the bad times.

Okay.  Explain to me how VPW generates additional money (looking at overall net worth).

I'm not stating that it generates additional money. That isn't possible. What may be possible is that you take out more money when the market is high and invest it into safer assets which means when the market drops you can not take money out at all or take out a minimal amount. Over time this might lead to you coming out ahead or at least having decreased volatility in your spending and your portfolio.

The actual results will always be dependent on how the market performs. If you get 20 years of booming returns in stocks you would come out with less. If you had booms and busts you might come out ahead. If you had a sequence of negative returns nothing is going to work.

steveo

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Re: Revisiting the asset allocation question - The case for 100% stocks
« Reply #51 on: November 18, 2015, 02:12:12 PM »

Naturally.  But then what's the point of using VPW if you don't actually use it?  The best I can figure is to figure out a max withdrawal number for that year.  But if you're just going to take out your same amount anyways, and let your portfolio grow by the excess (the smart thing to do anyways, IMO, increasing your chance of portfolio longevity), you aren't really using VPW, you're using a more normal X% rule.

So in my own case I have 2 budgets: #1 for essential or mostly essential items that I would like to spend each year [phone, mortgage, food, etc..] and #2 for non-essentials [new sports gear, international travel, larger home maintenance projects, new computer, etc...] that I don't need in any given year, but over say 10yrs I'll want to spend $$ in each area. I can defer those costs for a period of time if my investments are not doing well.

So my annual spending would not be the same each year if my portfolio allowed it. I've used the variable spending options in cFIREsim to see what that looks like and if I try a $40K/yr fixed WR vs a $30-$50K VWR I get similar backtesting success rates for much lower saved starting amounts. It would make the difference between working a number of extra years if I wanted to stick with the fixed 4% WR.

I haven't decided on exactly how I will determine when to spend $30K and when to spend $50K. I could use VPW to give me this signal as well as a signal when I needed to bring in additional income if it was suggesting a WR amount less than my base costs.

Now if it started to tell me I could take out $200K/yr I have no useful way to spend that kind of $$ so I would spend my base amount and pay for any items on my non-essential list I wanted to deal with in a given year. Then leave the rest to compound.

I like this approach in theory. The problem is that I did the figure on it and gave myself a 3% WR for essentials and a 5% WR for the non-essentials. My target ended up about the same.

steveo

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Re: Revisiting the asset allocation question - The case for 100% stocks
« Reply #52 on: November 18, 2015, 02:14:51 PM »
As always, though, Tyler makes a compelling case for looking beyond the generic total stock market and total bond market alternatives for additional portfolio fine-tuning options.

Indeed. But how to avoid the curve fitting from data mining?

The recent post on the Merriman Ultimate Buy and Hold Portfolio seems very much to be a case of this, to me.

That's one plus for the PP in my mind--1/4th to each of 4 asset types, done.  No "well 17.35% of this one and 29.84% of this one, etc. performed best historically."  Not that I'm a huge PP fan, but at least I know it isn't curve fitting.

My main concern with lots of portfolios is curve fitting. I also think the PP could be curve fitting based on your expected returns. It might have just been a point in time that the PP worked so well.

I think the best approach is to review the data and make your own decision based upon general principles like paying as little fees as possible, diversification and rebalancing.

Tyler

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Re: Revisiting the asset allocation question - The case for 100% stocks
« Reply #53 on: November 18, 2015, 02:52:59 PM »
Only looking at back-tested returns with no supporting investing philosophy other than maximizing a number at all costs is a bad idea and a sure sign of curve fitting.  But following financial dogma without regard to historical data or competing ideas is just as short-sighted.  When selecting a portfolio that you'll actually be able to stick with for the long run, IMHO it's important to engage both sides of the thought process.  Admittedly, that takes time and requires a learning process.  Easy answers usually fall on either end of the undesirable extremes above. 

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Re: Revisiting the asset allocation question - The case for 100% stocks
« Reply #54 on: November 18, 2015, 02:59:25 PM »
I like this approach in theory. The problem is that I did the figure on it and gave myself a 3% WR for essentials and a 5% WR for the non-essentials. My target ended up about the same.



Here is a 4% fixed WR simulation. You need to save $1M to get 99.13% success vs. historical data.



Avg Yearly WR = $40K
Avg Total WR - $1.2M



Here is a variable WR simulation in the range of $30K to $50K WR. You need to save $800K to get 99.13% success vs. historical data.



Avg Yearly WR = $41.1K
Avg Total WR - $1.23M

So you get some similar results and have to save 20% less with the variable WR example.

Assuming you are saving $30K/yr and getting 7% return that's 2.5 less years you have to work to close the gap from $800K to $1M.

I might be missing something, but it seems to me a VWR combined with some lifestyle flexibility can save you a bunch of time before FIRE.

frugalnacho

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Re: Revisiting the asset allocation question - The case for 100% stocks
« Reply #55 on: November 18, 2015, 03:36:23 PM »

So you get some similar results and have to save 20% less with the variable WR example.


Forgive me, I am still failing to understand this.  How do you get similar results? You have significantly reduced withdraws during down markets - so of course you come out ahead compared with a rigid withdraw strategy.  But i'm still failing to see how this is significant.  Couldn't you just achieve the exact same results by trimming some fat out of your budget during lean years even with a rigid 4% withdraw (which I guess is not exactly rigid if you can lower it when neccessary)?  Or better yet just lower your overall needed stash to the bare minimum of expenses right off the bat?  Then if the market tanks you still have a good chance of success, and if it does better than expected you can ratchet your spending back up to account for the "fat" you are now able to have in your annual budget.  And why not just take it a step further really crank it down?  Instead of saving up $1M I could shorten my career and I only need $100k with this VWR.  It will have 100% success rate, if you count a string of several years where I have to vary my withdraw so it's lower than my expenses a "success".

Retire-Canada

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Re: Revisiting the asset allocation question - The case for 100% stocks
« Reply #56 on: November 18, 2015, 04:12:56 PM »

Forgive me, I am still failing to understand this.  How do you get similar results? You have significantly reduced withdraws during down markets - so of course you come out ahead compared with a rigid withdraw strategy.  But i'm still failing to see how this is significant.  Couldn't you just achieve the exact same results by trimming some fat out of your budget during lean years even with a rigid 4% withdraw (which I guess is not exactly rigid if you can lower it when neccessary)?  Or better yet just lower your overall needed stash to the bare minimum of expenses right off the bat?  Then if the market tanks you still have a good chance of success, and if it does better than expected you can ratchet your spending back up to account for the "fat" you are now able to have in your annual budget.  And why not just take it a step further really crank it down?  Instead of saving up $1M I could shorten my career and I only need $100k with this VWR.  It will have 100% success rate, if you count a string of several years where I have to vary my withdraw so it's lower than my expenses a "success".

Reread my posts above as I have answered most of your questions. Keep in mind the simulation results I posted are not for VPW they are for a $30-$50K/yr variable WR which is quite different as there are hard floors and ceilings on WR each year.

Interest Compound

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Re: Revisiting the asset allocation question - The case for 100% stocks
« Reply #57 on: November 18, 2015, 08:45:10 PM »
The math for this works for me 100% of the time.  You can't create pie charts or graphs for emotion and that is the grenade pin as to why this allocation ends up failing for the majority of investors.  Honestly--I wholeheartedly agree with all of the data presented but where are the psychological formulas?  (Us programmers, engineers, accountants, etc., are good at creating efficient systems, but I've been in enough relationships to know my systems fail when presented with human reality.)

I think that's the biggest risk, but it's not one I'm worried about for myself. I have years of practice :) For others though...I think most non-investor people however, (my friends/family) would be better off with something like a 60/40 stock/bond allocation. Maybe even 40/60. While this puts them at a much higher inflation-risk, no one ever panic sold because of inflation.

Interest Compound

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Re: Revisiting the asset allocation question - The case for 100% stocks
« Reply #58 on: November 18, 2015, 08:47:38 PM »
Even with this, the portfolio's longevity surpassed the 4% rule, with a higher median withdrawal.

As you noted in the other VPW thread, it's difficult to use any single metric to compare different withdrawal strategies because it will always focus on only one of the multiple tradeoffs involved (for example, the traditional "success rate" metric focuses exclusively on likelihood of avoiding total portfolio depletion but otherwise ignores variability in terminal portfolio value and completely ignores spending levels throughout the retirement period).

Have you seen the comparison of different variable withdrawal strategies that Pfau did?  It's available here:  "Making Sense Out of Variable Spending Strategies for Retirees" (and was discussed in this thread:  Pfau on Variable Withdrawal Strategies).  To do an apples-to-apples performance comparison of the various withdrawal strategies, he used an "XYZ" benchmark for all of them -- the X% probability that spending falls below a threshold of $Y (in inflation-adjusted dollars) by year Z of retirement.  As noted in the linked thread, his methodology used Monte Carlo simulations with built-in capital market assumptions and therefore produced what many of us view as overly pessimistic results across the board for all of the strategies, but I thought the XYZ metric was an interesting way of comparing different withdrawal strategies (both variable and non-variable) against one another.

I haven't seen this yet, thanks for the link! From a quick review, I don't think I saw any that combine the two factors I'm looking for:

1. Depletes the portfolio on a timeline.
2. Adjusts based on asset allocation.

I'll check this out though :)
« Last Edit: November 18, 2015, 08:56:21 PM by Interest Compound »

steveo

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Re: Revisiting the asset allocation question - The case for 100% stocks
« Reply #59 on: November 18, 2015, 10:59:21 PM »
Vikb - your point there is interesting. I approached the situation differently however I think you make a good point. If I work out minimal expenses through to maximum expenses and choose a VWR I may be able to FIRE with a smaller target.

I focussed on my end point within Excel rather than using cfirmsim however I am thinking that I will utilise your approach as it makes sense to me.

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Re: Revisiting the asset allocation question - The case for 100% stocks
« Reply #60 on: November 19, 2015, 12:37:32 AM »
Reread my posts above as I have answered most of your questions. Keep in mind the simulation results I posted are not for VPW they are for a $30-$50K/yr variable WR which is quite different as there are hard floors and ceilings on WR each year.

But if you're fine living on a 30k budget, FIRE on the 4% rule and you only need 750k, even less than your variable withdrawal!

And you can use VPW as a ceiling to raise spending later if you want!

Our point Vik is that most of us have a budget we want to spend.  We want to save up to support that.  We might be okay tightening the belt and reducing spending in a severe downturn if we HAD to, but we don't want that to be a primary option.  Our spending is what it is because it makes us happy, and it's already optimized.

If we were happy spending 30k, instead of 40k, we'd FIRE on less to begin with.  We don't want to be happy spending 40k, then have to cut back to unhappy levels.  That's what variable withdrawals often promise: having to cut back way more than you'd like, way more often than you'd like.
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frugalnacho

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Re: Revisiting the asset allocation question - The case for 100% stocks
« Reply #61 on: November 19, 2015, 08:13:48 AM »
Reread my posts above as I have answered most of your questions. Keep in mind the simulation results I posted are not for VPW they are for a $30-$50K/yr variable WR which is quite different as there are hard floors and ceilings on WR each year.

But if you're fine living on a 30k budget, FIRE on the 4% rule and you only need 750k, even less than your variable withdrawal!

And you can use VPW as a ceiling to raise spending later if you want!

Our point Vik is that most of us have a budget we want to spend.  We want to save up to support that.  We might be okay tightening the belt and reducing spending in a severe downturn if we HAD to, but we don't want that to be a primary option.  Our spending is what it is because it makes us happy, and it's already optimized.

If we were happy spending 30k, instead of 40k, we'd FIRE on less to begin with.  We don't want to be happy spending 40k, then have to cut back to unhappy levels.  That's what variable withdrawals often promise: having to cut back way more than you'd like, way more often than you'd like.

Pretty much.  I think the disconnect for me is that the two options don't seem comparable.  What I mean is following a 4% SWR and a spending of $40k/yr, is not even remotely close to following a vwr with a spending of $40k/yr but the option that you will adjust your spending down significantly in down markets.  Of course the vwr will "win" in that situation, it's designed to by definition.  If you are able to FIRE on a vwr that gives you $40k/yr, but might cut it down to $30k/yr, and you can still get by comfortably for a few years without sacrificing, then saving up 25X your $40k budget to use a 4% SWR means you are grossly over saving.  It would be more comparable if your VWR option was like $50k/yr and might be reduced to a minimum of $40k/yr (which is the budget of the 4% SWR example).

I'm still a long way away from FIRE, but I plan to use the 4% rule, and start off pretty close to the bare bones budget that I am comfortable with.  Maybe I will get OMY syndrome and try to pad the stash, but I think I will want to pull the trigger once I cross the threshold.  I may front load my "bare bones" budget years at the beginning of my retirement if the markets perform poorly in those first few years, but odds are I will still end up with more money than I can spend.

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Re: Revisiting the asset allocation question - The case for 100% stocks
« Reply #62 on: November 19, 2015, 08:50:21 AM »

Pretty much.  I think the disconnect for me is that the two options don't seem comparable.  What I mean is following a 4% SWR and a spending of $40k/yr, is not even remotely close to following a vwr with a spending of $40k/yr but the option that you will adjust your spending down significantly in down markets.  Of course the vwr will "win" in that situation, it's designed to by definition.  If you are able to FIRE on a vwr that gives you $40k/yr, but might cut it down to $30k/yr, and you can still get by comfortably for a few years without sacrificing, then saving up 25X your $40k budget to use a 4% SWR means you are grossly over saving.  It would be more comparable if your VWR option was like $50k/yr and might be reduced to a minimum of $40k/yr (which is the budget of the 4% SWR example).


To me the $40K/yr fixed WR and the $30K - $50K/yr VR are comparable simply because over a reasonable period of time you are getting ~$40K/yr to spend so your lifestyle will be the same.

If you guys really can't adjust your spending by +/-25% per year than I can see that this won't work for you, but that lack of flexibility seems pretty shocking to me.

There are so many COL items I have that I want to spend on in FIRE, but that I don't feel forced to execute in any one year:

- replace computer/camera/phone
- major home reno projects
- replace car/motorcycle
- replace clothing
- major trips
- replace sports equipment [bike, surfboards, fly fish gear, etc...]

I just don't see it as a hardship or challenge to adjust my spending so these sorts of expenditures avoid market downturns. I'll end up with the same lifestyle as the $40K/yr fixed WR person, but have to work 2.5yrs less [using the sample values I posted above].

And yes the VWR plan is designed to weather market shocks, but that's my whole point. It seems superior with the assumption that you do not need exactly $40K/yr every year.

The disconnect I have with your example is how you can compare a $40K fixed WR with a $40K - $50K variable WR???  In every year you do the same or better than the $40K/yr fixed WR that's not equivalent.

I also don't understand how Arls can posit that being able to defer $10K/yr of expenses from a budget of $40K/yr for a few years during a market downturn means you would be fine FIRE-ing with a $30K/yr fixed WR for a 30yr+ retirement???  That just doesn't compute for me.  I can put off replacing a car, a roof or buying new clothes for a few years. but at some point those expenses have to occur.
« Last Edit: November 19, 2015, 09:03:27 AM by Vikb »

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Re: Revisiting the asset allocation question - The case for 100% stocks
« Reply #63 on: November 19, 2015, 09:02:41 AM »
Vikb - your point there is interesting. I approached the situation differently however I think you make a good point. If I work out minimal expenses through to maximum expenses and choose a VWR I may be able to FIRE with a smaller target.

I focussed on my end point within Excel rather than using cfirmsim however I am thinking that I will utilise your approach as it makes sense to me.

I'm glad the info was useful Steve.

I'm not excited about having to work full-time for 2.5 extra years to get to the same average performance level for a fixed WR vs. VWR plan. At least when I look at that the hassle of potentially having to manage my non-essential expenses vs. all that time chained to a desk it seems like a no brainer for me.

And for Arls and FC in no way am I suggesting that this is the plan for you. If you look at the opportunity cost of working extra years to hit a 4% fixed WR and that's the best solution for you I say go for it!

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Re: Revisiting the asset allocation question - The case for 100% stocks
« Reply #64 on: November 19, 2015, 09:25:06 AM »

Pretty much.  I think the disconnect for me is that the two options don't seem comparable.  What I mean is following a 4% SWR and a spending of $40k/yr, is not even remotely close to following a vwr with a spending of $40k/yr but the option that you will adjust your spending down significantly in down markets.  Of course the vwr will "win" in that situation, it's designed to by definition.  If you are able to FIRE on a vwr that gives you $40k/yr, but might cut it down to $30k/yr, and you can still get by comfortably for a few years without sacrificing, then saving up 25X your $40k budget to use a 4% SWR means you are grossly over saving.  It would be more comparable if your VWR option was like $50k/yr and might be reduced to a minimum of $40k/yr (which is the budget of the 4% SWR example).


To me the $40K/yr fixed WR and the $30K - $50K/yr VR are comparable simply because over a reasonable period of time you are getting ~$40K/yr to spend.

If you guys really can't adjust your spending by +/-25% per year than I can see that this won't work for you, but that lack of flexibility seems pretty shocking to me.

There are so many COL items I have that I want to spend on in FIRE, but that I don't feel forced to execute in any one year:

- replace computer/camera/phone
- major home reno projects
- replace car/motorcycle
- replace clothing
- major trips
- replace sports equipment [bike, surfboards, fly fish gear, etc...]

I just don't see it as a hardship or challenge to adjust my spending so these sorts of expenditures avoid market downturns. I'll end up with the same lifestyle as the $40K/yr fixed WR person, but have to work 2.5yrs less [using the sample values I posted above].

And yes the VWR plan is designed to weather market shocks, but that's my whole point. It seems superior with the assumption that you do not need exactly $40K/yr every year.

The disconnect I have with your example is how you can compare a $40K fixed WR with a $40K - $50K variable WR???  In every year you do the same or better than the $40K/yr fixed WR that's not equivalent.

I also don't understand how Arls can posit that being able to defer $10K/yr of expenses from a budget of $40K/yr for a few years during a market downturn means you would be fine FIRE-ing with a $30K/yr fixed WR for a 30yr+ retirement???  That just doesn't compute for me.  I can put off replacing a car, a roof or buying new clothes for a few years. but at some point those expenses have to occur.

Because we don't see it as saving you 2.5 years of work, it's actually making you work longer, so you can have excess in your budget.  If you can comfortably live on 30k/yr, then saving for 40k/yr using a 4% SWR or saving for an average of 40k/yr using a vwr are both foolish options in my opinion.   A better option would be to just use the 4% swr and a target of 30k/yr.  I think it's foolish to rigidly apply the 4% rule too and would advise that you remain flexible.  I'll be fairly young when I FIRE and will probably know within the first several years how my portfolio is going to do.  The 4% rule is rigid and still provides me a very low chance of failure even if I fail to adapt to the crashing economy, but of course I will adapt and I think that completely eliminates the possibility of failure.  If one of those 5% failure scenarios happens when I FIRE, I will earn more money, and temporarily cut my budget (though I won't be able to cut it as drastically as you are suggesting) and will still fair just fine long term.  A much more likely scenario is that I get good returns early in my FIRE and my portfolio ends up exploding and I can continually increase my spending without fear of failure.

I understand what you are getting at, and I suppose I already plan to incorporate a similar strategy of adjusting my spending (I would just call it being flexible though, not having an actual system to calculate out how much I should take out).   I am just planning to pull the trigger much closer to the spending floor and take my chances that I will still have more than enough luxury in time.   I don't know that it's worth those extra years at a desk to guarantee I have an average of $10k/yr fat in my budget, when it's not needed and I have a good chance of getting that anyway.

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Re: Revisiting the asset allocation question - The case for 100% stocks
« Reply #65 on: November 19, 2015, 09:40:38 AM »
If you guys really can't adjust your spending by +/-25% per year than I can see that this won't work for you, but that lack of flexibility seems pretty shocking to me.

Because we want to be optimized as possible, to FIRE as soon as possible.  That means cutting down to a budget that would be painful to cut more from.

If we can FIRE on 30k annually (and it'd be painful to cut more), then saving up to support a 40k VPW (so your spending can fluctuate from 30-50k) seems way too much.  And FIREing on a 30k VPW means you're way more likely to have to cut spending past the point you want to.

If your budget is filled with fat to where you can regularly cut without pain, your budget is too high, meaning you worked too long.

I want cuts to only occur in the most dire of market crashes, and for them to be painful when they do happen.  Not to work extra so I can go "oh, I just won't do X, Y, and Z this year, no big deal" because if it was no big deal, why did I work so much longer to fund X, Y, and Z every single year except in market crashes?  I want to go "damn, market's down.. guess I should earn some money to fund X, or guess I gotta decide between X and Y" or whatever.  Not "oh, market's down, no biggie, I planned for the with VPW".. cause if I planned to reduce spending, I oversaved.

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Re: Revisiting the asset allocation question - The case for 100% stocks
« Reply #66 on: November 19, 2015, 09:48:22 AM »
Withdrawing more than you're going to spend and leaving it sitting in cash, rather than invested, sounds like a terrible idea, and a good way to hurt your portfolio's longevity chances.

That's how I feel too, and maybe with the 4% rule it's true. But remember, all the VPW graphs I've shown thus far, including the worst-case scenarios, are following person #1's path, as if they literally threw away their cash allocation each year. Even with this, the portfolio's longevity surpassed the 4% rule, with a higher median withdrawal. If someone feels safer keeping their excess in cash during retirement, it won't hurt them too bad. Heck, they can even put it in CDs if they wanted to, and feel just as safe. Then it would look like your typical retirement glide-path :-P

But let's not get too hung up on this. I agree person #2's path is better, and it's the one I'd choose.

1st question ... what goes in the future value spot on the VPW setup for cfireSIM

2nd question have you run this capping your withdrawal at say 4.5% or even 4% to see what the worst draw down year looks like?  So you would just use it to dictate bad years not go up in good years.

frugalnacho

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Re: Revisiting the asset allocation question - The case for 100% stocks
« Reply #67 on: November 19, 2015, 10:08:49 AM »
If you guys really can't adjust your spending by +/-25% per year than I can see that this won't work for you, but that lack of flexibility seems pretty shocking to me.

Because we want to be optimized as possible, to FIRE as soon as possible.  That means cutting down to a budget that would be painful to cut more from.

If we can FIRE on 30k annually (and it'd be painful to cut more), then saving up to support a 40k VPW (so your spending can fluctuate from 30-50k) seems way too much.  And FIREing on a 30k VPW means you're way more likely to have to cut spending past the point you want to.

If your budget is filled with fat to where you can regularly cut without pain, your budget is too high, meaning you worked too long.

I want cuts to only occur in the most dire of market crashes, and for them to be painful when they do happen.  Not to work extra so I can go "oh, I just won't do X, Y, and Z this year, no big deal" because if it was no big deal, why did I work so much longer to fund X, Y, and Z every single year except in market crashes?  I want to go "damn, market's down.. guess I should earn some money to fund X, or guess I gotta decide between X and Y" or whatever.  Not "oh, market's down, no biggie, I planned for the with VPW".. cause if I planned to reduce spending, I oversaved.

Yes.  Exactly the point I was trying to articulate.

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Re: Revisiting the asset allocation question - The case for 100% stocks
« Reply #68 on: November 19, 2015, 01:11:50 PM »
Wow.

Lots of work into these posts.

100% stocks?  Sure, why not as long as you are diversified and intend to live off dividends or distributions I think it's a good call.

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Re: Revisiting the asset allocation question - The case for 100% stocks
« Reply #69 on: November 19, 2015, 01:24:39 PM »
I've always been 100% stocks now as I am in the accumulation phase and figure I have time on my side.  But always thought about switching to either 90/10 or 80/20 stocks/bonds AA strategy when I retired.  But I like the idea of VPW and am starting to feel more comfortable leaving it all 100% in stocks even when I retire too based on this.  I like the idea of being flexible in my spending. 

I understand the point arebelspy and frugal nacho are trying to make but I guess the extra $10k pad with a $30-50k variable spending is "safer" in my opinion than just planning for a 4% WR at the lowest spending of $30k.  Maybe that's because I don't have as good of a handle on my budget.  But I think there are definitely luxury expenses that I can put off like travel or what not that won't cause a significant change to my lifestyle.  But what I'm worried about is planning to spend a lower amount and then be hit with an emergency spending that I can't put off.  I think having that pad means I'm more comfortable and the difference of saving to 750k vs. 800k (4% WR at 30k vs. $30-50k VPW) doesn't seem as big a difference as saving 800k vs 1M ($30-50k VPW vs 4% WR at 40k spending).

morning owl

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Re: Revisiting the asset allocation question - The case for 100% stocks
« Reply #70 on: November 19, 2015, 01:32:52 PM »
This is a very interesting thread. I usually use VWR when I plug my numbers into cfiresim, mainly for the reasons Vikb is suggesting. Some years I will need more money than others, because of a house repair, or taking a trip, or what have you. It makes sense to me, too, to withdraw less, and forego any unnecessary expenses on years where the market is down. I like having the flexibility, and don't want to feel stuck with a fixed withdrawal rate year after year.

It's probably like the mortgage payoff question (which we have done, as well, though while also maxing out RRSP and TFSAs) -- it's an emotional preference. Our spending patterns are not regular. Some years we have bigger expenses than others, and this could make a $10-20k difference in our expenses. I'd like to plan accordingly.

Interest Compound

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Re: Revisiting the asset allocation question - The case for 100% stocks
« Reply #71 on: November 19, 2015, 02:05:28 PM »
To put some numbers to my statements on VPW, I've looked at all the available years, tested the standard 30 year retirement and a longer 70 year retirement, both with $1,000,000 in 100% stocks, and these factors remained consistent (all dollars inflation-adjusted):
  • In total, there was a 65% chance that VPW never lowered your withdrawal amount below the 4% rule.
  • The median withdrawal for these 65% of people was between $120k-$150k.
  • ---> If you were part of the unlucky 35%, 92% of your retirement years remained above the 4% rule.
  • ------> In the worst case scenario 8% of years where you fell short, you were typically about $5,000 short for the year. About $400-$500 a month.
  • The times this happened were clustered around 1966 and 1929, where the 4% rule left you unable to feed yourself.
  • The median withdrawal for these 35% of people, was between $50k-$70k.
This assumes Person #1's path, where they take the full possible withdrawal each year, and throw away 100% of withdrawn cash that's above and beyond their living expenses. No cash buffer, no keeping the unused portion invested (Person #2's path), none of that. The numbers above represent a subset of a subset of a worst case scenario (35%), on top of another worst case scenario (8%), on top of another worst case scenario (withdrawing the total amount each year, even if you don't need it, throwing away the excess cash each year so there's no buffer), and the result is $400-$500 a month.

If you aren't comfortable with that, VPW isn't for you.

arebelspy

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Re: Revisiting the asset allocation question - The case for 100% stocks
« Reply #72 on: November 19, 2015, 02:18:17 PM »
If you aren't comfortable with that, VPW isn't for you.

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Interest Compound

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Re: Revisiting the asset allocation question - The case for 100% stocks
« Reply #73 on: November 19, 2015, 05:00:11 PM »
Withdrawing more than you're going to spend and leaving it sitting in cash, rather than invested, sounds like a terrible idea, and a good way to hurt your portfolio's longevity chances.

That's how I feel too, and maybe with the 4% rule it's true. But remember, all the VPW graphs I've shown thus far, including the worst-case scenarios, are following person #1's path, as if they literally threw away their cash allocation each year. Even with this, the portfolio's longevity surpassed the 4% rule, with a higher median withdrawal. If someone feels safer keeping their excess in cash during retirement, it won't hurt them too bad. Heck, they can even put it in CDs if they wanted to, and feel just as safe. Then it would look like your typical retirement glide-path :-P

But let's not get too hung up on this. I agree person #2's path is better, and it's the one I'd choose.

1st question ... what goes in the future value spot on the VPW setup for cfireSIM

2nd question have you run this capping your withdrawal at say 4.5% or even 4% to see what the worst draw down year looks like?  So you would just use it to dictate bad years not go up in good years.

I've always used Cfiresim's old site:

http://gator3089.hostgator.com/~boknows/input.php

As this has more options. It wasn't until this post that I realized the new site now allows for VPW. Unfortunately, it didn't work for me (all simulations resulted in a blank screen), so I can only guess at what Future Value does. Since the default is 0, it's probably determining the value you're shooting for when the withdrawal period (30 years perhaps) is over. My default this is 0, because VPW is meant to completely deplete your portfolio. The VPW author says he doesn't want to be the "richest person in the graveyard".

For your second question, yes I've played with those settings. I like the defaults best :)

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Re: Revisiting the asset allocation question - The case for 100% stocks
« Reply #74 on: November 20, 2015, 06:25:44 AM »
yeah capping it does not appear to affect the bad draw down years much at all. 

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Re: Revisiting the asset allocation question - The case for 100% stocks
« Reply #75 on: February 12, 2016, 11:58:15 AM »
Relevant article in today's NY Times by a prominent economist:  How Much of Your Nest Egg to Put Into Stocks?  All of It

It even includes a nod to the forum's recurring theme of "a priori vs. a posteriori" that could almost make one believe it was written in response to debates held here ;)

Quote from: David Levine writing in the NY Times
My argument for full equity exposure rests not only on their historical and empirical superiority but their logical superiority. Consider this: [logical reasons given]

arebelspy

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Re: Revisiting the asset allocation question - The case for 100% stocks
« Reply #76 on: February 12, 2016, 01:51:33 PM »
Unlikely, but amusing.  :)

Good find!
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steveo

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Re: Revisiting the asset allocation question - The case for 100% stocks
« Reply #77 on: February 12, 2016, 02:45:51 PM »
That is a good article. I think I will always have some bonds or cash but I can see the logic of that article. I'm also not getting stressed despite my assets dropping at least 10%. Mind you I'm still in the accumulation phase.

Interest Compound

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Re: Revisiting the asset allocation question - The case for 100% stocks
« Reply #78 on: February 26, 2016, 03:25:26 PM »
I've completed the transition to 100% stocks. The one thing I didn't count on, never having to rebalance again! Whenever I go to make new contributions, I simply check the current breakdown:



https://personal.vanguard.com/us/funds/snapshot?FundId=3141&FundIntExt=INT#tab=2

And invest my new money accordingly. So 52.9% of any new contribution goes to VTSAX (USA) and the rest goes to VTIAX (International). Since I'm invested at market-weight, my portfolio won't shift off-balance, no matter how long I leave it alone :) I'm also no longer worried about trying to fit all my bonds in retirement accounts. My 100% stock portfolio involves less tinkering, simplicity is a good thing :)
« Last Edit: February 12, 2017, 03:16:42 PM by Interest Compound »

Interest Compound

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Re: Revisiting the asset allocation question - The case for 100% stocks
« Reply #79 on: February 26, 2016, 04:05:30 PM »
To put some numbers to my statements on VPW, I've looked at all the available years, tested the standard 30 year retirement and a longer 70 year retirement, both with $1,000,000 in 100% stocks, and these factors remained consistent (all dollars inflation-adjusted):
  • In total, there was a 65% chance that VPW never lowered your withdrawal amount below the 4% rule.
  • The median withdrawal for these 65% of people was between $120k-$150k.
  • ---> If you were part of the unlucky 35%, 92% of your retirement years remained above the 4% rule.
  • ------> In the worst case scenario 8% of years where you fell short, you were typically about $5,000 short for the year. About $400-$500 a month.
  • The times this happened were clustered around 1966 and 1929, where the 4% rule left you unable to feed yourself.
  • The median withdrawal for these 35% of people, was between $50k-$70k.
This assumes Person #1's path, where they take the full possible withdrawal each year, and throw away 100% of withdrawn cash that's above and beyond their living expenses. No cash buffer, no keeping the unused portion invested (Person #2's path), none of that. The numbers above represent a subset of a subset of a worst case scenario (35%), on top of another worst case scenario (8%), on top of another worst case scenario (withdrawing the total amount each year, even if you don't need it, throwing away the excess cash each year so there's no buffer), and the result is $400-$500 a month.

If you aren't comfortable with that, VPW isn't for you.

Tried (poorly) to visualize this:



If you were in the Unlucky 35%, this is the breakdown of your retirement years:



And of course, the median withdrawal for the 4% rule was $40k.

« Last Edit: February 12, 2017, 03:36:48 PM by Interest Compound »

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Re: Revisiting the asset allocation question - The case for 100% stocks
« Reply #80 on: February 27, 2016, 07:27:57 AM »
Thanks for posting this IC. Some form of variable WR is in my future. I have no kids so leaving money is not a concern. I'll need to study VPW.

Currently I am just simulating a VWR with a simple floor and ceiling value in cFIREsim.

I'm coming at FIRE with a low starting portfolio value relative to my target WR rate of $40K/yr. I definitely don't want to work FT any longer than I have to, but I don't mind working PT as part of the progression through FIRE.

So some sort of VWR plan is in the cards as they seem to offer the best mix of success vs. WR $ for lower starting portfolio values.

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Re: Revisiting the asset allocation question - The case for 100% stocks
« Reply #81 on: February 27, 2016, 04:40:45 PM »
I've always been 100% equities and will be so as long as shares represent a portion of business. I don't plan on ever selling my holdings so withdrawal rates don't really apply.

"How does he intend to cover living expenses then?"

Dividends. Everything I buy/own pays dividends. The dividends will be used for living expenses, charity, blow money and reinvestment.

I've never been a fan of the common plan of selling off shares  at some specific rate to cover living expenses. Feels too much like slaying the goose that has so much potential to lay more eggs.

brooklynguy

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Re: Revisiting the asset allocation question - The case for 100% stocks
« Reply #82 on: February 27, 2016, 04:58:43 PM »
Feels too much like slaying the goose that has so much potential to lay more eggs

...or shit more dollar bills.
« Last Edit: February 27, 2016, 05:24:05 PM by brooklynguy »

arebelspy

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Re: Revisiting the asset allocation question - The case for 100% stocks
« Reply #83 on: February 27, 2016, 05:33:03 PM »
I miss skyrefuge.
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Re: Revisiting the asset allocation question - The case for 100% stocks
« Reply #84 on: February 28, 2016, 08:26:47 AM »
I've always thought of asset allocation in relation to my goals.

During the accumulation phase I plan to continue in 100% stocks. The reason for this is the higher CAGAR and the fact that as long as I'm living off my earned wage income, the volatility shouldn't matter to me at all because i control the date at which i FIRE. It's possible that a major market crash would then delay my FIRE date, but again it's something that I can control (as long as i don't panic and sell).

Once you hit a point where you have the % withdraw rate you are targeting for FIRE then absolute CAGAR should be less important. The key here is do you get enough gains to cover your withdraw rate and inflation while minimizing volatility (since you are now drawing down). In this case having a portion of stocks and bonds can be much more safer than 100% stocks.

So basically my approach is 100 stocks to build wealth
stocks and bonds to maintain wealth after i pull the fire trigger.

Combining this with something like a variable withdraw would make it even safer.

(sorry if folks have already discussed this, i'm running out the door to devotion and could only skim the entire post)




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Re: Revisiting the asset allocation question - The case for 100% stocks
« Reply #85 on: February 28, 2016, 08:43:54 AM »

brooklynguy

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Re: Revisiting the asset allocation question - The case for 100% stocks
« Reply #86 on: February 28, 2016, 09:01:01 AM »
Where did he go?

Hopefully (for his sake) off to enjoy FIRE, but hopefully (for our sake) he'll return and grace us with his presence once in a while.

Interest Compound

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Re: Revisiting the asset allocation question - The case for 100% stocks
« Reply #87 on: August 02, 2016, 06:10:48 PM »
There are a few 100% stock posts on the front page right now, as we usually see when stocks hit an all-time-high (about once a year or so), so I gave this thread another read.

The VPW withdrawal sheet has been updated with a few more years of data:

https://www.bogleheads.org/wiki/Variable_percentage_withdrawal

And the percentage withdrawal for anyone above 30 years old is still over 5% with 100% stocks. Hmm...with my side-gig (a few hours a week) + VPW, I could FIRE today! Would it still be FIRE if I need the side-gig? Hmm...something to think about.

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Re: Revisiting the asset allocation question - The case for 100% stocks
« Reply #88 on: August 02, 2016, 06:52:10 PM »
There are a few 100% stock posts on the front page right now, as we usually see when stocks hit an all-time-high (about once a year or so), so I gave this thread another read.

The VPW withdrawal sheet has been updated with a few more years of data:

https://www.bogleheads.org/wiki/Variable_percentage_withdrawal

And the percentage withdrawal for anyone above 30 years old is still over 5% with 100% stocks. Hmm...with my side-gig (a few hours a week) + VPW, I could FIRE today! Would it still be FIRE if I need the side-gig? Hmm...something to think about.

It amuses me how strongly I can agree with your ideas/posts on the Golden Butterfly, and so strongly disagree with your ideas/posts on withdrawal strategy*.  :)

That's the great thing about interactive threads and forums for discussions like these.  You get a lot of great ideas, arguments for a bunch of different things, and can decide on your own which ones hold weight, and which ideas make sense to you.

Thanks to you (and Tyler and BrooklynGuy and waltworks and many, many others) for participating in these good discussions.  :)


*As discussed elsewhere, I think the VPW is...poor, for a number of reasons.
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Retire-Canada

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Re: Revisiting the asset allocation question - The case for 100% stocks
« Reply #89 on: August 02, 2016, 06:59:42 PM »
Would it still be FIRE if I need the side-gig? Hmm...something to think about.

How many hours/week? 8hrs or less I would say it was FIRE. Assuming you didn't hate those 8hrs.

brooklynguy

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Re: Revisiting the asset allocation question - The case for 100% stocks
« Reply #90 on: August 02, 2016, 07:32:36 PM »
and many, many others

...including skyrefuge, who is still sorely missed.

arebelspy

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Re: Revisiting the asset allocation question - The case for 100% stocks
« Reply #91 on: August 02, 2016, 07:40:17 PM »
and many, many others

...including skyrefuge, who is still sorely missed.

Yup.  Ditto warfreak2.  And many others.  Hope they're out there, FIRE'd or rocking their way there.  :)
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mathjak107

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Re: Revisiting the asset allocation question - The case for 100% stocks
« Reply #92 on: August 03, 2016, 04:20:49 AM »
The math for this works for me 100% of the time.  You can't create pie charts or graphs for emotion and that is the grenade pin as to why this allocation ends up failing for the majority of investors.  Honestly--I wholeheartedly agree with all of the data presented but where are the psychological formulas?  (Us programmers, engineers, accountants, etc., are good at creating efficient systems, but I've been in enough relationships to know my systems fail when presented with human reality.)

The math works.

For us:
Investments: Stocks and a few I-bonds bought many years ago at good interest rates.

Anchor: Paid for house, zero debt and some cash and a willingness to not pull money out of the investment portion until absolutely necessary.

We don't need bonds. The house is the security blanket.

IMHO, stocks will not give the returns many people are expecting. Bogle says returns might be something like 4% annually before inflation over the next ten years, and I think he could be right. And bonds will be worse than that.

spending the living room instead of bonds may be tough . i know our grocery will not take it .

Interest Compound

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Re: Revisiting the asset allocation question - The case for 100% stocks
« Reply #93 on: August 03, 2016, 11:46:48 AM »
There are a few 100% stock posts on the front page right now, as we usually see when stocks hit an all-time-high (about once a year or so), so I gave this thread another read.

The VPW withdrawal sheet has been updated with a few more years of data:

https://www.bogleheads.org/wiki/Variable_percentage_withdrawal

And the percentage withdrawal for anyone above 30 years old is still over 5% with 100% stocks. Hmm...with my side-gig (a few hours a week) + VPW, I could FIRE today! Would it still be FIRE if I need the side-gig? Hmm...something to think about.

It amuses me how strongly I can agree with your ideas/posts on the Golden Butterfly, and so strongly disagree with your ideas/posts on withdrawal strategy*.  :)

That's the great thing about interactive threads and forums for discussions like these.  You get a lot of great ideas, arguments for a bunch of different things, and can decide on your own which ones hold weight, and which ideas make sense to you.

Thanks to you (and Tyler and BrooklynGuy and waltworks and many, many others) for participating in these good discussions.  :)


*As discussed elsewhere, I think the VPW is...poor, for a number of reasons.

Indeed! This is why I love forums like these.

You get to make up your own opinions, but you don't get to make up your own facts.

Liking VPW or not is subjective. Some people have a good opinion of it, some don't. That's fine :) I tried to keep my Golden Butterfly posts as factual as possible. It's easy to agree with facts :)


(doesn't exactly fit, but I LOVE this :) )

I've had some time to think about VPW, and my opinion hasn't changed. Of the 8700 overlapping years from both 30 year and 70 year retirements, starting from 1871, only 243 of them had withdrawals lower than the standard 4% rule. Those 243 years were short about $500 a month, and clustered around the time when the 4% rule would've wiped.

So it's all subjective. I'd rather subject myself to that risk, than the sequence of returns risk of total portfolio wipe with the 4% rule. My easy access to a side-gig surely plays a part in this analysis. As does my desire to shave a few years off my FIRE date :-P

Tyler

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Re: Revisiting the asset allocation question - The case for 100% stocks
« Reply #94 on: August 03, 2016, 12:25:30 PM »
I tried to keep my Golden Butterfly posts as factual as possible. It's easy to agree with facts :)

Ha!  An epically long thread indicates otherwise.   ;) 

Because there's more than one way to productively invest, two smart people can look at the same facts and come to different conclusions about the best way to proceed.  I appreciate the opportunity to discuss different perspectives, and hope the forum never becomes too homogeneous on the "right" way to invest. 

« Last Edit: August 03, 2016, 12:37:27 PM by Tyler »

Interest Compound

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Re: Revisiting the asset allocation question - The case for 100% stocks
« Reply #95 on: August 03, 2016, 12:33:45 PM »
Would it still be FIRE if I need the side-gig? Hmm...something to think about.

How many hours/week? 8hrs or less I would say it was FIRE. Assuming you didn't hate those 8hrs.

About 12 hours split between two people to cover living expenses. But that's the thing, a big reason I want to FIRE is so I can spend MORE time on the side-gig. So yea...how about 140 hours a week between two people? Best FIRE ever :D

No, it probably doesn't count as "FIRE", but that's ok with me :)

AdrianC

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Re: Revisiting the asset allocation question - The case for 100% stocks
« Reply #96 on: August 13, 2016, 09:05:53 AM »
The math for this works for me 100% of the time.  You can't create pie charts or graphs for emotion and that is the grenade pin as to why this allocation ends up failing for the majority of investors.  Honestly--I wholeheartedly agree with all of the data presented but where are the psychological formulas?  (Us programmers, engineers, accountants, etc., are good at creating efficient systems, but I've been in enough relationships to know my systems fail when presented with human reality.)

The math works.

For us:
Investments: Stocks and a few I-bonds bought many years ago at good interest rates.

Anchor: Paid for house, zero debt and some cash and a willingness to not pull money out of the investment portion until absolutely necessary.

We don't need bonds. The house is the security blanket.

IMHO, stocks will not give the returns many people are expecting. Bogle says returns might be something like 4% annually before inflation over the next ten years, and I think he could be right. And bonds will be worse than that.

spending the living room instead of bonds may be tough . i know our grocery will not take it .

It would have to be one seriously bad, multi-year bear market for us to spend all our cash, I-bonds and dividends. That said, in the 8 months since the post you dragged up I have gotten more interested in bonds, and currently have 20% in cash and short term bonds (BSV). That's about 8 years of living expenses.

One thing that puzzles me no end is when people have debt (mortgage) and own debt (bonds). The math seldom works out in that case.


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Re: Revisiting the asset allocation question - The case for 100% stocks
« Reply #97 on: August 13, 2016, 04:08:20 PM »
One thing that puzzles me no end is when people have debt (mortgage) and own debt (bonds). The math seldom works out in that case.

A mortgage is not easy to rebalance in and out of.
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mathjak107

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Re: Revisiting the asset allocation question - The case for 100% stocks
« Reply #98 on: August 14, 2016, 03:30:58 AM »
a 4% mortgage and returns on TLT at 18% ytd and 13% the last 3 years   is why .   bond returns are more about appreciation than interest .

when the tide shifts it may not be a great idea to have conventional bond funds but for now a mortgage is just another housing  expense and bonds are an investment .
« Last Edit: August 14, 2016, 03:33:04 AM by mathjak107 »

arebelspy

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Re: Revisiting the asset allocation question - The case for 100% stocks
« Reply #99 on: August 14, 2016, 03:35:52 AM »
a 4% mortgage and returns on TLT at 18% ytd and 13% the last 3 years   is why .   bond returns are more about appreciation than interest .

when the tide shifts it may not be a great idea to have conventional bond funds but for now a mortgage is just another housing  expense and bonds are an investment .

In this case, a mortgage is not "just another housing expense" (like property taxes, or repairs), but rather leverage.
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