Author Topic: Should Stock/Bond and NOT Int/Small change as you get older?  (Read 3814 times)

heybro

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Should Stock/Bond and NOT Int/Small change as you get older?
« on: October 27, 2014, 03:35:04 AM »
Just to clarify, for the most part, is it the Stock to Bond ratio that should "only" in theory change as you get older?

For instance, if you have 30% of stocks in say international funds, as you get older, does this 30% OF STOCKS remain the same?

In other words, do people usually just increase in bonds and decrease in stocks (but maintain the same percentage of the types of stocks within).

OR, do they also shift stocks to less risky stocks (like get out of small caps).

?

GlassStash

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Re: Should Stock/Bond and NOT Int/Small change as you get older?
« Reply #1 on: October 27, 2014, 10:37:33 AM »
The general shift refers to stock/bond ratio. If you're a fan of your intra-equity ratio, I would sell the equities in order to keep that ratio.

Louisville

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Re: Should Stock/Bond and NOT Int/Small change as you get older?
« Reply #2 on: October 27, 2014, 10:42:20 AM »
I, for one, plan to keep my equity portion allocated as it currently is, even as it shrinks in relation to my bond portion.
See my Oct 23 post here:
http://forum.mrmoneymustache.com/investor-alley/what-is-your-asset-allocation/new/?topicseen#new

heybro

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Re: Should Stock/Bond and NOT Int/Small change as you get older?
« Reply #3 on: October 27, 2014, 10:41:25 PM »
OK COOL, so is keeping the same intra ratios the general consensus among experts?

The way I thought it was supposed to happen is that you'd move away from risky to safe.
Such that, when you were 80 let's say, you'd have like 80% bonds and 20% SP 500.  You would have zero small cap and zero international.


GGNoob

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Re: Should Stock/Bond and NOT Int/Small change as you get older?
« Reply #4 on: October 28, 2014, 11:32:08 AM »
I think it could make sense to shift your stock allocation from riskier stocks as you near retirement. However, I plan on keeping my stock allocation the same before and after retirement. But if I was going to shift away from riskier assets, here's an example of how I would do it.

Here's my current stock allocation:
35% VTI (Total US Stock)
35% VXF (Extended Market)
15% VXUS (International Stock)
15% VSS (International Small-Cap)

Lets say as I neared retirement, I wanted to have less exposure to small/mid-cap companies while keeping my domestic/foreign allocation at 70%/30%. I would come up with a plan and put it in my IPS. So I would maybe start 15 years before retirement and begin shifting 1% of VXF to VTI and 1% of VSS to VXUS. Then by the time I retired I would be at 70% VTI and 30% VXUS in my stock allocation.

This shift of your stock allocation could be going on while you are also lowering your overall stock allocation to purchase more bonds.

NP

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Re: Should Stock/Bond and NOT Int/Small change as you get older?
« Reply #5 on: October 28, 2014, 02:32:38 PM »
Shifting your allocation to less risky assets doesn't necessarily result in a less risky overall portfolio if at the same time you also decrease the diversification of the portfolio. The various stock categories discussed here are strongly but not completely correlated and there are studies that suggest that holding a combination of e.g. large and small cap stocks not only improves returns but also reduces volatility compared to holding large cap stocks only.

I would not change the ratios within my stock allocation in order to reduce risk unless I've carefully studied the likely outcome considering my specific circumstances and current portfolio. If this keeps you awake at night, keep in mind that as you decrease your overall stock allocation, the percentage of riskier stocks in your portfolio will become really small.

Kaspian

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Re: Should Stock/Bond and NOT Int/Small change as you get older?
« Reply #6 on: October 28, 2014, 02:35:25 PM »

In other words, do people usually just increase in bonds and decrease in stocks (but maintain the same percentage of the types of stocks within).


Yes, exactly.  Prudent advice is that the bond percentage allocation be roughly the same age as you.  The rest of the number to 100% is the same division as what you had before.  ...Of course, you won't hear that advice here because this saloon is filled with young gunslingers suffering from cheap whiskey and severe recency bias.  But I'm an investor, not a gambler, so I ignore the craps table at the other side of the room.  That said, I'm 43 and have 40% bond allocation.  ...I'll probably just up the allocation at age 45 and 50 to make the math simpler.

NP

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Re: Should Stock/Bond and NOT Int/Small change as you get older?
« Reply #7 on: October 28, 2014, 02:54:42 PM »
Prudent advice is that the bond percentage allocation be roughly the same age as you.
Even better advice is that the closer you are from either direction to starting your retirement, as in starting to withdraw money from your retirement savings, the less volatility you should have in your portfolio. The reason is that if you are unlucky enough start withdrawals in a bear market, you can easily decimate your assets if they drop too much together with the market.

It's been explained many times that there's little difference in the safe withdrawal rate if you're planning for a 30 year retirement or an infinitely long one. Since for most people it's quite impossible to predict the time of death, it follows that almost everyone should assume that their assets have to last forever and set their safe withdrawal rate accordingly. With such a high margin of safety, once your assets weathered the first few years (exactly how many depends on the market conditions) of retirement, they are likely to grow comfortably beyond what you need. From then on you'll be able to tolerate higher volatility even in retirement and can start increasing the allocation to stocks again.

heybro

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Re: Should Stock/Bond and NOT Int/Small change as you get older?
« Reply #8 on: October 28, 2014, 11:45:44 PM »
I think it could make sense to shift your stock allocation from riskier stocks as you near retirement. However, I plan on keeping my stock allocation the same before and after retirement. But if I was going to shift away from riskier assets, here's an example of how I would do it.

Here's my current stock allocation:
35% VTI (Total US Stock)
35% VXF (Extended Market)
15% VXUS (International Stock)
15% VSS (International Small-Cap)

Lets say as I neared retirement, I wanted to have less exposure to small/mid-cap companies while keeping my domestic/foreign allocation at 70%/30%. I would come up with a plan and put it in my IPS. So I would maybe start 15 years before retirement and begin shifting 1% of VXF to VTI and 1% of VSS to VXUS. Then by the time I retired I would be at 70% VTI and 30% VXUS in my stock allocation.

This shift of your stock allocation could be going on while you are also lowering your overall stock allocation to purchase more bonds.

So you are considering "small cap" to be risky and "international" to not be risky?
Even though you'd keep "total stock market," which has some small cap.
Maybe at heart you don't even view small to be risky, which means one should just not change them at all. ??  So many issues raised!

GGNoob

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Re: Should Stock/Bond and NOT Int/Small change as you get older?
« Reply #9 on: October 29, 2014, 07:17:36 AM »
I think it could make sense to shift your stock allocation from riskier stocks as you near retirement. However, I plan on keeping my stock allocation the same before and after retirement. But if I was going to shift away from riskier assets, here's an example of how I would do it.

Here's my current stock allocation:
35% VTI (Total US Stock)
35% VXF (Extended Market)
15% VXUS (International Stock)
15% VSS (International Small-Cap)

Lets say as I neared retirement, I wanted to have less exposure to small/mid-cap companies while keeping my domestic/foreign allocation at 70%/30%. I would come up with a plan and put it in my IPS. So I would maybe start 15 years before retirement and begin shifting 1% of VXF to VTI and 1% of VSS to VXUS. Then by the time I retired I would be at 70% VTI and 30% VXUS in my stock allocation.

This shift of your stock allocation could be going on while you are also lowering your overall stock allocation to purchase more bonds.

So you are considering "small cap" to be risky and "international" to not be risky?
Even though you'd keep "total stock market," which has some small cap.
Maybe at heart you don't even view small to be risky, which means one should just not change them at all. ??  So many issues raised!

First off, I would never change my stock allocation to be "less risky" as I near retirement. I was just bringing up an example. If anything, I'd just add bonds.

I probably used the wrong term here...instead of risky, I should use volatile. In my portfolio, I would expect VXF and VSS to be more volatile than VTI and VXUS. So if I was concerned with volatility, I would decrease my exposure to them. That would leave me with just VTI and VXUS, which would contain the market cap of small and mid-cap stocks.

heybro

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Re: Should Stock/Bond and NOT Int/Small change as you get older?
« Reply #10 on: October 29, 2014, 11:03:13 PM »
oh yes, all hypothetically speaking!  you rock!