Author Topic: The case against 100% US stocks  (Read 15011 times)


  • Handlebar Stache
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Re: The case against 100% US stocks
« Reply #50 on: October 30, 2014, 02:39:23 PM »
The first scenario in the OP shows -30.32 as the worst year for the 3 fund portfolio, and -37.04 as the worst year for the 100% US stock portfolio.  This is with 0 contributions or withdraws, so that's simply what the portfolios gave on their own.  These same two portfolios were used in the catastrophe scenario when 100% US stocks went to 0, while the 3 fund portfolio retained 80% of it's value.

My apologies if I'm missing something obvious, is this comparing apples to oranges?  If someone looks at that and says "Oh that's no big deal at all!  The worst year was only 7% worse, I'll just go 100% US stocks and stay the course!", they likely wouldn't see the catastrophe scenario coming.

Ok.  No, that's an apples to apples comparison.  But it does still suffer from being a cherry-picked single-case example from the period in history perhaps most likely to produce these results (even though I know that's not what you intended).  Examining all of the historical data to see the probabilities based on all historical periods is a better approach.  As you said, it would be nice if cfiresim let you introduce the variable of international stock exposure.


  • Handlebar Stache
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Re: The case against 100% stocks
« Reply #51 on: October 30, 2014, 02:52:41 PM »
Long term bonds outperformed the market during this time, so that result isn't unexpected.  This is also why I don't think this website should be used for slice-and-dice portfolios.  You could just as easily justifying 10% Apple stock since Apple stock outperformed during this time.  That doesn't mean you should weight your portfolio towards Apple stock.
Stocks outperformed bonds during the 1972-1994 period, and needless to say they also outperformed gold. Nevertheless, it looks like LoganT would be better off trading 20% US Total Stock Market for 10% each long bonds and gold over this period. What I'm saying is negative- and non-correlation is your friend if you are withdrawing, that is the reason for any bond allocation.

I learned how to get a picture in! Edit: sort of.
1. Dodge
2. Logan T
3. Logan T with 20% of US TSM swapped out for 10% gold and bonds


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Re: The case against 100% US stocks
« Reply #52 on: October 30, 2014, 03:10:56 PM »
What if one withdraws the high interest rates from the 70s till they went back down to <5%?

My feelings are that we can't count on seeing those interest rates again. 4%-5% will be the norm.


  • Magnum Stache
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Re: The case against 100% stocks
« Reply #53 on: October 30, 2014, 04:09:05 PM »
It's fascinating how the math works out.  Despite the difference between the worst years only being 9%, the "catastrophe" portfolio in the original post has the 100% stock portfolio dropping to 0, while the 3 fund portfolio retains 80% of it's value:

*Snip picture for brevity*

That's why I made this thread, the math doesn't always work out like you'd expect it to.

You are right, but there are flaws in that math as well. First off, withdrawing $40,000 a year from a $700,000 is 5.7%. I don't think anyone can expect that to last. Secondly, I feel 100% stocks is only good during the accumulation phase or while you are withdrawing a small percentage (maybe 2-3%) from your portfolio. It would be very scary to be withdrawing that much from a 100% stock portfolio. In that case, the person may have to switch and add bonds for some stability.

But I really love these kind of discussions because if nothing else, it opens your eyes to different situations that may come up. It's good in an investment plan to think of different scenarios and write down what to do if they happen, to try to prevent panic in the future.

I don't think the 5.7 withdraw rate is a flaw, as much as it is an unfortunate circumstance.  Imagine you are 100% stocks, and a personal catastrophe hits.  You now need to withdraw $40,000 from your $700,000 portfolio.  Do you immediately switch to a 80/20 stock/bond portfolio?  If you don't expect this catastrophe to last more than a year, you probably wouldn't.  What if you're 5 years in, would you then switch to 80/20?  You know bonds make it harder to withstand a 5.7% (probably 6-7% now) withdraw rate, so you rationalize it would be best to stay 100% stocks.  The market is down, and you don't want to sell low, it's ok, you're sure you'll be entering the workforce soon enough, let's give it another few years.

Next thing you know you're portfolio is wiped out.  The behavioral factors will kill you.

So partially this scenario is not only built on someone needing to consistently maintain an unsustainable withdrawal rate? Don't you think you're stretching your scenarios a bit here? Why can't our person go find a job? Lower their expenses? Why do they have to be so inflexible for your scenario? Of course the behavioral factors will kill you if you keep walking forward into the fire without adjusting necessarily. Regardless I think the whole premise of this discussion is still flawed as it only looks at small slices and not broader time periods, assumes people will maintain similar AA's during different financial phases, and doesn't factor in the inherent nature of being flexible and mitigating these risks. I'm certain if I suddenly had a personal catastrophe which made my expenses jump for an indefinite time frame I'd certainly be revisiting my AA and my scenario in general.


  • Pencil Stache
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Re: The case against 100% US stocks
« Reply #54 on: October 31, 2014, 11:19:10 AM »
Tldr all the replies. Malkiel, that guy who inspired Bogle to open Vanguard, suggests bond % makeup of your portfolio as your age as a rough marker. I'm 33, I have 27%. Adjust as you age.