What does 100% equities feel like?

[PencilMustache]

My wife and I have decided to go with a 100% allocation into equities (VTSAX) since we are convinced it makes the most Vulcan logic. However, I have been warned on this forum that the non-Vulcan aspect of forcing yourself to stay with 100% equities will be extremely tough and that not many people even on this forum would be able to stick with it.

I assume that there are plenty of people here who have lived through the housing bubble and maybe even the internet bubble, and I would like to get some feedback as to how it felt having 100% equities in those crashes. The cold data is plentiful on how your money does long-term, but what isn't clear is the experience of living through and in the middle of these busts.

[Louisville]

I just started adding bonds to my asset allocation in the last couple of years. So I was in 100% stocks during the tech bubble burst and the housing bubble burst. How did it feel? I didn't really notice. I don't plan on drawing down my nest egg for another decade at least, so I don't even keep track of my balances, I just re-balance my allocation.
Maybe when I get closer to actually drawing down I will start fretting about dips.

[solon]

I like your Vulcan analogy. It's a good one.

You have to completely remove all emotion from investing decisions. And if you actually succeed in doing that, then you won't feel anything at all. When the stock market crashed in 2007-2009, I was 100% in equities. The value of my portfolio was cut in half. And I said to myself, well, I expected stuff like this to happen from time to time, I'll just stick with the plan. Today, I'm really glad I stuck with the plan.

[brooklynguy]

I assume that there are plenty of people here who have lived through the housing bubble and maybe even the internet bubble, and I would like to get some feedback as to how it felt having 100% equities in those crashes. The cold data is plentiful on how your money does long-term, but what isn't clear is the experience of living through and in the middle of these busts.

My go-to recommendation for an excellent description of what it feels like to live through a market crash is the introduction of Dr. Doom's drawdown series, available here: 

http://www.livingafi.com/2014/05/drawdown-part-1-the-basics/

If you haven't personally lived through a crash, reading this is the next best litmus test to begin to approximate your true risk tolerance.

Also, keep in mind that the psychology differs when you are in the accumulation phase vs. the drawdown phase.  When you are still accumulating assets, it's easier to view a market meltdown as a buying opportunity and therefore a good thing or at least a mixed blessing.  But once you are living off your assets, I can only assume that it's much scarier to watch your portfolio shrink in half.   

[Heckler]

Until 8 months ago, I knew nothing other than a mutual fund sales lady was taking our money and putting it away for us.  I only looked at the account once a year when she visited and forced us to.  My wife was 100% equity, and still is.  By not looking at it, it doesn't feel like anything.

However now I know a lot more, have self directed access so check my balance every day.  I'm 90% equity, but plan to sell my wife's equity mutual funds and buy bonds so our combined allocation is 30% bonds.  Looking at bond returns, I hope that's the right plan. 

It's definitely more difficult to take emotion out once you take control of your future.

[TheOldestYoungMan]

I was working through the whole thing, but it felt like a gut punch.  I think I wouldn't be able to stomach it if I were living off that money.  So I expect that when I get to FIRE, I'll probably move at least a couple months, if not a whole year, of expenses into bonds.  I won't be FIRE until that's only 4% or less of my portfolio, so I figure it's a decent hedge.

When I first started working, I was saving 50% of my paycheck.  After it got to be a couple thousand dollars, I would log in once a week and sometimes see, "oh neat, I just earned 2 days pay in the market, that's like working 7 days this week" or "crap, I just lost a half day of pay!"

This is the wrong way to think about the investment.

When the "great recession" happened, I would log in and see that, year to date, I had lost an entire year's salary.

Luckily, I had some investment-minded coworkers who held my hand and made me really look at what I had lost.

Which was nothing.

Nothing is lost until you sell.  Nothing is gained until you sell.  Oh wait, dividends.

So now I don't actually look at the total dollar amounts anymore, I just look at the shares.  How many more shares do I own this week over last week?  Because that number only ever goes up.  And when the market is going down it goes up even faster!

It's a low information diet kind of a solution.

[REfinAnon]

I'm also basically 100% equities and sometimes worry about it.

I'm only 27 years old.

The thing I don't really understand about those who say I won't be able to take the next crash emotionally, is that if my portfolio is 80/20 instead, is the carnage really going to be that notably different?

Either way looking at your portfolio is going to make your stomach turn, and it's going to take mental fortitude not to do something stupid.

[andy85]

i know i've read some stuff from jim collins about how he is totally fine with it for somebody young and a fairly long investing period ahead of them

interesting read from him... http://jlcollinsnh.com/2012/04/19/stocks-part-ii-the-market-always-goes-up/

[PencilMustache]

We will be in the accumulation phase for probably only 8 or less more years (plan to retire by 32-33) so the reality of it is that we will be spending a lot longer in the drawing phase than in the accumulation phase. Our plan is to try to weather the dips by just almost never looking at our balance and just trusting in the simulations (while also saving up twice the amount we theoretically need to retire, giving us a 2% WR).

In cfiresim I see that over 30 years, we can expect it's lowest dip to be about 55%, and the stats say that it will dip >60% below initial 100% of the time, with a maximum number of such dips happening 3 times in a cycle.

i know i've read some stuff from jim collins about how he is totally fine with it for somebody young and a fairly long investing period ahead of them

We definitely don't have that ahead of us.

[skyrefuge]

I assume that there are plenty of people here who have lived through the housing bubble and maybe even the internet bubble, and I would like to get some feedback as to how it felt having 100% equities in those crashes.

For people who lived through those periods, it's important to know how much money they had at those times. Dr. Doom illustrates this pretty well, but your portfolio dropping 50% from $50k to $25k is an entirely different thing than it dropping from $1M to $500k. The first person sees that drop as inconsequential, because the money that they're adding to their stash each year from savings will quickly erase the loss. The second person sees the drop as hopeless; throwing another $25k onto the pile in a year (increasing the stash to $525k) seems meaningless.

I've never been 100% equities (more like 85%). In 2000-2003, I barely noticed since I had just started building my stash in 1999. I figured "eh, this sucks, I'm sure not getting the returns I was 'promised'!", but I didn't think of it any beyond that. At that point early retirement wasn't on my radar, so with no particular goal it didn't matter what my results were. In 2008-2009, I definitely noticed a lot more (net worth was ~$500k at the 2007 peak), though since I was still a good distance from my retirement goals, I just sadly shook my head when I heard of people selling all of their stocks. Now, with my stash over $1.2M, and retirement in reach, I imagine my stress would be significantly multiplied.

[skyrefuge]

Our plan is to try to weather the dips by just almost never looking at our balance and just trusting in the simulations

That seems both unwise and unlikely. The more I read some of the older, experienced Bogleheads, the more I hate that the portfolio-survival studies are called "Safe Withdrawal Rate" rather than "Safe Stash Size". Because it seems like 100% of pre-retirees get the idea that "x% of initial stash-size, per year, inflation-adjusted" is how they'll actually spend their money in retirement, while 0% of actual retirees have ever spent their money like that. It sounds like actual retirees (even those who know about SWRs) just use some ballpark, gut-feel, and feel free to spend a bit more after their portfolio has gone up, and spend a bit less after its gone down.

So if you're actually ignoring the value of your portfolio (which will be impossible to do, since the world will inform you when a crash is happening), you won't be able to make those real-life adjustments.

See The Taylor Larimore Method

(while also saving up twice the amount we theoretically need to retire, giving us a 2% WR).

Ah, ok, then you probably can ignore market, but that means you'll likely die with a mountain of unspent money (which may be your goal).

[brooklynguy]

What Dr. Doom's post nicely illustrates is that even the staunchest Vulcans among us are susceptible to the psychological tendency to believe that, when a major market crash occurs, this time is different.  And succumbing to that belief is how folks wind up self-sabotaging their own portfolio success.

Here's the inherent problem:  at the time you are living through a major market crash, it is impossible to know with certainty that this time really is not different.  It is only after the market has recovered and you have the benefit of hindsight that you can reassure yourself that staying the course was the right approach.  No matter how sophisticated of an investor you are and how much advance mental preparation you undertook to steel yourself against the inevitable crash that always loomed under the surface, once that crash rears its head the germ of an idea that maybe, just maybe, this time really is different will plant itself in your mind.  And once that idea takes root, it can take nickel-plated cast iron cojones to be able to cut it down and stay the course.

[gluskap]

I was 100% invested in stocks during these crises but it was in my 401k which I was just doing at the time the minimum for matching at 5%.  So I hardly ever looked at these accounts so I didn't even know if they were up or down since at the time retirement was the last thing on my mind since I didn't think I would retire until 65 so I knew I had a long time for those stocks to go back up.  Now however I want to retire earlier and I have maxed out my 401k contributions and also have a sizeable amount in a taxable account.  I plan on changing my asset allocation to something more reasonable like 80/20 or 75/25 to have less volatility.

[Gone Fishing]

...if my portfolio is 80/20 instead, is the carnage really going to be that notably different?

So true.

[brooklynguy]

...if my portfolio is 80/20 instead, is the carnage really going to be that notably different?

Senior Mustachian Dodge must be MIA today.  I was sure this post was going to draw him out to provide an impassioned argument (with plenty of fancy charts!) for why the ballast of even a modest bond allocation (like 20%) can provide a significant stabilizing effect.  But since he has not made an appearance in this thread, you can read one of his many previous extended explanations -- the latest one I am aware of is in this thread:

http://forum.mrmoneymustache.com/investor-alley/why-would-i-be-in-anything-other-than-100-stocks/

[Financial.Velociraptor]

I am probably an outlier here.  I don't think of my portfolio in terms of an equity/bond split but rather in terms of income-centric/growth-centric split.  I am about 90% "income centric."  Said income in the form of various dividend and non dividend distributions and options premiums covers all my spending needs.  I need never touch capital.  This I think should be the goal rather than trying to make a stock pile that is big enough to draw down (presumably no faster than it appreciates); to have productive assets that preclude the need to draw down.  The other 10% of my portfolio is mostly in insurance companies that pay little or no dividend.  I can periodically rebalance from their growth to increase my income producing bucket.

My point is, there are equities like convertibles, preferreds, MLPs (midstream assets), etc that behave very much like bonds but only bond-like.  My second point is, if your distributions are generally resistant to downturns, you don't give a rip if you have unrealized capital losses of 50% (or hundreds of thousands if you prefer.)  You can still pay the bills and wait out the market recovery.  I sleep well at night.

Side note: I like and hold NIO, a modestly leveraged municipal tax free bond fund.

[hodedofome]

If you can't handle losing half your money...two or three times in your life...then you shouldn't be invested in common stocks. - Charlie Munger

**This was actually my own words, he always says it more eloquently. Full interview here: https://www.youtube.com/watch?v=3WkpQ4PpId4

[iamlindoro]

I have found having 100% equities very easy to deal with after the first ~6 months, but I'm also still in the accumulation phase.  I really do love to see drops and corrections, even bigger ones, because time and again, the market comes back, and buying my way through the drop makes me lots of money.

The next time I anticipate it actually bothering me is when very close to retirement.  I really hope we don't have a major crash right before FI-- but I'm flexible enough to work another year or two, or switch to a job where I'm just earning enough for expenses, until it's back.

[chuckaluck]

I was in 100% equities for approximately 32 years --- 1980 to 2012.   During the entire time, I invested via dollar cost averaging into my retirement funds as well as my taxable accounts. I never thought about it much, except that I was convinced it was the way to go. Reading many books written by authors taking the long-term investing approach (Jack Bogle of Vanguard, for example) helped me to remain calm when markets tumbled. My only regret during the 32 year accumulation period was not having more cash during the market corrections, as I would have purchased even more shares.  In Dec 2012, I became FI at 58 years old and retired (actually semi-retired), and moved about 30% of my retirement fund into short term bonds. But when the market goes down by 10% from its current lofty value, I'll move 10% of bond money back into the market, if -20%, then 20% movement, etc and then wait for the recovery.  But I'll always keep a minimum of 70% in equities, even in my draw-down phase.

[nazar]

As you get closer to FI, you may find you have multiple accounts.  I have 4: Current company 401k, Rollover IRA, Roth IRA, and Taxable.  I think of these as buckets from which I will withdraw when I stop working, and as a result, the two buckets for late retirement have 100% equity, the other two buckets that will be tapped sooner have 30% and 15% bond funds respectively.  As I draw down I'll reevaluate the risk to remaining funds and make adjustments.  This gives me some short term protection for that first bucket and second bucket where it is needed and allows the long horizon funds to grow.  I've been through multiple crashes at different stages of accumulation and this is what allows me to sleep at night.  I know it isn't for everyone since we all have a different risk profile and are at different stages in the process, this is just how I choose to handle things as I get closer to the end game.

[Kmp2]

My husband had a fair size stash in all equities during the housing bust in 08-09, at the time we were shopping for a house. I was thinking how everything was on sale, and what a great time to buy. He managed not to sell anything, but he sure didn't have the confidence to do anything but sit tight through it all. My asset allocation was different, at 80:20, and a sizable cash down payment I was ready to buy, and there was so much available.

The best thing about an 80:20 split to me is that when things do crash and you rebalance you are selling the income portion and buying new shares at fire sale prices... It sure helps feed the recovery.

[bluecheeze]

My husband had a fair size stash in all equities during the housing bust in 08-09, at the time we were shopping for a house. I was thinking how everything was on sale, and what a great time to buy. He managed not to sell anything, but he sure didn't have the confidence to do anything but sit tight through it all. My asset allocation was different, at 80:20, and a sizable cash down payment I was ready to buy, and there was so much available.

The best thing about an 80:20 split to me is that when things do crash and you rebalance you are selling the income portion and buying new shares at fire sale prices... It sure helps feed the recovery.

This.  It is nice to have the ability to rebalance into a down market to further increase your gains on the way back up.

[cjottawa]

I can stomach volatility but everything I've read suggests that a 90/10 portfolio has always done better than a 100/0.

Further, Benjamin Graham advised to never go below 25% on any asset class.

As such, I question why anyone would be all in with 100% equity, especially 100% equity in a single country's stock market. At least diversify within that asset class and add an international component!

http://www.norstad.org/finance/risk-and-time.html

From that article:


To answer your question directly: "100% equity feels like it's ignoring a whole lot of information."

[Holyoak]

My only regret during the 32 year accumulation period was not having more cash during the market corrections, as I would have purchased even more shares.

Me too, and I guess my actions were pure market timing to the extreme in 08-09ish...  Buying CMI at $21-$25/share, DE at $37, Goodrich at $29, SWHC at $2.18...  I dumped as much as I had, when the whole world was saying USA is outa business.  Yeah right, it was like seeing an 80% off sale on essential items!  Never sold one share in any mutual fund either.  Been one hell of a ride over the last 30 years for me, and trying to "stay in my Vulcan mind" rather than "out of my Vulcan mind", has been beneficial.  Stay frosty folks.

[NorCal]

Coming from a finance background, I cringe every time I hear about someone going 100% in any asset class.  Remember, you are investing in a high risk asset class with no diversification.  Equities may have a high potential return, but this does not mean they will have the highest actual return.  Even in the long run.

Diversification is the only free lunch in investing.  It is the ONLY mathematically proven way to improve risk adjusted returns.

Remember, you can adjust your risk/return profile in many different ways.  You can add or subtract risk in many different ways.  If you just want the upside possibility of equities, how about putting 80% of your money into bonds and 20% of your money into out-of-the-money call options on SPY?  You'd have a ~20% downside, a massive upside, and will still be protecting the majority of your principle.  I don't advocate this portfolio, but it's a different way to think about it.

At an absolute minimum, put some diversified assets in there.  I personally use ZROZ (25yr+ zero coupon treasuries) as it has a high negative correlation to equities.  It is also ~50% more volatile than the S&P 500 (bonds aren't always less risky than stocks), so I can get a lot of diversification without much capital.  Compare a chart of your equity fund with ZROZ over the last few years, and you'll see why it makes sense to have both in the portfolio.  Particularly if you routinely re-balance.