Author Topic: Why would I be in anything other than 100% stocks?  (Read 49121 times)

brooklynguy

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Re: Why would I be in anything other than 100% stocks?
« Reply #100 on: February 04, 2015, 10:42:09 AM »
That worst-case nature is why we feel comfortable relying on 4% SWR studies, despite its ignorance of intrinsic values and future returns. The 4% SWR essentially counterbalances that ignorance by taking an extremely pessimistic approach.

And that is why 4% is considered "safe" even before the addition of extra layers of safety margin (such as flexibility to cut expenses or find supplemental sources of income, as James pointed out above).  After factoring in additional built-in safety margin, a planned 4% WR becomes absurdly safe, unless you believe either (or both) of two things:  (i) the future will be worse than the past, and/or (ii) you will incur unexpected expenses that force you to in fact use a higher-than-4% WR.

gluskap

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Re: Why would I be in anything other than 100% stocks?
« Reply #101 on: February 04, 2015, 11:09:56 AM »
If the cFIREsim calculator shows my financial position surviving every scenario based on a 100% allocation in stocks for the entirety of my life, is there any logical reason that I would move to a more conservative position after FIRE?

The reason to be more conservative is because your emotions almost certainly play a bigger part in your decision-making than they do for cFIREsim. Most people underestimate their likelihood of panic-selling during a stock-market crash, particularly if they have never experienced one (and given your age, you almost surely have not). If you sell during a crash, your actual wealth line will look incredibly worse than cFIREsim's robotically-created line. The main point of a bond allocation is to give you emotional comfort during the inevitable stock-market crashes, to prevent you from bailing out at the worst time.

If you can be absolutely sure that you will behave as robotically and unerringly as cFIREsim over the next 70 years of your life, then sure, 100% stocks is probably ok. Almost no one can behave like that though, and that's why 100% stocks is generally not recommended.

+1

Kaspian

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Re: Why would I be in anything other than 100% stocks?
« Reply #102 on: February 04, 2015, 11:32:22 AM »
In other words:  Possibly 4% of the population could successfully walk a tightrope between two skyscrapers.  ...Would you care to see if you're one of them?

brooklynguy

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Re: Why would I be in anything other than 100% stocks?
« Reply #103 on: February 04, 2015, 12:31:53 PM »
In other words:  Possibly 4% of the population could successfully walk a tightrope between two skyscrapers.  ...Would you care to see if you're one of them?

What does this mean?

I can understand what you were trying to say with your earlier "holding 100% stocks is like driving without a seatbelt" analogy (even though I think it is wrong, unless you meant that the "seatbelt"--i.e., the bond portion of your portfolio--is protecting you from panic-selling or incurrence of unexpected expenses, rather than from portfolio underperformance or likelihood of failure, but in the context of your post it sounded like the latter).

But I have no clue what you are trying to say with the tightrope-walking analogy.

aj_yooper

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Re: Why would I be in anything other than 100% stocks?
« Reply #104 on: February 04, 2015, 01:14:32 PM »
Here's how to reconcile the Cathy vs. Dodge debate:

Cathy is talking about the actual chances of retirement success (which has the problem of being impossible to predict).  Dodge is talking about the forecasted chances of retirement success using history as a guide (which has the problem of not necessarily being accurate).

If your portfolio value suddenly shrinks in half overnight due to market fluctuations, have your actual chances of retirement success suddenly gotten smaller?  Of course not.  But would you still be just as likely to be comfortable pulling the plug and declaring FIRE?  Of course not.

We use the historical research and history-based calculators to make predictions about sustainable withdrawal rates in the future.  This necessarily assumes that the past will to some extent predict the future, which we all know may or may not be true, but it's the best we have to go on.  When we say a 4% withdrawal rate has a 95% chance of success, we really mean that historically it was successful 95% of the time.  In that sense, the success rate does fluctuate with the market.  If your $1 million portfolio drops to $500k overnight, then your "chances of success" (as forecasted by history) of retiring at that moment have been cut in half, even though your actual chances of success have not.

Good summary of the differences, Brooklyn Guy! 

If OP is to retire tomorrow and has enough in his stash for a given SWR, then he has it done, won the game, got his nut covered, over the road, under the road, flat out, finished, QED.  So why would anyone gamble with a sure deal and go 100% equities?  Doesn't it make sense to put aside, say, at least, 5 or 10 (or more) years of money into bonds, as buckets to draw on?  As he does so, his AA tilts upwards, but he is still in a safer zone, c.f. Kitces.  https://www.kitces.com/blog/should-equity-exposure-decrease-in-retirement-or-is-a-rising-equity-glidepath-actually-better/ and a fine tune of the concept at:  https://www.kitces.com/blog/accelerating-the-rising-equity-glidepath-with-treasury-bills-as-portfolio-ballast/

"For the past 20 years, due both to the growing research on safe withdrawal rates, the adoption of Monte Carlo analysis, and just a difficult period of market returns, there has been an increasing awareness of the importance and impact that market volatility can have on a retiree's portfolio. Often dubbed the phenomenon of "sequence risk", retirees are cautioned that they must either spend conservatively, buy guarantees, or otherwise manage their investments to help mitigate the danger of a sharp downturn in the early years.

One popular way to manage the concern of sequence risk is through so-called "bucket strategies" that break parts of the portfolio into pools of money to handle specific goals or time horizons. For instance, a pool of cash might cover spending for the next 3 years, an account full of bonds could handle the next 5-7 years, and equities would only be needed for spending more than a decade away, "ensuring" that no withdrawals will need to occur from the portfolio if there is an early market decline.

Yet the reality is that strict implementation of a bucket strategy is more than just an exercise in mental accounting; it can actually distort the portfolio's asset allocation, leading to an increasing amount of equity exposure over time as fixed income assets are spent down while equities continue to grow. Yet recent research shows that despite the contrary nature of the strategy - allowing equity exposure to increase during retirement when conventional wisdom suggests it should decline as clients age - it turns out that a "rising equity glidepath" actually does improve retirement outcomes! If market returns are bad in the early years, a rising equity glidepath ensures that clients will dollar cost average into markets at cheaper and cheaper valuations; and if markets are good... well, clients won't have a lot to worry about in retirement anyway (except perhaps how much excess money will be left over at the end of their life)."
« Last Edit: February 04, 2015, 02:24:27 PM by aj_yooper »

James

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Re: Why would I be in anything other than 100% stocks?
« Reply #105 on: February 04, 2015, 02:20:14 PM »
In other words:  Possibly 4% of the population could successfully walk a tightrope between two skyscrapers.  ...Would you care to see if you're one of them?


Sure, what the hell. I would strap on a harness, clip it to the rope, and give it my best shot. Worst that could happen is I fall and the harness catches me.


But if this has something regarding the topic at hand I sure miss it...

brooklynguy

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Re: Why would I be in anything other than 100% stocks?
« Reply #106 on: February 04, 2015, 02:48:35 PM »

If OP is to retire tomorrow and has enough in his stash for a given SWR, then he has it done, won the game, got his nut covered, over the road, under the road, flat out, finished, QED.  So why would anyone gamble with a sure deal and go 100% equities?  Doesn't it make sense to put aside, say, at least, 5 or 10 (or more) years of money into bonds, as buckets to draw on?

The problem is how to know when you've accumulated enough to have "won the game."  The 4% rule-of-thumb relies on having significant equity exposure in you allocation.  If you've accumulated enough assets to support a ridiculously safe WR of, say, 1%, you can probably safely switch to an ultra-conservative allocation like 100% bonds or even 100% cash (alternatively, you can stick with significant equity exposure, "let it ride" and bequeath a massive fortune to your heirs or your charity of choice).  But for most of us accumulating enough assets to support such a low withdrawal rate is antithetical to the idea of early retirement -- it requires working longer than necessary.  So, instead, we retire once we've accumulated enough assets to support a more reasonable WR, like 4%, which requires holding a significant percentage of equities to generate the returns to support that WR.

ThatGuy701

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Re: Why would I be in anything other than 100% stocks?
« Reply #107 on: March 19, 2015, 08:14:00 AM »
Posting to follow.