Author Topic: Why would I be in anything other than 100% stocks?  (Read 44821 times)

brooklynguy

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Re: Why would I be in anything other than 100% stocks?
« Reply #50 on: February 03, 2015, 02:11:12 PM »
I sound like a broken record but "winners rotate".  Most crazy graphs show returns based on a buy-and-hold strategy instead of a rebalancing one.  Why would you not take advantage of diversification?  A one-asset investment strategy has never been particularly smart or clever.  You can drive without a seatbelt and trust yourself to never get in an accident, but why would you do that?   (See attached. I have yet to hear anyone refute the data in a way that made sense.)

The cfiresim results that we've been talking about include rebalancing and allow you to gauge the historical performance of different asset allocations, including periodic rebalancing in the case of allocations with mixed asset classes.  Read through the "100% stock forever" threads linked to at the beginning of this thread for extended discussions of why a single-asset class investment strategy can be considered "smart or clever".  The short answer, as already discussed in this thread, is that holding 100% stocks over extended time periods historically has produced equal or near-equal (which one depends on the exact variables for things like expense ratios) success rates and wildly higher portfolio ending values that allocations that include bond exposure.  But, in spite of this, a compelling reason not to hold 100% stocks is that we are not robots and when the shit hits the fan we are likely to abandon reason, panic and sell low.

All your chart shows is that in any given year a different asset class or sub-class will emerge as the highest-performing one for that year.  It does not automatically follow that a mixed or diversified asset allocation will perform better over extended time periods (what it will do, however, is smooth out volatility).

nereo

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Re: Why would I be in anything other than 100% stocks?
« Reply #51 on: February 03, 2015, 02:23:38 PM »
[snip]...However, I believe this research assumed that the cash reserve would always be replenished once it was exhausted, unlike your proposal where the markets need to cover by some threshold percentage before the reserve gets replenished.
exactly - my strategy is to only replenish when the markets have returned above a certain percentage and only if necessary. 
so far the only way i've found of doing this is through a rather clunky excel sheet of my own making where i tracking the running average returns of the SP and simulate two portfolios, one all SP500, the other the 'dynamic' one.  Right now I'm limited by my own programming abilities, but preliminary results are encouraging.

Regardless, my holdings in bonds won't ever exceed 10%, and I fully except that the biggest advantage my be that it helps my own sanity.
"Do nothing" may be the easiest advice, but the hardest to follow when everyone else around you is going mad.  Sometimes just have something to do, even if it is slightly less than the most optimal thing to do, is better than being left to your own stupidity.


dungoofed

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Re: Why would I be in anything other than 100% stocks?
« Reply #52 on: February 03, 2015, 02:24:37 PM »
Your approach sounds similar to the strategy of holding a cash buffer to get through bear markets, which generally results in worse performance and higher failure rates (see the research described in this article, for example:  https://www.kitces.com/blog/research-reveals-cash-reserve-strategies-dont-work-unless-youre-a-good-market-timer/), except the drag effect on your performance shouldn't be as bad with bonds as with cash (since they are generally higher-performing assets).

But the extended bear market example discussed in the Kitces article demonstrates how you could be worse off using your buffer strategy if you plan to replenish the buffer.  If you experience a return sequence on your equity portfolio of -5%, -10%, -20% in the three years immediately following ER, you will have exhausted your bond reserve in years 1 and 2 and then be selling two years of expenses' worth of equities in year 3, leading to a lower average sale price than if you had simply sold one year's worth of equities each year.

You can offset the drag to an extend with T-bills instead of a wad of cash.

Actually there are quite a few assumptions the Kitces article made which are less than ideal. Also, holding huge wads of cash is a proven strategy that corporations have used over the decades to purchase other companies at fire-sale prices. Berkshire Hathaway is the obvious example.

brooklynguy

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Re: Why would I be in anything other than 100% stocks?
« Reply #53 on: February 03, 2015, 03:31:04 PM »
Also, holding huge wads of cash is a proven strategy that corporations have used over the decades to purchase other companies at fire-sale prices. Berkshire Hathaway is the obvious example.

Holding cash as "dry powder" to purchase assets at fire-sale prices is also known as "market timing" and is very unlikely to be successful strategy (to say the least).

James

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Re: Why would I be in anything other than 100% stocks?
« Reply #54 on: February 03, 2015, 03:44:41 PM »
I am 100% stocks. I don't much care why it might be right for others to have less than 100% stocks. That is their call and I don't judge them. But I do think they can expect less return over time unless they are very careful to rebalance appropriately and are still mostly stocks. I don't want to rebalance, I don't care about volitility, I have good job security, I have a long time before I expect to withdraw anything, I don't scare easy including 2008, I very much like simplicity, etc. Sure, I might find a reason to change allocation at some point, and am always open to rational reasons to do so. But for now I am 100% stock and comfortable with that.
So yes, there are reasons to not be in 100% stocks for certain individuals, but I don't think there is a reason not to be 100% stocks that applies to everyone.

nereo

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Re: Why would I be in anything other than 100% stocks?
« Reply #55 on: February 03, 2015, 03:59:20 PM »
Also, holding huge wads of cash is a proven strategy that corporations have used over the decades to purchase other companies at fire-sale prices. Berkshire Hathaway is the obvious example.

Holding cash as "dry powder" to purchase assets at fire-sale prices is also known as "market timing" and is very unlikely to be successful strategy (to say the least).
I realize you were addressing dungoofed, but to be clear I'm talking about a small portion of bonds, not cash.  I read the kitces article with a lot of interest, and I'm going to keep thinking about it.  But a very small position and the fact that it would be held in securities, NOT cash, make it a bit different.  If i find anything earthshattering in my simulations i'll let you know.

brooklynguy

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Re: Why would I be in anything other than 100% stocks?
« Reply #56 on: February 03, 2015, 04:58:31 PM »
Yes, I realize your proposed strategy uses bonds instead of cash which as I said earlier should reduce the drag effect, but really it's the setting of the recovery threshold for replenishing that potentially makes your strategy much stronger (after all cash can be thought of as a low rate bond).  Moreover, even the pure cash buffer strategy isn't necessarily a bad thing; you're not trading away that much performance or chances of portfolio success, and you're getting an important psychological benefit that will keep you from panicking (exactly like having some bonds in your allocation in general as we've been discussing in this thread).  I believe Nords uses a form of cash buffer in his withdrawal strategy.

Do keep us posted on what you learn in your modeling.

dungoofed

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Re: Why would I be in anything other than 100% stocks?
« Reply #57 on: February 03, 2015, 05:17:24 PM »
In my view, there are only three reasons to hold anything less than a 100% stocks when you have a sufficiently long investment horizon:

1.  As others have said above, to have an emotional security blanket to cling to to prevent you from sabotaging your own investment plan and panic-selling during a market crash (this is the best reason, in my opinion).

2.  If you believe the future may be worse than any of the worst investment periods in the past.

3.  If your portfolio is so large that lower-performing assets are beyond any reasonable doubt sufficient to support your expenses (i.e., "you can stop playing, because you've already won the game").

Or if you believe you may have unexpected expenses that force you to draw down more than your intended withdrawal rate, but that's really doubting the assumption about the length of the investment time horizon rather than arguing for a different investment allocation once a sufficiently long time horizon has been assumed.
+1. very well summarized ! When I was young and starting out I used to think exactly the same way as OP. Whenever I saw a risk/return graph plotting different portfolios and showing the 100% share portfolio as the highest risk and highest return option, I always thought to myself why would any rational long-term investor make any other choice. Over the years I figured out the answers, as listed above. You really need to be self aware and understand your risk tolerance (genuinely) to make sure you can stick with your chosen plan.

Hi Brooklynguy - I was just wondering, what would be your advice to someone who had a 100% stocks portfolio but lost their job in the 2008 downturn (as many did) and had burnt through their emergency money despite working a few part time jobs over the period?

okonumiyaki

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Re: Why would I be in anything other than 100% stocks?
« Reply #58 on: February 03, 2015, 05:17:48 PM »
So you intend to rent forever?  (if 100% stocks)  Must admit I am comfortable with my plan to buy property outright when I retire.  Sure, stocks might return higher than rent, but the reduction in risk looks worth it (not needing to move if landlord requests etc.)

Plan to be 20-25% of net worth in property

nereo

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Re: Why would I be in anything other than 100% stocks?
« Reply #59 on: February 03, 2015, 05:53:27 PM »
So you intend to rent forever?  (if 100% stocks)  Must admit I am comfortable with my plan to buy property outright when I retire.  Sure, stocks might return higher than rent, but the reduction in risk looks worth it (not needing to move if landlord requests etc.)
yes, because if the landlord forces you to leave you won't ever find another place ::eyeroll::
lots of reasons to be a perma-renter, including geographical flexibility, higher returns, no maintenance worries, etc.

Also, i think many here consider their home part of their net worth, but not part of their asset allocation so long as it doesn't generate revenue.  Yes it can be looked at both ways.

YoungInvestor

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Re: Why would I be in anything other than 100% stocks?
« Reply #60 on: February 03, 2015, 06:09:54 PM »
People don't seem to understand that the value of bonds can go down the drain too.


If rates on 30 years treasury bills got up to 5%, their value would be ridiculously low compared to their current level. That's why I don't want to get into bonds now. Rates can't possibly go much further down (unless you believe negative interest is possible for a while), while they have plenty of historical room upwards.

I guess that leaves cash.

Dodge

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Re: Why would I be in anything other than 100% stocks?
« Reply #61 on: February 03, 2015, 06:11:08 PM »
How will you feel when your account goes from $900,000 (fire in less than a year), to $700,000 in two months.  You were counting down the days till fire, and now that day seems years away.  $200,000 just "gone".  Years of hard work down the drain.

This doesn't make any sense. If your sticker net worth changed from $900,000 to $700,000, your "FIRE" date has not changed. It's still the same. The sticker value of your account changing does not mean your level of wealth has changed.

The fire date as described in the MrMoneyMustache blog, is the day the 4% rule applies to your portfolio.  If you have $1,000,000 and your expenses are $40,000, you can fire.  If it takes one portfolio an extra 5 years to reach $1,000,000, then you have delayed your fire date by 5 years.  If you have $900,000, and are saving $100,000 a year, you are expected to reach your fire date in under a year.  If your portfolio drops to $700,000, your expected fire date has changed.

The sticker value of your account changing does not mean your level of wealth has changed.

Your net worth is calculated based on the current market value of your assets.  If your assets becomes less valuable, then yes your level of wealth has changed.

brooklynguy

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Re: Why would I be in anything other than 100% stocks?
« Reply #62 on: February 03, 2015, 06:15:24 PM »
Hi Brooklynguy - I was just wondering, what would be your advice to someone who had a 100% stocks portfolio but lost their job in the 2008 downturn (as many did) and had burnt through their emergency money despite working a few part time jobs over the period?

I'm not sure if your question was meant to be rhetorical, but that's where the following part of the quoted language from my post comes in:

"Or if you believe you may have unexpected expenses that force you to draw down more than your intended withdrawal rate, but that's really doubting the assumption about the length of the investment time horizon rather than arguing for a different investment allocation once a sufficiently long time horizon has been assumed."

If you may need to access the funds in the short-term (whether because of job loss or desire to buy a house or any other reason), then a 100% stock allocation is not prudent.  You're gambling as to whether you'll get lucky and liquidate your stocks at a time when they're high or get unlucky and have to sell during a down market.  That's why it can make sense to have an emergency fund if your job security isn't air tight -- the sacrifice in returns is the premium you pay for the insurance protection against an unexpected need for cash.

Dodge

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Re: Why would I be in anything other than 100% stocks?
« Reply #63 on: February 03, 2015, 06:16:13 PM »
People don't seem to understand that the value of bonds can go down the drain too.


If rates on 30 years treasury bills got up to 5%, their value would be ridiculously low compared to their current level. That's why I don't want to get into bonds now. Rates can't possibly go much further down (unless you believe negative interest is possible for a while), while they have plenty of historical room upwards.

I guess that leaves cash.

I have copied my response from a similar question below.  I'd rather not reinvent the wheel every time someone advocates market-timing in the bond market :)

-------------

Everyone knows (well almost everyone) not to market time the stock market.  The bond market is no different.  My standard "market-timing bond" response is below, but I'll add one more chart, just for fun :)

You might not see it, but this is market timing.  Ignore the noise, the news reports, and the doomsday articles.  You can't guess where the market will go next.  Let's review what happened to bonds the last time interest rates soared:



Interest rates spiked pretty high from 1975 through 1981 (the peak).  Let's see what happened to intermediate term bonds during this time (orange line):



A $10,000 deposit grew almost 60%!

This is why we say ignore the noise.

------

Now let's look at another point on the chart, the two decades from 1950-1970, where interest rates tripled from their record low.  What happens to bonds then?



Unfortunately Morningstar's Intermediate bonds graph doesn't start until 1955, so I added "High Yield Bonds", a category which should be more negatively impacted by a rise in interest rates.  Looking at the chart, we see:
  • High Yield Bonds more than tripled during this time.  With a $10,000 deposit growing to $31,775.33
  • Intermediate Bonds more than doubled during this time, despite not starting until about 1955.  A $10,000 deposit grew to $23,435.50

Dodge

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Re: Why would I be in anything other than 100% stocks?
« Reply #64 on: February 03, 2015, 06:41:48 PM »
How will you feel when your account goes from $900,000 (fire in less than a year), to $700,000 in two months.  You were counting down the days till fire, and now that day seems years away.  $200,000 just "gone".  Years of hard work down the drain.

This doesn't make any sense. If your sticker net worth changed from $900,000 to $700,000, your "FIRE" date has not changed. It's still the same. The sticker value of your account changing does not mean your level of wealth has changed.

The fire date as described in the MrMoneyMustache blog, is the day the 4% rule applies to your portfolio.  If you have $1,000,000 and your expenses are $40,000, you can fire.  If it takes one portfolio an extra 5 years to reach $1,000,000, then you have delayed your fire date by 5 years.  If you have $900,000, and are saving $100,000 a year, you are expected to reach your fire date in under a year.  If your portfolio drops to $700,000, your expected fire date has changed.

The sticker value of your account changing does not mean your level of wealth has changed.

Your net worth is calculated based on the current market value of your assets.  If your assets becomes less valuable, then yes your level of wealth has changed.

MMM does not use the term "FIRE" as far as I can remember, so "FIRE date" is not a concept you can cite to the blog.

However, the only reasonable interpretation of the term would be the date when you can retire and expect to live indefinitely off your investments. That date is not affected by the sticker value of your assets changing.

Suppose you own a business that is generating $100,000 per year in after-tax profits and today somebody offers you $1 million for that business. Tomorrow that person retracts his offer and is now only offering $800,000. No one else is offering you any more. Has your FIRE date changed between today and yesterday? Of course not, you still have $100,000 per year in after-tax profits.

The determination of when you can retire -- and hence your level of wealth -- depends on what you actually own, not a magic number determined by the sticker value of your assets.

In the case of stocks, the sticker value of your account changing should not in itself cause you to revise your FIRE date, unless you believe that that change is because equity returns will actually be lower in the future.

In other words, your retirement date should be primarily determined by the intrinsic value of the assets you own, not the sticker value. We mostly use the sticker value because it's easter to ascertain, but for the purpose of this discussion, the intrinsic value is what matters.

When you're selling your portfolio at market value for income, market value is the only value that matters.

dungoofed

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Re: Why would I be in anything other than 100% stocks?
« Reply #65 on: February 03, 2015, 06:54:01 PM »
Hi Brooklynguy - I was just wondering, what would be your advice to someone who had a 100% stocks portfolio but lost their job in the 2008 downturn (as many did) and had burnt through their emergency money despite working a few part time jobs over the period?

I'm not sure if your question was meant to be rhetorical, but that's where the following part of the quoted language from my post comes in:

"Or if you believe you may have unexpected expenses that force you to draw down more than your intended withdrawal rate, but that's really doubting the assumption about the length of the investment time horizon rather than arguing for a different investment allocation once a sufficiently long time horizon has been assumed."

If you may need to access the funds in the short-term (whether because of job loss or desire to buy a house or any other reason), then a 100% stock allocation is not prudent.  You're gambling as to whether you'll get lucky and liquidate your stocks at a time when they're high or get unlucky and have to sell during a down market.  That's why it can make sense to have an emergency fund if your job security isn't air tight -- the sacrifice in returns is the premium you pay for the insurance protection against an unexpected need for cash.

Hi Brooklynguy - thanks for the response. So we have established that "100% stocks" actually means "100% stocks, except for Emergency Money." Now, I might be a little slow but I'm still not understanding what advice you are giving to the person who has lost their job in the 2008 downturn and burnt through their emergency money. 100% stocks portfolio. I assume you're not saying "know in advance when you are likely to be layed off, and for how long, and determine your Emergency Fund based on that."

FFA

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Re: Why would I be in anything other than 100% stocks?
« Reply #66 on: February 03, 2015, 07:05:02 PM »
People don't seem to understand that the value of bonds can go down the drain too.

If rates on 30 years treasury bills got up to 5%, their value would be ridiculously low compared to their current level. That's why I don't want to get into bonds now. Rates can't possibly go much further down (unless you believe negative interest is possible for a while), while they have plenty of historical room upwards.

I guess that leaves cash.

This is exactly where i'm at too. As per Buffett's 2012 article, bonds should be about risk free return, but at current prices all you get is return free risk.

And yes, I know it's market timing, which I agree is not a good idea usually. But I think sometimes you have very abnormal events, and the 2008 financial crisis, followed by this balance sheet recession / deleveraging and central bank ultra expansionary monetary policy, is such a case. To me, this is not a 7-10 year cycle, it's like a 80-100 year event (refer to the ray dalio economic machine video if you haven't seen it, worth a watch). I could be wrong of course. But as someone who has never held bonds, I don't think now is a prudent time to start. I will continue to hold my defensive allocation substantially in cash for the time being.

Yes, I realize your proposed strategy uses bonds instead of cash which as I said earlier should reduce the drag effect, but really it's the setting of the recovery threshold for replenishing that potentially makes your strategy much stronger (after all cash can be thought of as a low rate bond). 

Personally, I see the distinction between cash vs a low rate bond. Maybe under "normal" circumstances these can be more or less interchangeable, but I am wary of the current times. As per YoungInvestor's first line "the value of bonds can go down the drain too." The FT article yesterday gave a rule of thumb, for a 1% rise in yield on a 10 year bond you will see a 10% decrease in value. I expect to see 10% or more moves in my growth assets, but not my defensive ones.

In another thread I was suggested to look into corporate bonds instead of treasuries. Still pondering this but my thinking so far it's still the same asset class and same underlying risk. I think if you look at most pricing models for a corporate bond it will just start with the price of a treasury and add the cost of credit insurance on the issuing company.

Anyway, for those who have been in bonds for the long haul, I'm sure you will continue to do well if you stick with it and rebalance. But for newbies considering getting started in bonds, some caution might be warranted until interest rates and central bank balance sheets return to conventional norms.

Dodge

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Re: Why would I be in anything other than 100% stocks?
« Reply #67 on: February 03, 2015, 07:21:02 PM »
This is exactly where i'm at too. As per Buffett's 2012 article, bonds should be about risk free return, but at current prices all you get is return free risk.

And yes, I know it's market timing, which I agree is not a good idea usually. But I think sometimes you have very abnormal events, and the 2008 financial crisis, followed by this balance sheet recession / deleveraging and central bank ultra expansionary monetary policy, is such a case. To me, this is not a 7-10 year cycle, it's like a 80-100 year event (refer to the ray dalio economic machine video if you haven't seen it, worth a watch).

Despite the data showing that bond funds have increased in value the last few times interest rates rose dramatically, it feels like this time is different? Like there's been a turning point, a division between an old era and a new era, and therefore past history is no longer a guide to the future?  You're realizing this only after reading a nothing-like-this-has-ever-happened-before, heralds-a-new-era news event?

Again, to any newbies in the thread.  This is why it's so hard to stay the course.

Dodge

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Re: Why would I be in anything other than 100% stocks?
« Reply #68 on: February 03, 2015, 07:37:52 PM »
How will you feel when your account goes from $900,000 (fire in less than a year), to $700,000 in two months.  You were counting down the days till fire, and now that day seems years away.  $200,000 just "gone".  Years of hard work down the drain.

This doesn't make any sense. If your sticker net worth changed from $900,000 to $700,000, your "FIRE" date has not changed. It's still the same. The sticker value of your account changing does not mean your level of wealth has changed.

The fire date as described in the MrMoneyMustache blog, is the day the 4% rule applies to your portfolio.  If you have $1,000,000 and your expenses are $40,000, you can fire.  If it takes one portfolio an extra 5 years to reach $1,000,000, then you have delayed your fire date by 5 years.  If you have $900,000, and are saving $100,000 a year, you are expected to reach your fire date in under a year.  If your portfolio drops to $700,000, your expected fire date has changed.

The sticker value of your account changing does not mean your level of wealth has changed.

Your net worth is calculated based on the current market value of your assets.  If your assets becomes less valuable, then yes your level of wealth has changed.

MMM does not use the term "FIRE" as far as I can remember, so "FIRE date" is not a concept you can cite to the blog.

However, the only reasonable interpretation of the term would be the date when you can retire and expect to live indefinitely off your investments. That date is not affected by the sticker value of your assets changing.

Suppose you own a business that is generating $100,000 per year in after-tax profits and today somebody offers you $1 million for that business. Tomorrow that person retracts his offer and is now only offering $800,000. No one else is offering you any more. Has your FIRE date changed between today and yesterday? Of course not, you still have $100,000 per year in after-tax profits.

The determination of when you can retire -- and hence your level of wealth -- depends on what you actually own, not a magic number determined by the sticker value of your assets.

In the case of stocks, the sticker value of your account changing should not in itself cause you to revise your FIRE date, unless you believe that that change is because equity returns will actually be lower in the future.

In other words, your retirement date should be primarily determined by the intrinsic value of the assets you own, not the sticker value. We mostly use the sticker value because it's easter to ascertain, but for the purpose of this discussion, the intrinsic value is what matters.

When you're selling your portfolio at market value for income, market value is the only value that matters.

A little bit of nuance is required here, Dodge.

If your plan is that on the day you retire, you will enter a sell order to liquidate your entire portfolio at market value and then live off cash for the rest of your life, then yes, the sticker value of your account is the sole determinant of whether you can retire.

That is not a good plan.

The dramatic statements about market value changing from, say, $700,000 to $500,000 overlook the fact that you haven't "lost" anything unless you actually sell. Suppose you need to sell $28,000 to cover your expenses for the year. At that point, you have indeed locked in $11,200 of losses -- however, that is well within rounding error in the long term, because in the long term the market value of your portfolio will be approximately equal to its intrinsic value.

If you doubt the latter proposition, it would be irrational to invest in stocks at all. As in, if you don't believe that in the long term, the market value of your assets will approximate their intrinsic value, you must believe that you can predict "the crash" and liquidate before it. That is a foolhardy belief. So if you are investing in stocks at all, you must accept that we can rely on the market value to approximate the intrinsic value in the long term. So the small losses you take in a down market are not a big deal in the long run.

However, the real situation is even rosier than the above, because in real life, you wouldn't need to sell at all. Instead, you would just make use of a credit line secured by your assets. Then you don't need to lock in any losses at all.

That is the same reason I see no point in an "emergency fund". The correct solution is to use credit, not to sell assets.

This does not refute my position.  The Trinity Study, and every retirement calculator based on it (FireCalc, Cfiresim...etc) determined the 4% safe withdrawal rate using historical data, based on the market value of the starting portfolio.  If you FIRE at $700,000 with $40,000 in expenses, that's a 5.7% withdrawal rate, which is deemed unsafe.  It doesn't matter if you believe the intrinsic value of the portfolio is actually $1,000,000, statistically you have a portfolio with a high rate of failure.

If your advocating this scenario as being safe, because you can take out a loan to cover your living expenses until the portfolio reaches the value you believe it to be worth ($1,000,000), that doesn't seem very prudent.  I'd have to see some studies/simulations before I believed it.

goodrookie

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Re: Why would I be in anything other than 100% stocks?
« Reply #69 on: February 03, 2015, 07:44:12 PM »
You should be dedicating 50% of your portfolio on long term options (LEAP). With all the leverages, you can easily earn up to 40% of your investment per year.

brooklynguy

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Re: Why would I be in anything other than 100% stocks?
« Reply #70 on: February 03, 2015, 08:28:05 PM »
Hi Brooklynguy - thanks for the response. So we have established that "100% stocks" actually means "100% stocks, except for Emergency Money." Now, I might be a little slow but I'm still not understanding what advice you are giving to the person who has lost their job in the 2008 downturn and burnt through their emergency money. 100% stocks portfolio. I assume you're not saying "know in advance when you are likely to be layed off, and for how long, and determine your Emergency Fund based on that."

No, we have established that everyone needs to ascertain their own personal risk tolerance and priorities.  Everything is a tradeoff.  If your goal is to retire as soon as possible and your temperament will allow you to stay the course during downturns, 100% stock allocation is your best bet, but you are assuming the risk that you may have to tap your stocks in the event of job loss.  If you'd rather have protection against job loss, you should have some conservative assets in your allocation, but you're doing so at the cost of some return.  Once you FIRE, job loss is no longer a concern, but you still need to perform the same type of analysis for the possibility of major unexpected expenses.  I don't understand what point you are trying to make.

innerscorecard

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Re: Why would I be in anything other than 100% stocks?
« Reply #71 on: February 03, 2015, 08:38:47 PM »
Therefore, basing your retirement date purely on the sticker value of your portfolio is irrational.

It's irrational for a certain point of view, but what else would be the result when people invest blindly regardless of valuation? That's what regularly contributing to index funds is, after all.

FFA

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Re: Why would I be in anything other than 100% stocks?
« Reply #72 on: February 03, 2015, 09:14:49 PM »
This is exactly where i'm at too. As per Buffett's 2012 article, bonds should be about risk free return, but at current prices all you get is return free risk.

And yes, I know it's market timing, which I agree is not a good idea usually. But I think sometimes you have very abnormal events, and the 2008 financial crisis, followed by this balance sheet recession / deleveraging and central bank ultra expansionary monetary policy, is such a case. To me, this is not a 7-10 year cycle, it's like a 80-100 year event (refer to the ray dalio economic machine video if you haven't seen it, worth a watch).
Despite the data showing that bond funds have increased in value the last few times interest rates rose dramatically, it feels like this time is different? Like there's been a turning point, a division between an old era and a new era, and therefore past history is no longer a guide to the future?  You're realizing this only after reading a nothing-like-this-has-ever-happened-before, heralds-a-new-era news event?

Again, to any newbies in the thread.  This is why it's so hard to stay the course.

Hi Dodge, many thanks for all your data and guidance , I do appreciate it ! even though I might have a different view of what's best for my circumstances, which I have tried my best to explain.

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Re: Why would I be in anything other than 100% stocks?
« Reply #73 on: February 03, 2015, 09:17:17 PM »
Dodge, let me put this another way to make my point better.

Suppose the world is currently behaving in a highly irrational fashion such that the market value of assets is varying wildly every day. You are considering retiring any day now. Here is what the market value of your portfolio was on each day of the last week:

Monday: $1,000,000
Tuesday: $500,000
Wednedsay: $700,000
Thursday: $600,000
Friday: $800,000
Saturday: $1,200,00
Sunday: $600,000


Here is my claim: Assuming your portfolio consists a broad index fund, then regardless of which day in the last week you chose to pull the plug and retire, your chance of successful retirement would be the same within rounding error, despite the dramatic difference in your portfolio value.

Do you disagree with that?

I don't know what the actual intrinsic value of this example portfolio is. But whatever it is, it probably hasn't actually fluctuated wildly during this week, so your chance of a successful retirement has also not been affected, to within rounding error.

Therefore, basing your retirement date purely on the sticker value of your portfolio is irrational.

When you're selling your portfolio at market value for income, market value is the only value that matters, because market value is what determines your sequence of returns risk.  The Trinity Study was specifically created to avoid this, based on the market value of the starting portfolio.  If you have another study which can reliably calculate the intrinsic value of a portfolio, and uses that to recommend a safe withdrawal rate which avoids sequence of returns risk, that would be a fun discussion (but please create a new thread).  As it stands now, a person's FIRE date is determined by the 4% rule, which is based on the portfolio's market value.

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Re: Why would I be in anything other than 100% stocks?
« Reply #74 on: February 03, 2015, 09:29:07 PM »
This is exactly where i'm at too. As per Buffett's 2012 article, bonds should be about risk free return, but at current prices all you get is return free risk.

And yes, I know it's market timing, which I agree is not a good idea usually. But I think sometimes you have very abnormal events, and the 2008 financial crisis, followed by this balance sheet recession / deleveraging and central bank ultra expansionary monetary policy, is such a case. To me, this is not a 7-10 year cycle, it's like a 80-100 year event (refer to the ray dalio economic machine video if you haven't seen it, worth a watch).
Despite the data showing that bond funds have increased in value the last few times interest rates rose dramatically, it feels like this time is different? Like there's been a turning point, a division between an old era and a new era, and therefore past history is no longer a guide to the future?  You're realizing this only after reading a nothing-like-this-has-ever-happened-before, heralds-a-new-era news event?

Again, to any newbies in the thread.  This is why it's so hard to stay the course.

Hi Dodge, many thanks for all your data and guidance , I do appreciate it ! even though I might have a different view of what's best for my circumstances, which I have tried my best to explain.

No problem FFA. :)  If you end up going with CDs for the fixed-income portion of your portfolio you'll be just fine.  Especially at those Australia rates!

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Re: Why would I be in anything other than 100% stocks?
« Reply #75 on: February 03, 2015, 09:32:36 PM »

I don't know what the actual intrinsic value of this example portfolio is. But whatever it is, it probably hasn't actually fluctuated wildly during this week, so your chance of a successful retirement has also not been affected, to within rounding error.

Therefore, basing your retirement date purely on the sticker value of your portfolio is irrational.

Cathy, which model do you typically use to determine the intrinsic value of a stock?

Dodge

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Re: Why would I be in anything other than 100% stocks?
« Reply #76 on: February 03, 2015, 09:35:24 PM »
Dodge, let me put this another way to make my point better.

Suppose the world is currently behaving in a highly irrational fashion such that the market value of assets is varying wildly every day. You are considering retiring any day now. Here is what the market value of your portfolio was on each day of the last week:

Monday: $1,000,000
Tuesday: $500,000
Wednedsay: $700,000
Thursday: $600,000
Friday: $800,000
Saturday: $1,200,00
Sunday: $600,000


Here is my claim: Assuming your portfolio consists a broad index fund, then regardless of which day in the last week you chose to pull the plug and retire, your chance of successful retirement would be the same within rounding error, despite the dramatic difference in your portfolio value.

Do you disagree with that?

I don't know what the actual intrinsic value of this example portfolio is. But whatever it is, it probably hasn't actually fluctuated wildly during this week, so your chance of a successful retirement has also not been affected, to within rounding error.

Therefore, basing your retirement date purely on the sticker value of your portfolio is irrational.

When you're selling your portfolio at market value for income, market value is the only value that matters, because market value is what determines your sequence of returns risk.

I already responded to that argument above. Unless you are selling your entire portfolio at market value on the day you retire, market value on the day you retire alone does not control your chance of success at retirement.

You do not need to be able to calculate the intrinsic value of a portfolio to know that this is true. So long you accept that stocks are assets that have an intrinsic value (as opposed to their value being totally random), then the sticker value of your portfolio is not the sole determinant of when you can retire.

To attach a mystical significance to the market value of your portfolio on the day you retire is actually a form of market timing, which is normally discouraged on this forum.

In effect, you are claiming that if you can time your retirement at a market peak, your chance of a successful retirement will be higher than if you retired one week earlier when your portfolio was worth 50% as much. That is wrong and also the kind of thinking that probably leads to "one more year" syndrome.

Yes, the Trinity study, and every retirement calculator based on it, says this.  Your chance of a successful retirement will be higher if you start out with a higher portfolio.

innerscorecard

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Re: Why would I be in anything other than 100% stocks?
« Reply #77 on: February 03, 2015, 10:23:35 PM »
So long you accept that stocks are assets that have an intrinsic value (as opposed to their value being totally random), then the sticker value of your portfolio is not the sole determinant of when you can retire.

One of your key premises is mistaken.

When you mechanically invest in index funds regardless of valuation, you do not accept that. To people who do that, the value truly is random. So the sticker value of your portfolio is the sole determinant.

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Re: Why would I be in anything other than 100% stocks?
« Reply #78 on: February 03, 2015, 10:25:23 PM »
My theory on this is it won't happen here because of demographics. White people will become a minority by 2060 and there will be 3 Hispanic people for every 4 White people. I believe White people as the driver of growth in the US have stagnated. But Hispanic people by and large are coming here to pursue better opportunities, which generally includes buying more stuff. Ultimately I think the US will not face stagnation like Japan because another wave of immigration will fuel the fires of growth. That's my crude analysis. I'll keep the diversified allocation in mind though for stagnating growth and read up on that.

http://www.pewresearch.org/next-america/
[/quote]

Japan also has a really bad aging population issue and they're highly nationalistic, so they weren't exactly welcoming immigrants to the extent that we do...

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Re: Why would I be in anything other than 100% stocks?
« Reply #79 on: February 03, 2015, 10:28:42 PM »
Hi Brooklynguy - thanks for the response. So we have established that "100% stocks" actually means "100% stocks, except for Emergency Money." Now, I might be a little slow but I'm still not understanding what advice you are giving to the person who has lost their job in the 2008 downturn and burnt through their emergency money. 100% stocks portfolio. I assume you're not saying "know in advance when you are likely to be layed off, and for how long, and determine your Emergency Fund based on that."

No, we have established that everyone needs to ascertain their own personal risk tolerance and priorities.  Everything is a tradeoff.  If your goal is to retire as soon as possible and your temperament will allow you to stay the course during downturns, 100% stock allocation is your best bet, but you are assuming the risk that you may have to tap your stocks in the event of job loss.  If you'd rather have protection against job loss, you should have some conservative assets in your allocation, but you're doing so at the cost of some return.  Once you FIRE, job loss is no longer a concern, but you still need to perform the same type of analysis for the possibility of major unexpected expenses.  I don't understand what point you are trying to make.

Ok maybe the part I have misunderstood is where you said this:

Quote
In my view, there are only three reasons to hold anything less than a 100% stocks when you have a sufficiently long investment horizon:

1.  As others have said above, to have an emotional security blanket to cling to to prevent you from sabotaging your own investment plan and panic-selling during a market crash (this is the best reason, in my opinion).

2.  If you believe the future may be worse than any of the worst investment periods in the past.

3.  If your portfolio is so large that lower-performing assets are beyond any reasonable doubt sufficient to support your expenses (i.e., "you can stop playing, because you've already won the game").

Or if you believe you may have unexpected expenses that force you to draw down more than your intended withdrawal rate, but that's really doubting the assumption about the length of the investment time horizon rather than arguing for a different investment allocation once a sufficiently long time horizon has been assumed.

I read it as "there are only three reasons to hold anything less than a 100% stocks when you have a sufficiently long investment horizon" and then you listed four cases (I'm including that last paragraph because essentially it's a fourth reason). Have I missed something?


FFA

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Re: Why would I be in anything other than 100% stocks?
« Reply #80 on: February 03, 2015, 10:29:50 PM »
Hi Dodge, many thanks for all your data and guidance , I do appreciate it ! even though I might have a different view of what's best for my circumstances, which I have tried my best to explain.

No problem FFA. :)  If you end up going with CDs for the fixed-income portion of your portfolio you'll be just fine.  Especially at those Australia rates!
yeah I probably should've clarified when I say cash, I mean a high interest saving account (in Australia these fetch 3.5-4%, although maybe slightly less after the RBA cut cash rate by 0.25% yday). I'm not stashing it under the bed :) Definitely I will look at splitting some into "term deposits" / CDs as you'd suggested, to at least have some fixed rate, not all floating. thanks again!

innerscorecard

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Re: Why would I be in anything other than 100% stocks?
« Reply #81 on: February 03, 2015, 10:32:10 PM »
The most important reason not to hold 100% stocks would be that you have sufficient personal expertise or some other edge in other investment types so that you personally would get better returns there. Like arebelspy with real estate. Or many other people with their own private, local businesses.

okonumiyaki

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Re: Why would I be in anything other than 100% stocks?
« Reply #82 on: February 03, 2015, 10:43:34 PM »

Now I want you to consider a slightly less trivial case.

Suppose that on January 1, 2015, Bill has $1,000,000 in assets but he's a pretty conservative guy so he decides to work for another two years. After this point, Bill never sells any assets. He does not rebalance or tamper with anything. None of his assets pay dividends or make other distributions.

During those two years, he saves another $200,000 and uses it to buy more investments.

On January 1, 2017, it's finally time for Bill's retirement, but due to market fluctuations, his portfolio is only worth $1,000,000 (in 2015 dollars) despite the two extra years of work!


Based on all your arguments in this thread, both the 2015 Bill and the 2017 Bill would have the same chance of a successful retirement, since they would both be beginning their retirements with $1,000,000 in 2015 dollars.

That conclusion would be incorrect. The 2017 Bill obviously has a higher chance of a successful retirement because he owns more assets. It is highly unlikely he could possibly be worse off, or only as well off, as the 2015 Bill, because he owns strictly more assets.

I claim that is obvious, and it alone is enough to disprove all of your arguments fixated on the final value of the portfolio.

Do you disagree with that Dodge, or do you accept that the 2017 Bill is in a better position to retire than the 2015 Bill would have been, if they had commenced their retirements in 2017 and 2015 respectively?

2017 Bill is a better position because he has two years less of life left, so less chance of running out of cash...

If you own 100,000 USD of stock at 100 USD a share, and they have a 2:1 share split, do you now own double the amount of assets?

innerscorecard

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Re: Why would I be in anything other than 100% stocks?
« Reply #83 on: February 03, 2015, 10:48:49 PM »
If you own 100,000 USD of stock at 100 USD a share, and they have a 2:1 share split, do you now own double the amount of assets?

No, because the fraction of the company that you own is still the same after the split. You own the same amount of assets and will receive the same fraction of earnings as before.

DavidAnnArbor

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Re: Why would I be in anything other than 100% stocks?
« Reply #84 on: February 03, 2015, 11:02:07 PM »
For me having a specified % portion of my portfolio allocated to bonds meant I could buy stocks index funds during the 2008/2009 crash to bring the asset allocation back in line. And then conversely as the stocks rose I had to reallocate some back to bonds. Additional savings helped in this regard as well.

My fear about stocks is the Nikkei 225 graph of the last 30 years, or the NASDAQ graph of the last 20 years. Of course, to answer my own fear, I just diversify the stock portion as much as possible.

Deflationary secular stagnation could also play a role in poor stock performance. Hopefully, governments will spend more money and help boost the economy, even if it involves deficit spending. The increased government spending however will generate increased tax revenues, and then there might not even be an increase in deficits.

innerscorecard

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Re: Why would I be in anything other than 100% stocks?
« Reply #85 on: February 03, 2015, 11:14:10 PM »
About a century ago all publicly traded common stocks were seen as speculative. Only bonds were seen as prudent investments. Obviously that was too extreme a view, and we have improved on that view with the benefit of experience. But the view that stocks are safe investments for the long-term is classically always only remembered in bull markets. And the hotter the market, the safer stocks seem.

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Re: Why would I be in anything other than 100% stocks?
« Reply #86 on: February 03, 2015, 11:34:32 PM »
It's an interesting idea Cathy. To know the intrinsic value you almost would have to be able to accurately predict just how well the earnings of the companies are going to be in the future. If earnings are equivalent to the idea of rent on a home, then you would have to predict in the future what a company like Apple would earn in 2016, or five years from now. How else would you know what the intrinsic value is of the stocks you own? The market value would then eventually align itself with the intrinsic value, and therefore your 4% rule is based on what you believe is the theoretical intrinsic value of a portfolio of stock investments.

innerscorecard

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Re: Why would I be in anything other than 100% stocks?
« Reply #87 on: February 03, 2015, 11:40:52 PM »
I should clarify that it's not my intent to express a view on whether 100% stocks is a good idea. I am not 100% invested in stocks.

I merely wanted to dispute the model that retirement planning consists of working exactly until the fair market value of your assets exceeds a particular magic number. It seems I have not managed to convince anyone of that though.

For the average index investor with no knowledge or training in fundamental analysis, there is no other proxy for worth than price. I don't see what that's so hard for you to get.

FFA

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Re: Why would I be in anything other than 100% stocks?
« Reply #88 on: February 04, 2015, 12:20:14 AM »
I read it as "there are only three reasons to hold anything less than a 100% stocks when you have a sufficiently long investment horizon" and then you listed four cases (I'm including that last paragraph because essentially it's a fourth reason). Have I missed something?
this is the way I understand it. Furthermore I personally would expect the vast majority of people to fall into at least one or more of these four categories and therefore they should NOT be holding 100% stocks.

IMHO, it will only be a small minority that have the capability, temperament, discipline and risk tolerance to ultimately succeed in 100% stocks and actually capture the theoretical increment in long-term returns. For the majority of us mere mortals its better to be diversified !
« Last Edit: February 04, 2015, 12:22:09 AM by FFA »

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Re: Why would I be in anything other than 100% stocks?
« Reply #89 on: February 04, 2015, 04:32:19 AM »
I merely wanted to dispute the model that retirement planning consists of working exactly until the fair market value of your assets exceeds a particular magic number. It seems I have not managed to convince anyone of that though.
On the contrary, I am finding your intrinsic value arguments quite thought provoking and convincing. The only thing I really struggle with how to actually work out what the intrinsic value of an investment portfolio is at any point in time.

dungoofed

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Re: Why would I be in anything other than 100% stocks?
« Reply #90 on: February 04, 2015, 04:36:49 AM »
I read it as "there are only three reasons to hold anything less than a 100% stocks when you have a sufficiently long investment horizon" and then you listed four cases (I'm including that last paragraph because essentially it's a fourth reason). Have I missed something?
this is the way I understand it. Furthermore I personally would expect the vast majority of people to fall into at least one or more of these four categories and therefore they should NOT be holding 100% stocks.

IMHO, it will only be a small minority that have the capability, temperament, discipline and risk tolerance to ultimately succeed in 100% stocks and actually capture the theoretical increment in long-term returns. For the majority of us mere mortals its better to be diversified !

Ok I read it the other way round and feel like a bit of a fool now. People losing their jobs is highly correlated with stocks plummeting, which to me is a massive reason to be diversified away from stocks if you have a job. But in fact Brooklynguy is saying that there are very few cases where 100% stocks allocation is actually a good idea.

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Re: Why would I be in anything other than 100% stocks?
« Reply #91 on: February 04, 2015, 06:31:07 AM »
Haven't read the whole thread but just wanted to say I get what you are trying to explain Cathy. It would be a shame if we get a massive stock market bubble that pushed every company up to ridiculous prices and everyone on these forums retired based on a 4% withdrawal rule.

You have to consider whether your assets are capable of generating sufficient return to cover your expenditure and inflation with hopefully some buffer to cover risk. Relying on some arbitary rule seems stupid to me but this 4% rule seems to get a lot of following.

brooklynguy

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Re: Why would I be in anything other than 100% stocks?
« Reply #92 on: February 04, 2015, 07:01:22 AM »
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.

innerscorecard

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Re: Why would I be in anything other than 100% stocks?
« Reply #93 on: February 04, 2015, 07:52:34 AM »
The issue is that there's no one way to value stocks. Because the effective risk-free rate right now is so low, you could saw stocks are quite cheap. Or you could say they are hideously expensive, based on CAPE. Which way of thinking is right is only useful in retrospect.

The same goes for other heuristics used in evaluating a whole index. You could use dividend yield, but that's flawed because it doesn't take into account buybacks. You could use earnings yield, but that's not as accurate as free cash flow, or EBIT or EBITDA, depending on the firm. Valuing companies is hard. Valuing the whole market is exponentially harder. That's the whole reason index investing tells you to basically buy blind, on faith.

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Re: Why would I be in anything other than 100% stocks?
« Reply #94 on: February 04, 2015, 08:23:04 AM »
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.
Here Here! We're mixing cold, hard math with human behavior. Sounds like a nerdy mid-day soap opera1 :)

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Re: Why would I be in anything other than 100% stocks?
« Reply #95 on: February 04, 2015, 08:28:37 AM »
Haven't read the whole thread but just wanted to say I get what you are trying to explain Cathy. It would be a shame if we get a massive stock market bubble that pushed every company up to ridiculous prices and everyone on these forums retired based on a 4% withdrawal rule.

You have to consider whether your assets are capable of generating sufficient return to cover your expenditure and inflation with hopefully some buffer to cover risk. Relying on some arbitary rule seems stupid to me but this 4% rule seems to get a lot of following.

For normal people I see your point, if they followed the 4% rule and retired on a bubble that might affect their long term chances of success. But not for those who are like MMM. If I had 100% stock and retired right before a crash, I could pick up whatever job I could and cover my living expenses. I would probably already have cash on hand to cover a year or two, I wouldn't be 100% stocks at that point, but even if I did, I could drop my expenses to the bone, pick up some odd jobs either based on my career of simply whatever I could find, and I would hope to actually put more into the market during the crash if possible. Simply put, following the "arbitary" 4% rule doesn't force blindness to changes in the market, and retiring doesn't force you to avoid all paying work. Shit happens, we adapt, regardless of what rules we follow.

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Re: Why would I be in anything other than 100% stocks?
« Reply #96 on: February 04, 2015, 08:56:19 AM »
Haven't read the whole thread but just wanted to say I get what you are trying to explain Cathy. It would be a shame if we get a massive stock market bubble that pushed every company up to ridiculous prices and everyone on these forums retired based on a 4% withdrawal rule.

You have to consider whether your assets are capable of generating sufficient return to cover your expenditure and inflation with hopefully some buffer to cover risk. Relying on some arbitary rule seems stupid to me but this 4% rule seems to get a lot of following.

For normal people I see your point, if they followed the 4% rule and retired on a bubble that might affect their long term chances of success. But not for those who are like MMM. If I had 100% stock and retired right before a crash, I could pick up whatever job I could and cover my living expenses. I would probably already have cash on hand to cover a year or two, I wouldn't be 100% stocks at that point, but even if I did, I could drop my expenses to the bone, pick up some odd jobs either based on my career of simply whatever I could find, and I would hope to actually put more into the market during the crash if possible. Simply put, following the "arbitary" 4% rule doesn't force blindness to changes in the market, and retiring doesn't force you to avoid all paying work. Shit happens, we adapt, regardless of what rules we follow.
Agreed. I'm basing my FIRE numbers off of $40,000 a year in expenses, knowing I could cut that to $20,000-25,000 if I really had to. That also doesn't take into account whatever paltry amount of SS is left by the time I "retire" or any rental income from a townhouse that I may choose to keep and rent. And then there's always another job if I absolutely had to. Multiple layers of security there.

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Re: Why would I be in anything other than 100% stocks?
« Reply #97 on: February 04, 2015, 09:18:55 AM »
I did not read all the post but to put to but it very simply a person getting close to retire (your definition of "close" is going to very) you are worried about sequence of return risk.

skyrefuge

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Re: Why would I be in anything other than 100% stocks?
« Reply #98 on: February 04, 2015, 10:06:57 AM »
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).

Yep. The reason we rely on 4% SWR studies is not because we trust them to accurately predict our financial paths. We rely on them because we don't have anything better. The 4% SWR is an extremely rough rule-of-thumb. It would certainly be better to choose our FIRE date based on the intrinsic value of our portfolio and its future returns, but since we know neither of those things, we're forced to fall back to SWR studies. To paraphrase Churchill: "The 4% SWR is the worst form of retirement-readiness predictor, except for all the rest"

Furthermore, it's critical to remember that the 4% SWR is a worst-case number, not an average-case number.

Say that at a market peak, Adam had a $1M portfolio and Betty had a $2M portfolio (so Betty unarguably has much more "intrinsic value"). Adam retires with $1M and uses a 4% WR. A month later, the market crashes, and Betty's portfolio is cut in half to $1M. She then retires, also with $1M and uses a 4% WR. Cathy would say that Adam is in a worse position than Betty, and she's right. But according to the 4% SWR rule-of-thumb, neither of their plans would fail.

However, that doesn't mean the 4% SWR calculations are unaware of the difference between the two. In a cFIREsim graph, Adam's line would likely be one that ends with a portfolio value near 0, while Betty's would likely be one that soars up-and-up-and-up and she dies with way more than the $1M she started with.

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.
« Last Edit: February 04, 2015, 10:22:41 AM by skyrefuge »

Eric

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Re: Why would I be in anything other than 100% stocks?
« Reply #99 on: February 04, 2015, 10:39:24 AM »
To paraphrase Churchill: "The 4% SWR is the worst form of retirement-readiness predictor, except for all the rest"

Hahahaha!  Awesome!