stock/bond allocation in FIRE

[Sweet freedom]

22% equities, ~10% real estate, the rest in CDs and bonds. (more CDs than bonds) I am following the rising glide path suggestion by Wade Pfau. When I resigned from my job in 1/2015 at age 44, I rec'd a good chunk of cash from the buyout of my partnership in the investment mgmt firm. (1/3 of my net worth) I couldn't stomach slugging it into the equities market at current valuations in the 7th year of a bull market. I realize I am risking a much nicer retirement 20 years from now, but I just don't want to be forced back into the job market at my age.

Hi Sweet freedom, thanks for sharing. does this mean you're looking to buy into dips over time to increase your equity exposure? I'm also struggling to convince myself to put more money in equities now at current valuations.

Yes, I am going to DCA some money this week and monthly forward...

[dude]

100% fixed income (CDs, preferred stocks, GICs) for me, not dealing with risk of equities.

That's fine, so long as you recognize that you are assuming a different risk, namely, that the buying power of your account will be eroded year upon year by inflation and you may run out of money.  Here's a good real-world example of how poorly a 100% fixed income portfolio has fared over the past 20 years, as compared with other mixed portfolios:

http://www.retireearlyhomepage.com/reallife15.html

[Shane]

Maybe Warren Buffett might be able to convince you? Here's a recent letter he sent to his shareholders:

Our investment results have been helped by a terrific tailwind. During the 1964-2014 period, the S&P 500 rose from 84 to 2,059, which, with reinvested dividends, generated the overall return of 11,196% shown on page 2. Concurrently, the purchasing power of the dollar declined a staggering 87%. That decrease means that it now takes $1 to buy what could be bought for 13’ in 1965 (as measured by the Consumer Price Index).

There is an important message for investors in that disparate performance between stocks and dollars. Think back to our 2011 annual report, in which we defined investing as “the transfer to others of purchasing power now with the reasoned expectation of receiving more purchasing power – after taxes have been paid on nominal gains – in the future.”

The unconventional, but inescapable, conclusion to be drawn from the past fifty years is that it has been far safer to invest in a diversified collection of American businesses than to invest in securities – Treasuries, for example – whose values have been tied to American currency. That was also true in the preceding half-century, a period including the Great Depression and two world wars. Investors should heed this history. To one degree or another it is almost certain to be repeated during the next century.

Stock prices will always be far more volatile than cash-equivalent holdings. Over the long term, however, currency-denominated instruments are riskier investments – far riskier investments – than widely-diversified stock portfolios that are bought over time and that are owned in a manner invoking only token fees and commissions. That lesson has not customarily been taught in business schools, where volatility is almost universally used as a proxy for risk. Though this pedagogic assumption makes for easy teaching, it is dead wrong: Volatility is far from synonymous with risk. Popular formulas that equate the two terms lead students, investors and CEOs astray.

It is true, of course, that owning equities for a day or a week or a year is far riskier (in both nominal and purchasing-power terms) than leaving funds in cash-equivalents. That is relevant to certain investors – say, investment banks – whose viability can be threatened by declines in asset prices and which might be forced to sell securities during depressed markets. Additionally, any party that might have meaningful near-term needs for funds should keep appropriate sums in Treasuries or insured bank deposits.

For the great majority of investors, however, who can – and should – invest with a multi-decade horizon, quotational declines are unimportant. Their focus should remain fixed on attaining significant gains in purchasing power over their investing lifetime. For them, a diversified equity portfolio, bought over time, will prove far less risky than dollar-based securities.

[faramund]

More on time scale, this time from "Stocks for the Long Run", by Siegal.

He has stock, bond and T-bill returns from 1802-2012. He reports the following real annualised figures (I haven't included the bond figures.. they are always in between stocks and T-bills)

Over 1 year, the worst stock return he found was -38.6%, T-bills were -15.6%.
Over 2 years, the worst stock return was -31.7, T-bills -15.1
5 years, stocks worst -11.9, T-bills -8.3%
10 years, stocks worst -4.1, T-bills -5.1%.

Once you reach 20 years, stocks have always gained money, T-bills worst was still -3%.

In a sense, this is the whole story about stocks/bonds. Short term, stocks are riskier, medium-long, T-bills and bonds are riskier.

[lordmetroid]

60% Mid Cap Blend,
20% 10 Year Treasury
20% Gold

http://portfoliocharts.com/portfolio/pixel/
Very nice CAGR, low volatility and best of all, I have all these necessary investment vehicles available to me in Sweden.

[Reader]

50% Mid Cap Blend,
25% 10 Year Treasury
25% Gold

http://portfoliocharts.com/portfolio/pixel/
Very nice CAGR, low volatility and best of all, I have all these necessary investment vehicles available to me in Sweden.

Hiya lordmetroid, are you a Swede? is there any reason that you have essentially 100% of your FIRE investment based denominated in USD with no home bias? i'm also curious about your considerations of FX risk since your living expenses are in Krona.

[Reader]

Yes, I am going to DCA some money this week and monthly forward...

all the best and stay the course.. huge dip so far in Jan..

[lordmetroid]

Hiya lordmetroid, are you a Swede? is there any reason that you have essentially 100% of your FIRE investment based denominated in USD with no home bias? i'm also curious about your considerations of FX risk since your living expenses are in Krona.

Sure am a Swede and of course I use swedish investment vehicles, except for gold as gold is always evaluated in USD anyways.

[4tify]

I haven't left work yet, but I'm right around my FI baseline. I'm a little older (48) and I can't bear the thought of seeing my nest egg drop drastically so I'm at 75/25. I include in my "25" the equity I have in a rental property. Would love to know people's thoughts on that.

However, now that I have my baseline FI I feel like I can take on more risk going forward. My plan is to invest in any additional amounts in 100% equities and/or pay off rental property from here on out. I feel like the equity path is kind of like what Wade Pfau has talked about.

I have no idea how much money I'll earn between here & death and I'm not much of a math guy, but this feels pretty good to me.

Thoughts?

[Reader]

Hiya lordmetroid, are you a Swede? is there any reason that you have essentially 100% of your FIRE investment based denominated in USD with no home bias? i'm also curious about your considerations of FX risk since your living expenses are in Krona.

Sure am a Swede and of course I use swedish investment vehicles, except for gold as gold is always evaluated in USD anyways.

ah ok. i was asking because you were using the portfoliocharts which models returns based on vanguard mutual funds that are US based. that was why i assumed you had all investments in the US stock market for 50% Mid Cap Blend and US T-bills for 25% 10 Year  Treasury.