Damn, Nords, 90% equities, eh? I'm such a pussy -- I wound down my equity exposure from 90 to 80 to 75 to 60 over the last 8-9 years, and in fact recently went to 55 on the basis of Buffet's "be fearful when others are greedy, and greedy when others are fearful" mantra. Keep thinking that I want to be somewhere between 60 and 75%, but waiting for a shake out before going all in again (market timing? I don't know).
Thanks! But I should mention that I have a military pension anchoring my expenses. It's the equivalent of the income from a portfolio of I bonds, so I can afford to put the rest of our investment portfolio in equities. We also keep the two years' expenses in cash to ride out the breathtaking volatility that those equities will experience during a recession.
William Bernstein's efficient frontier research shows that 80/20 is about the limit of the performance curve. 100/0 does not offer appreciably more return but it's a lot more risk (and volatility).
Buffett is pretty happy these days. The last time he was fearful was 1999, and the last time he was greedy was 2009. Instead of riding his coattails, perhaps it's easier to find the sweet spot in your own asset allocation that lets you sleep at night. Maybe it's 60/40 or maybe it's more dividend-paying stocks or maybe it's a mutual fund like Vanguard Wellesley that automatically rebalances for you. That's why Buffett says that most people should invest in index funds instead of trying to time the market.
I've always been torn between the two competing theories of how to treat a pension, i.e., as a portion of one's fixed income allocation, thus allowing one to be more aggressive with invested funds; or as a basis for being a lot more conservative because with the pension (and eventually SS), one doesn't need to be very aggressive with invested funds in order to cover one's financial needs.
I don't have a good answer to the dilemma of investing assets which you don't need. It's a stewardship question-- do you bury your extra money in a coffee can in the back yard, or do you fling it around to create even more money?
We ER'd with a bare-bones 4% SWR budget, and in the last 13 years our net worth has gone up while our expenses have stayed largely flat. I've responded to that by investing even more aggressively (angel investing in startups) but I've learned enough to know that I'm not going to do it for the rest of my life.
We've also donated the "excess" to charities but we've felt underwhelmed by our philanthropy. We haven't figured out that issue, either. I'd rather invest $10K in a startup that hires six people, does good work for a year or two, and then pivots or flames out. Our next-best idea is college scholarships, but I'd want a selection board to do the grunt work.
I guess I've tended toward the "what helps you sleep at night" philosophy, but a part of me thinks I'm being too conservative (though my goal of 6% return have been more than met the past 12 years (avg. return 9.67%)) and should just set it at 75/25 and be done with it.
That'll work.
I swear every time I read a post from Nords, I end up in a google cycle for at least an hour. Thank you Nords!
Do people generally keep the same AA between before and after FIRE? From Syd's post about the 4% rule, she talks about a 50/50 being the most conservative you would ever want to go. I guess you could have a 50/50 even before FIRE, it would just take a lot longer to get there?
You're welcome!
That's controversial and the research is still inconclusive. A Canadian analyst, Jim Otar, has suggested that beginning investors should pile up cash for a couple of years just to avoid getting savaged by a recession. After they'd built up a cash stash then they could start putting their paychecks toward their asset allocation.
The "human capital" theory of Moshe Milevsky is that you invest according to your career. If you're a professional football player or a Wall Street financial analyst (high earnings, short career, lots of unemployment) then you'd want to have an asset allocation high in bonds and cash. If you're a college professor (low earnings, long career, tenure) then you can afford to put your portfolio mostly into equities.
But you're right, a 50/50 AA before retirement would be a long haul. While you're working, it makes more sense to have a higher equity asset allocation (up to 80/20 or whatever lets you sleep comfortably at night) because you have a relatively reliable paycheck and an unemployment emergency fund.
A more recent theory by Wade Pfau is that retirees should adopt a more conservative asset allocation just before retirement in order to avoid a sequence-of-returns risk during the first decade of retirement. If you get through the first 5-10 years without a serious recession then you'd allow your equity asset allocation to have a "rising glide slope" during the rest of retirement.
This may all be very interesting research, but the fundamental issue is avoiding portfolio failure. The best way to prevent portfolio failure is to annuitize some of your retirement income for longevity insurance. Maybe that's "just" Social Security, or maybe you buy a single-premium immediate annuity for a bare-bones budget. (Even if it's not adjusted for inflation, SS will be.) Then you can be more aggressive with the rest of your portfolio in retirement, knowing that you have an 80% success rate on your 4% SWR while also having covered the 20% failure possibility with the annuity.
I'd say that a 50/50 equities/bonds portfolio is the lowest equity asset allocation you'd want to have in order to keep up with inflation. My parents-in-law are at 0% equities, 100% CDs & Treasuries and I can affirm that they are losing to inflation.