The Money Mustache Community
General Discussion => Welcome and General Discussion => Topic started by: Bateaux on September 29, 2017, 07:25:47 AM
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I need to move some money out of stock funds. I'm a buy and hold type. Yes it hurts to see hundreds of thousands of dollars disappear in a crash, then so very slowly return. Sitting here at 49 and NW of about 2M, I should be more diversified since I'm Fire Class of 2019. I just can't seem to be able to throw in the towel and buy bonds/bond funds. I've pulled up Vanguard Total Bond Index many times on the Buy screen. I'm holding about 100k in cash and may buy 10k of Admiral class just to get started. Bond returns just suck. Exflyboy really got me thinking hard about moving some stash to bonds.
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Then don't.
It "hurts" to see paper losses when the stock market goes down. We all agree there. Would you do something stupid and sell while down though? Because if not, there is not reason you HAVE to have bonds. GoCurryCracker is all stocks.
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I might ask GCC about it. Been following them for years.
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I'm 31 with FIRE quite a ways off. I'm 100% stocks as well, but considering adding 5-10% in bonds.
JLCollins suggests that there is evidence out there that holding a small amount of bonds can actually INCREASE your returns over the long run, provided you periodically (annually or so) re-balance your portfolio. Forcing you to buy low and sell high as Sun Hat is saying.
If anyone has any more info / links on this topic I and I'm sure others would be very interested!
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IMO, if you're within two years of your FIRE date, it's time to start setting up some cash flow for the withdrawals. You have to weigh the foregone potential appreciation in stocks against the risk of a crash either delaying FIRE or resulting in a sequence of return risk.
Personally, I've never been a fan of bonds and don't actually have any myself. Then again, I certainly called the last @20 years wrong -- interest rates have consistently dropped since I got married (my first house was at almost 9%), and every time they'd drop, I'd think, ok, that's it, they've got to go up now. My staying anchored to what interest rates were when I was growing up -- seeing 10-12% as "normal" -- meant I missed very significant bond returns. Of course, I still think that interest rates have to go up now, because there's not much lower they can really go. Because, you know, this time it's different and all that.
But all of that is the wrong way to look at it. You are not looking at bonds for return on investment, you are looking at bonds for return of investment. The nice thing about bonds is, if you buy a bond that is going to be worth $100 in 3 years, you know that 3 years from now you are guaranteed to get $100. At the one-year mark, it may be worth $50 on the open market; at the two-year mark it may be worth $150 on the market; but at the three-year mark you are getting the $100 you were promised. Can't say that about the stock market. Or bond funds -- bond funds can be mismanaged, buy high/sell low, overreact and panic in a crash, just like stock funds.
As I get closer to FIRE, I plan to set up a bond or CD ladder (depending on interest rates and such at the time). I will probably plan to have about 3 years' expenses in that ladder. So 3 years out, I will buy bonds/CDs equalling one year's expenses that mature in three years; then the following year, I will buy another set of bonds/CDs equalling one year's expenses that also mature in three years; etc. So that by the time I FIRE, I will have my next three years' income guaranteed, which gives me time to ride out any market dips without having to sell at a low.
Of course, you may not need this level of security -- you may have a backup plan to tighten the belt, go back to work, whatever. But for me, since I am going to be close to 60 and may not be able to find work, it's important to have adequate protection for my downside risk, even though it means giving up some of the upside potential.
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I felt the same until literally yesterday, when I read "Millionaire Teacher".
Maintaining a balance of bonds and equities allows you to buy low and sell high.
The basic idea is that when equities crash (as they do), your equity/bond ratio will become too skewed towards bonds, so you sell bonds to buy equities when they're cheap. Vice versa when equities are riding high - you buy bonds.
Looking at bonds this way, they're not just useful for their boring returns, but as a resource for buying the equity indexes when they're on sale!
Is the "Millionaire Teacher" a book? Do you have a link? I'd like to read more.
I feel like a real dummy, but hadn't thought about the perspective you laid out...Makes a lot of sense--perhaps even more so for people who are close to FIRE....
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Scenario 1:
- AA 60% stocks & 40% bonds
- value = $2M
- crash results in stocks dropping 40% & bonds stay steady
- after crash value = $1.5M = 25% loss
Scenario 2:
- AA 100% stocks
- value = $2.5M [due to higher growth of stocks over time]
- crash results in stocks dropping 40% & bonds stay steady
- after crash value = $1.5M = 40% loss
Yes bonds could reduce the size of a loss in a crash, but they will also very likely mean you'll go into the crash with less money. In both scenarios above the investor ends up with the same after crash value. The 100% stock investor could well come out ahead after enough time since he might go into the crash with $3M and end up with $1.8M.
Of course these are just arbitrary values, but they serve to demonstrate that there is more than one way to protect yourself from a market crash and the answer doesn't have to be buying bonds.
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JL Collins is a mostly VTSAX kinda guy and he doesn't say you have to buy anything else ever. Maybe a smidge of VBTLX for buying more stock at the bottoms. My point is that it isn't much better than cash in a sock drawer.
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Looking at bonds this way, they're not just useful for their boring returns, but as a resource for buying the equity indexes when they're on sale!
Playing Devil's advocate, if bonds are a resource to buy equity indices when they're on sale, then won't having some portion of them afterward hurt your gains relative to someone 100% stocks assuming the equities outperform the bonds after this sale period?
I get various strategies based on your position regarding FIRE but in general or for the person several years away from retirement aggressively accruing - having bond funds as a resource for buying equity indices is something I'd be curious to learn more about.
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Playing Devil's advocate, if bonds are a resource to buy equity indices when they're on sale, then won't having some portion of them afterward hurt your gains relative to someone 100% stocks assuming the equities outperform the bonds after this sale period?
I get various strategies based on your position regarding FIRE but in general or for the person several years away from retirement aggressively accruing - having bond funds as a resource for buying equity indices is something I'd be curious to learn more about.
This idea gets thrown around to justify bonds, but I think on its face it's a terrible idea. You live with the drag of bonds on your portfolio thereby likely going into a crash with less money to then turn around and throw away your "safety" net to buy stocks on sale to bump up performance. That doesn't really compute for me. Both because I think your likely to lose financially with that approach and if you really needed bonds for their psychological cushion to paper losses in your investments or because you need to withdraw money to live off of then you aren't going to be inclined to get rid of the safety net in the teeth of a serious crash.
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Have you looked into savings bonds or fixed-term deposits? Interest is similar to bonds, but you dont have price risk (bonds are seriously overpriced currently) and you can get federal deposit insurance which makes the investment as save as bonds.
At least in europe it's a good alternative.
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I need to move some money out of stock funds. I'm a buy and hold type. Yes it hurts to see hundreds of thousands of dollars disappear in a crash, then so very slowly return. Sitting here at 49 and NW of about 2M, I should be more diversified since I'm Fire Class of 2019. I just can't seem to be able to throw in the towel and buy bonds/bond funds. I've pulled up Vanguard Total Bond Index many times on the Buy screen. I'm holding about 100k in cash and may buy 10k of Admiral class just to get started. Bond returns just suck. Exflyboy really got me thinking hard about moving some stash to bonds.
Think about your cash flow needs when you are retired. Yes bond returns suck compared to stocks but they are better than what you're getting on your 100k in cash. If you are going to maintain 100k cash in your retirement then I think holding bonds would be a little redundant. If that 100k is greater than 2x annual spending then you should have fewer problems with a market downturn as you will not be selling to meet your immediate cash needs. Not reinvesting your dividends will help push your need to sell a little farther out allowing the market to recover more before you need to sell.
What are you doing with your cash now? You could look into laddering CD's to get a higher return than from a normal savings account.
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Bonds do not, in general, increase returns over stocks in the long term.
I felt the same until literally yesterday, when I read "Millionaire Teacher".
Maintaining a balance of bonds and equities allows you to buy low and sell high.
The basic idea is that when equities crash (as they do), your equity/bond ratio will become too skewed towards bonds, so you sell bonds to buy equities when they're cheap. Vice versa when equities are riding high - you buy bonds.
Looking at bonds this way, they're not just useful for their boring returns, but as a resource for buying the equity indexes when they're on sale!
I'm 31 with FIRE quite a ways off. I'm 100% stocks as well, but considering adding 5-10% in bonds.
JLCollins suggests that there is evidence out there that holding a small amount of bonds can actually INCREASE your returns over the long run, provided you periodically (annually or so) re-balance your portfolio. Forcing you to buy low and sell high as Sun Hat is saying.
If anyone has any more info / links on this topic I and I'm sure others would be very interested!
It's counterintuitive - because stocks have the highest return rates. But they also have huge volatility. And you can profit from that volatility using diversification.
Yes! Excellent point that gets overlooked.
It's a point that gets repeated a lot that is not, in general, true:
(http://www.richardcyoung.com/wp-content/uploads/2015/12/an-efficient-frontier.gif)
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IMHO:
bonds buy some price stability, but don't yield much. With the exception of 70's-80's stagflation, they are on a 200+year decline.
The world is addicted to cheap debt. the CB's must keep debt cheap because no major 1st world country could afford it's bond payments otherwise.
I have around 15% of the portfolio in high grade corporate bonds. They pay better than t-bills and frankly, the companies are more solvent than governments ;)
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It's counterintuitive - because stocks have the highest return rates. But they also have huge volatility. And you can profit from that volatility using diversification.
Yes! Excellent point that gets overlooked.
It's a point that gets repeated a lot that is not, in general, true:
(http://www.richardcyoung.com/wp-content/uploads/2015/12/an-efficient-frontier.gif)
That's not what the efficient frontier is about. The efficient frontier is about being adequately compensated for taking on additional risk.
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http://www.gocurrycracker.com/path-100-equities/ (http://www.gocurrycracker.com/path-100-equities/)
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It's counterintuitive - because stocks have the highest return rates. But they also have huge volatility. And you can profit from that volatility using diversification.
Yes! Excellent point that gets overlooked.
It's a point that gets repeated a lot that is not, in general, true:
(http://www.richardcyoung.com/wp-content/uploads/2015/12/an-efficient-frontier.gif)
That's not what the efficient frontier is about. The efficient frontier is about being adequately compensated for taking on additional risk.
I don't see how your post relates to my point that adding bonds to a portfolio does not increase returns, as suggested by some other posters. The figure I posted shows evidence for my point.
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http://www.gocurrycracker.com/path-100-equities/ (http://www.gocurrycracker.com/path-100-equities/)
I agree with GCC's rationale on 100% stocks for the most part. But, he states numerous times they are living a luxury lifestyle off just dividends, which on broad index funds is ~2%. If you are already at 2% WR with max luxury spending than a lot of this discussion is pointless that's about as safe as it gets without factoring in nuclear war, zombies, etc...
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How close are you to retiring? Have you thought about cash flow in retirement?
The problem with 100% stock market isn't that you'll lose in the long run, it's that you'll need to take out money when the market has tanked. I started buying individual zero coupon muni bonds set to start maturing in the year I planned on retiring. Now, this was a different time (20 years ago) so interest rates were higher. Zero coupon bonds generally get a slightly higher interest rate than those that pay interest every year.
I agree that bond funds are extra scary since they never "mature". When (if?) interest rates rise the value of the bond fund will dip. I've been waiting for 20 years and it hasn't happened yet...but it will.
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I agree that bond funds are extra scary since they never "mature". When (if?) interest rates rise the value of the bond fund will dip. I've been waiting for 20 years and it hasn't happened yet...but it will.
^ That's the whole thing right there. Personally (not recommending this), given the low interest rate environment and interest rate risk, it is better just to sit on cash for stability. Then use it to buy when the opportunity presents itself.
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How close are you to retiring? Have you thought about cash flow in retirement?
The problem with 100% stock market isn't that you'll lose in the long run, it's that you'll need to take out money when the market has tanked. I started buying individual zero coupon muni bonds set to start maturing in the year I planned on retiring. Now, this was a different time (20 years ago) so interest rates were higher. Zero coupon bonds generally get a slightly higher interest rate than those that pay interest every year.
I agree that bond funds are extra scary since they never "mature". When (if?) interest rates rise the value of the bond fund will dip. I've been waiting for 20 years and it hasn't happened yet...but it will.
Honestly haven't considered the income part yet. Accumulation is the easy part, go to work and invest. Maybe try rental again on our currently unrented rent house and possibly our house as well. I'm including 325k in a cash balance pension growing about 30k per year in our NW, but not much of the real estate. The pension can be an annuity if I wait wait to 55 years old, it would grow large enough by then that it's income and eventually Social Security would be more than enough to live on. The stocks and stock funds could just compound as legacy funds.
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Then don't.
It "hurts" to see paper losses when the stock market goes down. We all agree there. Would you do something stupid and sell while down though? Because if not, there is not reason you HAVE to have bonds. GoCurryCracker is all stocks.
I fail to see how the asset allocation of a blogger with zero credentials related to finance or portfolio construction has any impact on what I should do with my portfolio.
People have such short memories. Just because equity indexes recovered very quickly in 2000 and 2008 does not mean it will happen again. Hopefully we get a nice, long extended bear market so these 100% equities folks can really test their resolve.
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Bonds do not help returns by letting you rebalance and buy stocks on sale. Yes, that will happen, but most of the time stocks go up, and while that's happening they're dragging you down. As a couple people pointed out, 100% stocks will outperform a mix over the long term, for this reason. However, once retired and drawing down on your investments, it's not total return you're concerned about, it's sequence of returns, and some of the calculators do show i better portfolio success rate with a little bit of bonds mixed in, but very minimal, like 10%.
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You have $100k in cash and you're worried about returns on bonds? lol
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I never understood buying bonds. You are basically guaranteeing under performance.
Of course it helps that I have about twice as many assets as I need to live on.
I am presently sitting on 95% Equity and 5% cash. The equities are mostly in mutual funds which throw off dividends and capital gains one or twice a year. This will pay about 100% of my expenses. I plan on selling about 2% of my equities per year to fund travel, luxuries etc on top of this. If the market tanks, I can dip into the cash and cut luxuries til it recovers . I'll go to 100% Equity once I start Social Security.
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I agree that bond funds are extra scary since they never "mature". When (if?) interest rates rise the value of the bond fund will dip. I've been waiting for 20 years and it hasn't happened yet...but it will.
^ That's the whole thing right there. Personally (not recommending this), given the low interest rate environment and interest rate risk, it is better just to sit on cash for stability. Then use it to buy when the opportunity presents itself.
Good luck timing the market. ;)
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I don't attempt to time the market, but I do buy individual stocks from time to time and real estate (once) when the prices are attractive.
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IMHO:
bonds buy some price stability, but don't yield much. With the exception of 70's-80's stagflation, they are on a 200+year decline.
The world is addicted to cheap debt. the CB's must keep debt cheap because no major 1st world country could afford it's bond payments otherwise.
I have around 15% of the portfolio in high grade corporate bonds. They pay better than t-bills and frankly, the companies are more solvent than governments ;)
Can these companies print their own currencies?
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IMO, if you're within two years of your FIRE date, it's time to start setting up some cash flow for the withdrawals. You have to weigh the foregone potential appreciation in stocks against the risk of a crash either delaying FIRE or resulting in a sequence of return risk.
This.
And I think you might do well to think of "enough". Enough means you don't have to worry about returns. You can have enough, and move on to more interesting things in life than wealth acquisition. When you have "enough" the game shifts to wealth preservation, and it makes sense to have a position in bonds or even (gasp) cash. Best wishes, ap.
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I need to move some money out of stock funds. I'm a buy and hold type. Yes it hurts to see hundreds of thousands of dollars disappear in a crash, then so very slowly return. Sitting here at 49 and NW of about 2M, I should be more diversified since I'm Fire Class of 2019. I just can't seem to be able to throw in the towel and buy bonds/bond funds. I've pulled up Vanguard Total Bond Index many times on the Buy screen. I'm holding about 100k in cash and may buy 10k of Admiral class just to get started. Bond returns just suck. Exflyboy really got me thinking hard about moving some stash to bonds.
Close your eyes, pretend you had this amount invested in 2000. Imagine what you felt like for a couple years while your investments got cut by more then half. Keep them closed, imagine 2008 when in a few days your investments also got cut in half and the world looked like it was over with no bottom in sight. You were now wondering how to pay your bills and looking for a job when companies were doing mass layoffs and froze hiring. That should help you with your decision to add bonds.
Sequence of returns is your biggest risk here.
The only way I would stick with 100% stocks is if.
1) You are not emotional and can hold long when things look deperate. Very few people are able to do this.
2) You can drop your spending down to 4% of your total portfolio after it took the haircut (I think this is called variable withdrawl rate).
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I don't attempt to time the market, but I do buy individual stocks from time to time and real estate (once) when the prices are attractive.
But what's "attractive" is timing.
Don't get me wrong, I do the same thing. I just do it with a certain segment of my account knowing I'm unlikely to beat the market. But since I enjoy making bets, I don't care (too much).
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Really means nothing, but while we discussed the issue the Nasdaq made a new high. My stocks and stock funds made thousands of dollars just today. Eventually the crash will come, maybe next week. Today we feast.
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I don't attempt to time the market, but I do buy individual stocks from time to time and real estate (once) when the prices are attractive.
But what's "attractive" is timing.
Don't get me wrong, I do the same thing. I just do it with a certain segment of my account knowing I'm unlikely to beat the market. But since I enjoy making bets, I don't care (too much).
I care a lot, and I don't like making bets. Losing a percent here or there to poor stock picks will seriously damage your returns over time. I never buy anything unless I have a very strong expectation that stock will beat the market. Those stocks do come along, but they don't come along very often. At least, I can't identify them very often.
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I have friend that is 76yrs old, he has owned a percentage of bonds in his portfolio for many years. The decline in rates over the years has caused his bond prices to increase dramatically.
From that, I take, if bond interest rates are high it could be a good time to increase your bond exposure, to take advantage of gains when rates drop.
But rates are not high now.
I'm 62 and the age old wisdom is 50% stocks 50% bonds, maybe up to 70% stocks.
But I have never owned a bond, the rates are just to low.
So, I'm with you, "Just can't convince myself to buy bonds/bondfunds"
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Before I found out about FIRE, I had a lot of cash savings accumulated. After I discovered MMM and educated myself, I knew putting it into index funds was the right thing to do, but I couldn't bear to do it all at once. I was worried about the market plunging the day after I made a big transfer.
Instead, I DCA'd it into the market over about three months, moving around $10,000 each time and waiting a few days before I did the next batch. It probably would've been better to just do it in one big lump sum, but psychologically, this way was easier for me. If you want to rebalance into bonds, this might be the way to go about it.
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I care a lot, and I don't like making bets. Losing a percent here or there to poor stock picks will seriously damage your returns over time. I never buy anything unless I have a very strong expectation that stock will beat the market. Those stocks do come along, but they don't come along very often. At least, I can't identify them very often.
Mutual fund managers can't identify them very often either. That's why we use index funds.
I say "bets" because that's what they are. They may be based on a firm conviction that the market is wrong about something, but sometimes the market is right and you're wrong. Or your chosen stock goes down even further before rebounding, meaning you could have made more money if you'd timed your trade better.
FWIW, my best bet percentage-wise was on bonds back in 2008. I bought AIG bonds for pennies on the dollar betting the government would bail them out. Too bad I had much less money to invest back then. And even then I only put a small percentage of my net worth on the bet in case I was wrong.
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FWIW Vanguard manages all of my ex-401(k) money (actually, they manage all my 401(k) money too). They only have me 10% into bonds. The rest is stocks.
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100% equities (or 95/5 equities/cash) is the right AA for some investors. If it is for you, then don't sweat it. It's irrational to force yourself into the wrong AA (or to stick with the wrong AA).
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I felt the same until literally yesterday, when I read "Millionaire Teacher".
Maintaining a balance of bonds and equities allows you to buy low and sell high.
The basic idea is that when equities crash (as they do), your equity/bond ratio will become too skewed towards bonds, so you sell bonds to buy equities when they're cheap. Vice versa when equities are riding high - you buy bonds.
Looking at bonds this way, they're not just useful for their boring returns, but as a resource for buying the equity indexes when they're on sale!
There is an assumption in here and it's too late in the evening for me to pinpoint it (that bond and equity returns are negatively correlated?).
It seems too easy to replace the word 'bonds' in the above with any other asset class, which clearly isn't true. At minimum, seems to view bonds as steady, positive return vehicles, which they are not necessarily. It sounds too similar to holding a mix of large, medium, and small caps.....and when this gets out of balance, reset. What is out of balance? What frequency?
It might be worthwhile to simulate with historical data. Be interesting to know the SWR assuming an all equity portfolio (i.e. rather than 4% with a balanced portfolio).
Bond returns can be quite volatile historically. Not only do you have the term structure of interest rates, but credit quality if you hold corporates. All I conclude is that they are less volatile than equities and thus can dampen portfolio volatility if included.....at the expense of total return over long periods. Lower vol has value when your time horizon is shorter.
For the curious, this is on the bond-equity correlation:
http://media.pimco.com/Documents/PIMCO_Quantitative_Research_Stock_Bond_Correlation_Oct2013.pdf
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My concern though is that with a bond fund, I cannot control how the portfolio manager acts. Even with an index fund, there is a certain amount of leeway.
Anyone investigate investing directly in corporates? I'd feel better owning specific bonds with high ratings and having a buy and hold policy.....eventually (likely) getting back the face value even though there might be ups and downs during the holding period.
I don't hold bonds now. Some argue that as rates go up, even though the currently held bonds with drop in value, the money from coupon payments and maturing bonds will be reinvested at a higher interest rate.
But, even with an intermediate term bond fund, say with a duration of 5 years, the return on the bonds are -5% for each percentage point rise in interest rates. I'd rather wait until rates have gone up to invest in bonds than get pounded as they rise.
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You might want to look into yyy. It consists of nothing but closed end funds that have very high dividend yields and the expense ratio is low. The yield on yyy is close to 9%, and it seems to be a safer play in a crash. For muni bonds I own some nmz, mav, used to own pmf, ktf. Some of these seem pretty safe plays and have high tax free yields for the municipal bond funds from 4 to 6%. Lately I am more wary of being 100 % in stocks, so I have been hedging as well as increasing my bond percent and I will soon be working at paying off my mortgage faster. Good luck.
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YYY has an expense ratio of 1.72%, hell no
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I felt the same until literally yesterday, when I read "Millionaire Teacher".
Maintaining a balance of bonds and equities allows you to buy low and sell high.
The basic idea is that when equities crash (as they do), your equity/bond ratio will become too skewed towards bonds, so you sell bonds to buy equities when they're cheap. Vice versa when equities are riding high - you buy bonds.
Looking at bonds this way, they're not just useful for their boring returns, but as a resource for buying the equity indexes when they're on sale!
There is an assumption in here and it's too late in the evening for me to pinpoint it (that bond and equity returns are negatively correlated?).
It seems too easy to replace the word 'bonds' in the above with any other asset class, which clearly isn't true. At minimum, seems to view bonds as steady, positive return vehicles, which they are not necessarily. It sounds too similar to holding a mix of large, medium, and small caps.....and when this gets out of balance, reset. What is out of balance? What frequency?
It might be worthwhile to simulate with historical data. Be interesting to know the SWR assuming an all equity portfolio (i.e. rather than 4% with a balanced portfolio).
Bond returns can be quite volatile historically. Not only do you have the term structure of interest rates, but credit quality if you hold corporates. All I conclude is that they are less volatile than equities and thus can dampen portfolio volatility if included.....at the expense of total return over long periods. Lower vol has value when your time horizon is shorter.
For the curious, this is on the bond-equity correlation:
http://media.pimco.com/Documents/PIMCO_Quantitative_Research_Stock_Bond_Correlation_Oct2013.pdf
I did that with cFiresim a while back. IIRC, the highest SWR was achieved with anywhere from a 60/40 to 80/20 stock/bond mix. Below 60/40, SWR dropped due to lower returns; above 80/20 SWR dropped due to sequence of return risk. There wasn't much difference within that 60/40 - 80/20 range. Again, I'm going from memory here; if you're interested it might pay to run the sims yourself.
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From AMA William Bengen gave on the Financial Independence subreddit:
Yes, I still believe bonds should play a significant role in most retirement portfolios. During a stock bear market, interest rates often decline, which causes an increase in the price of bonds. This can offset some of the losses from the stocks. Overall, I believe a 50% equities/50% bonds mixture at the start of retirement is close to ideal. Years ago, I talked to Harry Markowitz, the founder of Modern Portfolio Theory, about this. He used that 50/50 ratio in his personal portfolio, which speaks volumes! Some recent research advocates increasing the fraction of stocks in the portfolio as the retiree ages. I haven't had an opportunity to verify this, but I plan to look into it in the next year.
Source: https://www.reddit.com/r/financialindependence/comments/6vazih/im_bill_bengen_and_i_first_proposed_the_4_safe/ (https://www.reddit.com/r/financialindependence/comments/6vazih/im_bill_bengen_and_i_first_proposed_the_4_safe/)
My sense is that the general mainstream of the MMM forum is to be 100% stocks, while the rest of the retirement world is promoting much more caution and diversification into bonds. Bengen repeated the 50% bonds position several times in the AMA interview.
In his article on Rising Equity Glidepath, Michael Kitces examines portfolios various stock/bond allocations and shows that poor market performance early in retirement can be ameliorated by a heavy bond holding.
Source: https://www.kitces.com/blog/should-equity-exposure-decrease-in-retirement-or-is-a-rising-equity-glidepath-actually-better/ (https://www.kitces.com/blog/should-equity-exposure-decrease-in-retirement-or-is-a-rising-equity-glidepath-actually-better/)
For me, 9 months out from my FIRE date, with market valuations at extreme historic highs, I have an asset allocation of 30% US bond index. I have a pension that I can take as a lump sum, so this is another 20% bond-equivalent. I am not planning to hold this big stake in bonds forever, but rebalance annually with a shrinking investment in bonds over the first 10 years of retirement. I am OK turning only 50% of my sail to the equities-wind because it will assure that I have a sail to put into the wind 5 to 10 years after FIRE.
I am 55, but my goal is to assure a successful and wealthy 40 - 50 year retirement for my DW who is a decade younger than I am. Best wishes, ap.
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I did that with cFiresim a while back. IIRC, the highest SWR was achieved with anywhere from a 60/40 to 80/20 stock/bond mix. Below 60/40, SWR dropped due to lower returns; above 80/20 SWR dropped due to sequence of return risk. There wasn't much difference within that 60/40 - 80/20 range. Again, I'm going from memory here; if you're interested it might pay to run the sims yourself.
I ran some cFIREsim simulations - all default values except period is 50yrs to simulate a long ER:
- stocks/bonds = success rate
- 100/0 = 90%
- 90/10 = 85%
- 80/20 = 83%
- 70/30 = 80%
- 60/40 = 71%
- 50/50 = 61%
I also ran an AA starting at 50/50 and moving to 100/0 over the first 10yrs. Success rate was 79%.
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Well said Aperture. I'm late forties and am currently 80/20....and don't plan on touching that money for at least a decade. Based on the readings I've found, you'd be crazy to go 100 equities unless you're in your 20s.
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Adding to posts above...
1. I use cash to serve the purpose of bonds. I can't be bothered to do bonds, and prefer to have a bit more in cash, for various good reasons. However, I allocate and rebalance annually as though my cash is bonds. This way, I have stability while stocks do their thing and I have something to purchase cheap stocks with.
2. Millionaire Teacher was released in a 2nd Edition last January, if you want the latest. Excellent.
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I did that with cFiresim a while back. IIRC, the highest SWR was achieved with anywhere from a 60/40 to 80/20 stock/bond mix. Below 60/40, SWR dropped due to lower returns; above 80/20 SWR dropped due to sequence of return risk. There wasn't much difference within that 60/40 - 80/20 range. Again, I'm going from memory here; if you're interested it might pay to run the sims yourself.
I ran some cFIREsim simulations - all default values except period is 50yrs to simulate a long ER:
- stocks/bonds = success rate
- 100/0 = 90%
- 90/10 = 85%
- 80/20 = 83%
- 70/30 = 80%
- 60/40 = 71%
- 50/50 = 61%
I also ran an AA starting at 50/50 and moving to 100/0 over the first 10yrs. Success rate was 79%.
Yeah, I was running the 30-yr default. You got me thinking, so I went back an re-ran some sims. For a 30 yr period, 60/40 and 100/0 give the same success rate (95%). 80/20 gives 97% and 70/30 gives 96%. So really, for a 30 year period, it doesn't seem to matter much.
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Yeah, I was running the 30-yr default. You got me thinking, so I went back an re-ran some sims. For a 30 yr period, 60/40 and 100/0 give the same success rate (95%). 80/20 gives 97% and 70/30 gives 96%. So really, for a 30 year period, it doesn't seem to matter much.
Yes the shorter the period the less it matters, but for ER you are going to be retired for more than 30yrs. I'm FIREing late, but my family is long lived so even I'll likely run out the full 50yrs. For true ER types they could be retired for 60yrs+.
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Yeah, I was running the 30-yr default. You got me thinking, so I went back an re-ran some sims. For a 30 yr period, 60/40 and 100/0 give the same success rate (95%). 80/20 gives 97% and 70/30 gives 96%. So really, for a 30 year period, it doesn't seem to matter much.
Yes the shorter the period the less it matters, but for ER you are going to be retired for more than 30yrs. I'm FIREing late, but my family is long lived so even I'll likely run out the full 50yrs. For true ER types they could be retired for 60yrs+.
I'm drifting a little off-topic here, but one thing to remember with 50+ yr sims is that your sample size is getting smaller and smaller the longer you run it. With a 50-yr sim, the latest start year you get is 1967. I'd be inclined to take the results of such long runs with a large grain of salt.
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I'm drifting a little off-topic here, but one thing to remember with 50+ yr sims is that your sample size is getting smaller and smaller the longer you run it. With a 50-yr sim, the latest start year you get is 1967. I'd be inclined to take the results of such long runs with a large grain of salt.
I may be missing the point about the latest start years. But that last 50 year period has had some rough times on an inflation adjusted basis.
I found this inflation adjusted S&P chart, sorry it doesn't go to 2017. But my point is to show the rough times.
It shows 1968 to 1991 had no real growth, and 1997 to 2010 had no real growth.
That's a long wait just to beat inflation!
It might be worth checking other 50 year periods to have a comparison, but this rather surprising.
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I am 70/30 stocks/bonds. I mostly hold bonds as a hedge against myself. I have been through the dot-com crash and the 2008 crash. I cant stomack a 50% drop.
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I'm drifting a little off-topic here, but one thing to remember with 50+ yr sims is that your sample size is getting smaller and smaller the longer you run it. With a 50-yr sim, the latest start year you get is 1967. I'd be inclined to take the results of such long runs with a large grain of salt.
I may be missing the point about the latest start years. But that last 50 year period has had some rough times on an inflation adjusted basis.
I found this inflation adjusted S&P chart, sorry it doesn't go to 2017. But my point is to show the rough times.
It shows 1968 to 1991 had no real growth, and 1997 to 2010 had no real growth.
That's a long wait just to beat inflation!
It might be worth checking other 50 year periods to have a comparison, but this rather surprising.
O.K., I'm drifting even further off-topic now, but that graph does not appear to include dividends. My guess is the no-growth periods would be a lot shorter if it did.
My point about the 50 year period is just that (1) your sim contains fewer runs than a 30 year sim, and (2) it is more influenced by the distant past, when the economy was very different from the current economy. Those two factors, in my opinion, make a 50 year sim much less reliable than a 30 year sim.
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I'm drifting a little off-topic here, but one thing to remember with 50+ yr sims is that your sample size is getting smaller and smaller the longer you run it. With a 50-yr sim, the latest start year you get is 1967. I'd be inclined to take the results of such long runs with a large grain of salt.
Good point. Here are the same simulations, but with 40yr periods. Results are tighter.
I ran some cFIREsim simulations - all default values except period is 50yrs to simulate a long ER:
- stocks/bonds = success rate
- 100/0 = 92%
- 90/10 = 92%
- 80/20 = 91%
- 70/30 = 89%
- 60/40 = 82%
- 50/50 = 73%
I also ran an AA starting at 50/50 and moving to 100/0 over the first 10yrs. Success rate was 83%.
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You don't want to conflate "risk" and "volatility." For the individual investor, the only real risk to holding volatile equities is being caught short and needing to sell them at a big loss.
If I was set for income and health insurance in retirement, I would probably never touch a bond as long as I lived.
Financial advisers like bonds because they don't want to face clients with a portfolio half the size of the one that was delivered to them last year. That is a disaster -- not for the client, but for the financial adviser, who probably gets the boot :-)
But cash flow, cash flow, cash flow. Businesses fail and people go broke because cash flow fails. Nail your cash flow down and you don't need to give a damn about volatility.
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People keep throwing around 50% losses as if that mattered in and of itself. I'd rather have 50% of $2M in my portfolio than 80% of $1M.
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No disrespect and not wanting to restart the equity returns are not guaranteed debate, but they aint.
No arguements there. I'm just reading in this thread people repeatedly talking about how they'd be happier with a smaller % loss due to higher bond content, but overlooking the issue that the resulting stash may be lower despite the cushioning effect of bonds on their portfolio. Like you mention the higher value of the portfolio at the time of the crash due to higher stock content is not a for sure thing. That said bonds being a safe haven in the next "big one" is not guaranteed either. It's possible you pay the "price" of lower returns for carrying bonds and the next crash is configured such that bonds turn out to be a poor choice.
Ultimately the future is uncertain.
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Its not accurate to talk dividends making any difference to an outcome. Its a fallacy that you are earning an income.
You do realise its just mental fund accounting. Stocks going XD - its the same as selling off part of your holdings.
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Its not accurate to talk dividends making any difference to an outcome. Its a fallacy that you are earning an income.
You do realise its just mental fund accounting. Stocks going XD - its the same as selling off part of your holdings.
True, but dividends from a bond fund vs. dividends from a stock funds are slightly different. While the bond fund values represent a valuation of the anticipated future cash flows in present day dollars, just like equities, the anticipated variation is much less. Bond cash flows are fairly cetain and valuations face mostly a discount based on interest rate risk (positive or negative). Stock cash flows are more interest rate independent (as companies can increase prices) but more reliant on the economy overall. So what drives the discount rates of future cash flows are generally a combination of interest rate stability or fears plus economic activity growth or lack of growth fears (or greed). Bonds have proportionately more interest rate risk and less economic robustness risk, hence the dividend flows are discounted at a different rate (if you are familiar this discounts of future cash flows as a way to value a security).
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I'm drifting a little off-topic here, but one thing to remember with 50+ yr sims is that your sample size is getting smaller and smaller the longer you run it. With a 50-yr sim, the latest start year you get is 1967. I'd be inclined to take the results of such long runs with a large grain of salt.
Good point. Here are the same simulations, but with 40yr periods. Results are tighter.
I ran some cFIREsim simulations - all default values except period is 50yrs to simulate a long ER:
- stocks/bonds = success rate
- 100/0 = 92%
- 90/10 = 92%
- 80/20 = 91%
- 70/30 = 89%
- 60/40 = 82%
- 50/50 = 73%
I also ran an AA starting at 50/50 and moving to 100/0 over the first 10yrs. Success rate was 83%.
Retire-Canada, what withdrawal rates were you using? Was it always 4% of the portfolio?
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Dividends are much stickier than stock prices, though. The odds that the stock price of an outfit like Johnson & Johnson will be down 30% next year are reasonably good. But the odds that they'll cut their dividend by 30% are very low: they wouldn't cut their dividend unless they really thought the company was on the skids. So the dividends of companies like that frequently walk over recessions without turning a hair: and having the cash is what makes you not have to sell at any particular time. So while it's true in a sense that the total return is dividends plus sell price, if you need to get 10K out of your investments next year and your quarter million is invested in Alphabet you just have to sell a chunk, however bad the price is. If you're invested in Johnson & Johnson though, you just collect your usual check and go about your business. There are other ways to guarantee your cash flow, of course, if you're paying attention. If I didn't like steady dividend-paying companies for other reasons, I wouldn't buy them just for the cash flow. But dividends and equity are not identical.
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Dividends are much stickier than stock prices, though. The odds that the stock price of an outfit like Johnson & Johnson will be down 30% next year are reasonably good. But the odds that they'll cut their dividend by 30% are very low: they wouldn't cut their dividend unless they really thought the company was on the skids. So the dividends of companies like that frequently walk over recessions without turning a hair: and having the cash is what makes you not have to sell at any particular time. So while it's true in a sense that the total return is dividends plus sell price, if you need to get 10K out of your investments next year and your quarter million is invested in Alphabet you just have to sell a chunk, however bad the price is. If you're invested in Johnson & Johnson though, you just collect your usual check and go about your business. There are other ways to guarantee your cash flow, of course, if you're paying attention. If I didn't like steady dividend-paying companies for other reasons, I wouldn't buy them just for the cash flow. But dividends and equity are not identical.
I think he means in terms of total returns for stocks over time vs bonds (the original OP issue). If J&J is performing poorly but maintaining dividends their CFO is likely borrowing cash to pay it, which is reflected on the balance sheet and in a corresponding share price drop. There are some tax differences, but ultimately a poor economy will reduce total returns on JJ while a good economy will increase them. The dividend is sort of not correllated with total returns. Whereas J&J bonds will perform similarly, regardless of the economy, as long as J&J remains solvent. Given similar cash flows, the stocks cash flows will be more expensive, reflecting the need for a higher discount rate to cover the risk. The price will reflect the price to earnings multiple you need to pay, assuming rising values and the cash expected, vs a bond/corp note which is just the fixed cash flow.
Given low interest rates and plentiful capital, bonds have a low discount rate, and are nominally expensive. Whether that is a good deal or not depends on future interest rates, the supply of capital, the value of the money in the future, in real terms, etc. None of this is easy to forecast.
Maybe this is obvious to everyone.
Ah! Maybe I misunderstood. But point well taken, in any case. (I didn't mean the company's cash flow, I meant the investor's -- that may not have been clear. It makes me nervous to hear small investors talking like cash in hand will never matter. Sometimes it matters very much indeed.)
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Retire-Canada, what withdrawal rates were you using? Was it always 4% of the portfolio?
Yes. Default cFIREsim settings unless specified.
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You need an IPS.
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Its not accurate to talk dividends making any difference to an outcome. Its a fallacy that you are earning an income.
You do realise its just mental fund accounting. Stocks going XD - its the same as selling off part of your holdings.
Not sure if you are responding to my post about the exclusion of dividends from the graph that BTDretire posted. If so, I wasn't making a commentary on whether one should or should not seek dividend-paying stocks. I was merely pointing out the fact that the dividend payments did happen, so excluding them from the graph understates the actual total return that was achieved.
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...snip. We won't know until the time passes (for the next 10-20 years at yeast),.... snip...
at yeast we know the Pizza will rise! And if the stocks are left at yeast for 10 years, they should rise also.
Sorry. Had to.
/end foam coming from orange or black boxes - See Overheard at Work page 180 or so for the reference.
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People keep throwing around 50% losses as if that mattered in and of itself. I'd rather have 50% of $2M in my portfolio than 80% of $1M.
Is this supposed to be a likely scenario? Hold 20% bonds and you'll end up with only half as much pre-crash money? I think you may need to re-check your hypothetical math here.
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Is this supposed to be a likely scenario? Hold 20% bonds and you'll end up with only half as much pre-crash money? I think you may need to re-check your hypothetical math here.
I didn't specify a bond allocation so there is no hypothetical math to check. I was simply pointing out the fallacy of focusing on the % loss rather than the resulting actual account balance.
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Is this supposed to be a likely scenario? Hold 20% bonds and you'll end up with only half as much pre-crash money? I think you may need to re-check your hypothetical math here.
I didn't specify a bond allocation so there is no hypothetical math to check. I was simply pointing out the fallacy of focusing on the % loss rather than the resulting actual account balance.
Wouldn't it also be a fallacy to pretend that holding a reasonable percentage in bonds reduces (pre-crash) returns by 50%? I realize you're simply trying to point out that it's possible to have a higher starting balance for the next recession if you were holding all stocks, but it was a pretty terrible example. You can make the case for holding all stocks without resorting to ridiculousness.
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You can make the case for holding all stocks without resorting to ridiculousness.
My intent was not to make the case for all stocks. It was to highlight the problem with only factoring the 50% loss. How you come out on the question is a personal decision based on a lot of factors.
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You can make the case for holding all stocks without resorting to ridiculousness.
My intent was not to make the case for all stocks. It was to highlight the problem with only factoring the 50% loss. How you come out on the question is a personal decision based on a lot of factors.
Okay, fair enough. I may have misunderstood your intent, considering the thread that it's in.
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Okay, fair enough. I may have misunderstood your intent, considering the thread that it's in.
It seems to me the issue I raised is pretty important when deciding on whether or not to buy bonds. Which is on point for this thread. I don't care whether you or anyone else buys bonds or goes 100% stocks. I do care that the analysis undertaken considers all the relevant factors and the ultimate impact on the portfolio in question not just the % of loss sustained.
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People keep throwing around 50% losses as if that mattered in and of itself. I'd rather have 50% of $2M in my portfolio than 80% of $1M.
Well, a good portion of my generation started the workforce in the late 90's. All my investments kept getting slaughtered all the way thru 2009. Just when I felt like investing in stocks was the "right" thing to do, I got punched in the gut, beaten with a wet towel, and dragged behind a prius for 200 miles. The emotional toll of such volatility definatly triggered some fight or flight, especially when the industry I worked in is HARD and each dollar came at great costs to my personal life to learn learn learn, work work work 18 hour days... Then to see it all just disapear so quickly is tought to stay the course. I know now in retrospec if I stayed the course and just went with a TSM I would have been very happy today, but everytime the stock market got a little higher after those crashes, you kept hearing constant doom and gloom about bubbles so you were always questioning your investments (even today). It took a good 15 years!! to see significant gains, which is kind of forever, especially in your 20's when you cannot even imagine your 40 year old self. I strongly believe in diversification even at the cost of gains if you have any emotion reactions to significant drops.
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My intent was not to make the case for all stocks. It was to highlight the problem with only factoring the 50% loss. How you come out on the question is a personal decision based on a lot of factors.
A better way to think about it might be to refer back to the efficient frontier graph. The graph curves showing that, though you'll probably see increased returns with 100% stocks, the level of risk rises disproportionately with returns. Whether you're comfortable with that additional risk to eke out higher returns is a personal decision. Historical data shows it's the "right" decision on average if one wants to maximize returns, but there is some non-zero chance it'll end badly. Think if you retired right as the dotcom bubble burst or the housing bubble burst.
Personally, I believe the market is bound to drop significantly again. I don't know when or by how much. But it will, and that's why my allocation is roughly 80/20. If I were a market-timing type, I'd have sold all my stocks 2 years ago, and missed out on a bunch of gains. Good thing I'm not. :)
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Here's some cFiresim results. The portfolio with 75% stocks and 25% bonds has a much lower standard deviation on the withdrawals than the other one. As expected.
The 100% stock portfolio has a higher average withdrawal though, growing over time. If you can handle lots of variance in your withdrawals year by year, the all stock case has something going for it.
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Personally, I believe the market is bound to drop significantly again. I don't know when or by how much. But it will, and that's why my allocation is roughly 80/20. If I were a market-timing type, I'd have sold all my stocks 2 years ago, and missed out on a bunch of gains. Good thing I'm not. :)
I view bonds in part as insurance against my own stupidity. If stocks dropped 50% tomorrow, would i panic? I am not sure I can answer that. I rode out the 2008 downturn, but retirement was much more mythical to me then, and the losses as an absolute number were not nearly as horrendous as they would be today.
All the cFireSim and FIREcalc stuff is dependent on doing nothing but annual re-balancing, market timing can destroy a winning strategy. If you fear your own resolve will crumble in the face of a major crash then a 100% stock portfolio is probably a bad idea. My own personal plan is to aim for about 75/20/5 stocks/bonds/cash at FIRE. Knowing I have at least 4-5 years of funds sitting in cash and bonds should be adequate to prevent myself from panic selling of stocks, or otherwise being overly stressed out when I should blissfully retired.
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I'm struggling with the bond allocation issue too. Good thread.
I'm also sitting on a good bit of real estate, which adds to the equation.
subscribed/
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I'm surprised I haven't seen any discussion of the Rising Equities Glidepath. Michael Kitces has been doing research on this for the past 4 years or so, and the evidence points very strongly towards an increase in success rate by starting with a low allocation to stocks, moving to a higher allocation to stocks after a number of years (approximately 10). The reason is that the sequence of returns risk is significantly reduced. This does have the effect of reducing maximum total assets at the end, but that's of little concern to most Mustachians. Basically, you're reducing the chance at having vastly more than you need at the end but minimizing the chance that you retire into a crash and fail due to poor sequence of returns. Because most of us here don't have the goal of being deca-millionaires in our 80s but we do want to have a successful retirement that seems like a good tradeoff. The research that he's done is a lot more thorough than the couple of CFireSim runs that I've seen so far on this post. Here are a few links that show the power of having a higher bond allocation a couple of years before FIRE, and during the first few years of FIRE:
https://www.kitces.com/blog/should-equity-exposure-decrease-in-retirement-or-is-a-rising-equity-glidepath-actually-better/
https://www.kitces.com/wp-content/uploads/2015/03/Setting-A-Proper-Asset-Allocation-Glidepath-In-Retirement-Fi360-Mar-19-2015-Handouts.pdf
https://www.kitces.com/blog/retirement-date-risk-how-sequence-of-returns-risk-impacts-a-pre-retirement-accumulator/
https://www.aier.org/research/case-increasing-stock-exposure-retirement
If your goal is maximizing the chances for maximum wealth as you die, then 100% stocks is the way to go. But with that comes a high price in terms of the chance of succumbing to the sequence of returns risk during the first few years of retirement. Starting a few years before retirement with a significant bond allocation and spending that part of the allocation down while letting the stock portion do whatever it does during the first decade or so of retirement does reduce maximum overall wealth, but it increases the likelihood of success.
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One other thing - you can run this in CFireSim yourself by setting "Keep Alloacation Constant" to "no".
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I'm surprised I haven't seen any discussion of the Rising Equities Glidepath.
I brought this up as well, (look for my name in this thread). I suspect that having a 50% to 70% bond allocation at the start of retirement is a radical position for this forum (even though it is pretty routine among normal retirees).
FIRE 20/20, I note that your intention is to retire in 2019, would you mind sharing what your asset allocation is? What percent of your assets are currently in bonds? Will you grow this in the next year before retirement? How do you feel about seeing double digit percent growth in stocks if you have significant bond allocation? Sorry for the personal questions, but I have not found anyone else that is pursuing this strategy. Best wishes, ap.
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I'm surprised I haven't seen any discussion of the Rising Equities Glidepath.
I brought this up as well, (look for my name in this thread). I suspect that having a 50% to 70% bond allocation at the start of retirement is a radical position for this forum (even though it is pretty routine among normal retirees).
FIRE 20/20, I note that your intention is to retire in 2019, would you mind sharing what your asset allocation is? What percent of your assets are currently in bonds? Will you grow this in the next year before retirement? How do you feel about seeing double digit percent growth in stocks if you have significant bond allocation? Sorry for the personal questions, but I have not found anyone else that is pursuing this strategy. Best wishes, ap.
Sorry I missed your post.
My asset allocation is 60% stocks, 40% bonds. This is not in Kitces' sweet spot, but he makes some simplifying assumptions (related to future income like SS, pensions, inheritance, and part time work) that don't apply to me. I don't know if I will adjust the allocation before retirement. I just learned about Kitces' work in this area about a year ago, and I waited until around March or April of this year to make the move. I was hesitant to change my approach significantly until I had thought it through and done more research. After doing that research, making a lot of CFireSim runs on my own, and talking about goals with my partner, etc. we decided to make the move.
As for the question about how I'll feel when we see double digit percentage growth in stocks, I'm ok with that. The way I see it, I'm making the best decision I can given the information I have. Based on the analysis I have done, a rising equities glidepath reduces the chances of the worst possible outcome (sequence of returns risk) while taking as its price a reduction in something I don't care about (maximum peak wealth at the end). Part of the reason I am confident in maintaining my equanimity is that most of my career has included analysis of stochastic processes via modeling and simulation. It's not in the area of finance, but I think it's given me a comfort level in making decisions when the future outcome is determined in large part by randomness (or at least unpredictability). At work I often make the best possible decision given the available data but still see the undesirable outcome occur. I think that experience allows me to view my finances somewhat dispassionately.
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Ok, I just added $10,000 to a new Vanguard Total Bond Market Index Fund Admiral Shares
MUTF: VBTLX account. I've got buckets of cash right now so I figured what the hell. It's a normal taxable account since both myself and wife already have fully funded Roths VTSAX. I re-read "A Simple Path to Wealth" and have decided to start ramping towards 90% Stock and 10% bonds/bond funds. I don't see myself selling any stock funds at this time to convert to bonds. I may shift much of my future purchases towards bonds till 90/10. With about 18-20 months of working life remaining should add up pretty quick. Having a nonstock cash balance pension of 350K, with company contributions monthly and growing at a guaranteed 5% we'd be close to 75% Stocks and 25% eventually.
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Why wouldn't you increase the bond allocation inside your Roth (in which you don't pay any income tax) and set the $10 K taxable aside in stocks?
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Why wouldn't you increase the bond allocation inside your Roth (in which you don't pay any income tax) and set the $10 K taxable aside in stocks?
I'm thinking I'd be much better off having my power money grow tax free in my Roth with VTSAX. Roths, 401K maxed for the year with mostly stocks and REITs. Bonds are going to make shit right now anyway so it won't amount to much of any tax. It's a taxable account because all my tax deferred accounts are done for the year.
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If you are in the 25% bracket or above (including your state taxes), you may benefit from investing in municipal bonds instead taxable.
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25% marginal bracket here:
I have bonds inside my Roth IRA so that I won't be charged tax on their yield. My taxable accounts are 99% in stocks because the long-term rate and dividend rates are 15%, i.e. less than my tax rate.
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There will be no taxes on the money I draw from my Roth, regardless of the growth. That's why I think loading it with stock funds is a better deal for later.
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Attached is a graph of a client that was 100% NASDAQ when he retired in 2000. The blue line is his money invested minus withdrawals. The green is how much his account is worth. One of the things I find the most interesting is the green line post 2008. The market has recovered nicely but because the damage was already done and with ongoing withdrawals, there isn't much of rebound in his account value. (you can even see how he cut back on withdrawals in the down market as the blue steps became longer during that period)
He is moving back home to live with his son after originally retiring to Florida.
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Man, that chart is ugly and will sober you up quick!
Two days ago I bought my first bond fund, it was a bit of a forced situation,
as it was the best choice that is available for my HSA funds. VWEAX
I'm 62 and now have 2.5% my NW in bonds and 70% in stocks, real estate, cash, and business inventory.
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Attached is a graph of a client that was 100% NASDAQ when he retired in 2000. The blue line is his money invested minus withdrawals. The green is how much his account is worth. One of the things I find the most interesting is the green line post 2008. The market has recovered nicely but because the damage was already done and with ongoing withdrawals, there isn't much of rebound in his account value. (you can even see how he cut back on withdrawals in the down market as the blue steps became longer during that period)
He is moving back home to live with his son after originally retiring to Florida.
You're taking a worst-case scenario and saying we should make decisions based off it? I'm much more interested in LIKELY-case scenarios and averages. I could come up with worst-case scenarios for holding bonds too, doesn't do much good.
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Attached is a graph of a client that was 100% NASDAQ when he retired in 2000. The blue line is his money invested minus withdrawals. The green is how much his account is worth. One of the things I find the most interesting is the green line post 2008. The market has recovered nicely but because the damage was already done and with ongoing withdrawals, there isn't much of rebound in his account value. (you can even see how he cut back on withdrawals in the down market as the blue steps became longer during that period)
He is moving back home to live with his son after originally retiring to Florida.
You're taking a worst-case scenario and saying we should make decisions based off it? I'm much more interested in LIKELY-case scenarios and averages. I could come up with worst-case scenarios for holding bonds too, doesn't do much good.
Definitely picked worst case scenario - NASDAQ rather than S&P500 or total stock market and started during a crash. But it is instructive...
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Attached is a graph of a client that was 100% NASDAQ when he retired in 2000. The blue line is his money invested minus withdrawals. The green is how much his account is worth. One of the things I find the most interesting is the green line post 2008. The market has recovered nicely but because the damage was already done and with ongoing withdrawals, there isn't much of rebound in his account value. (you can even see how he cut back on withdrawals in the down market as the blue steps became longer during that period)
He is moving back home to live with his son after originally retiring to Florida.
Definitely a sobering view. Shows how much of an impact sequence risk can have in the worst case scenario. Since you have his money invested and withdrawals can you do a comparison of how he would have fared with a portfolio that included bonds?