(Planned) AA Change consideration - return to 100% equities

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(Planned) AA Change consideration - return to 100% equities

Postby Khanmots » Mon Jul 15, 2013 7:29 pm

When I discovered this forum and developed my AA I had received a lot of advice to move away from 100% equities. I decided to do so as an experiment to see what my emotional reaction was. So I went from 100% equities to 80% with a plan to reassess after a year. When the time came to reevaluate, I was really feeling strongly that I should move back to 100%... that holding a sub-optimal position was grating on me. However I delayed doing so however as I realized I didn't have a plan in place to get me away from 100% as I age and it becomes less and less appropriate.

Well, I now have a plan that I feel comfortable with. Namely...
Return to 100% equities.
At 46 move to 96%, 47 move to 92%, until at 55 I've moved to 60%.
Then the rule would be age - 15 until age 85 (so maintain 30% after that)

Also, I'd leave myself the leeway to accelerate the transition, but not change my mind once I did. So I might start the transition at 40 instead, or go with age -10, or something else, but not back out once I did. I have no illusions that my risk tolerance is going to remain the same as the magnitude of my savings grow, I'm not sure that I'm *that* coldly rational, so felt I should leave myself an out if I ever find myself getting nervous ;)

As an aside, my reaction during 2008 was working at talking myself out of dumping my entire EF into equities... and when I had bad timing when switching AA and being out of the market for a week (thanks ameriprise...) and lost 5% or so it was a mental shrug of crap happens I made the optimal move given what was known (and knowable) and the random dice of life got me.

Anyways, while I mostly have my mind made up, I know myself and I need to get feedback to ensure I've not overlooked something before I'm really comfortable with a decision. So... I'm looking for thoughts of things I need to be considering, or concerns that I should be addressing, or potential holes in my plan. I can provide my current AA if needed, but the basics (for equities) are roughly 50/50 domestic/intl with a large small and value tilt, future AA would be the same.
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Re: (Planned) AA Change consideration - return to 100% equit

Postby gvsucavie03 » Mon Jul 15, 2013 7:41 pm

Make an IPS and stick with it. The entire post sounded "might do this or might do that".... make a firm decision ALWAYS keeping in mind the worst-case scenario. A move to a 100% stock position means that you are at the highest risk exposure. Also, you're missing out on the other market sectors (FI) that can boom when your equity position plummets (check out '08).

Also, you're making a decision after 1 year. It would take at least 10 years to really make an informed decision about AA (and that wouldn't be that informed anyway), that's why we make the firm IPS and pinky-swear that we won't try to time the market. You also missed out on a great year for the S&P and are trying to jump back in... another sign of market timing.

100% equities is just around the block from the blackjack table IMO. Your winnings are sweet if you can gut out some pretty substantial losses. Not the ride I want to take when I've worked so hard for it.
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Re: (Planned) AA Change consideration - return to 100% equit

Postby zebrafish » Mon Jul 15, 2013 7:46 pm

sub-optimal position

I sense that you feel you've "lost" because you could have done better at 100% equities. It seems like you've had a tendency to try to market-time. It almost seems like you are trying to take a similar approach by going to 100% equities.

More risk = more potential reward
More risk = more potential loss

It is that simple. You are taking a risk that by sitting at 100% equities, that you will take a bigger loss. You have to make sure you don't get greedy and get your head taken off, that is all...
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Re: (Planned) AA Change consideration - return to 100% equit

Postby gkaplan » Mon Jul 15, 2013 7:47 pm

You sure this isn't recency talking?
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Re: (Planned) AA Change consideration - return to 100% equit

Postby livesoft » Mon Jul 15, 2013 7:48 pm

How about an Asset Allocation Plan that lets you change equity:fixed ratio based on some outside factor(s)?

For example, I have an AAplan where on a RBD, I must increase my allocation to equities. This forces me to buy equities when they go down big-time.

Thus you could be 80:20 some of the time and 100:0 some of the time. Or any other ratio that you like. But the reasons have to be pretty solidly defined or you may find you get emotional about it. I suggest you avoid emotions on this.
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
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Re: (Planned) AA Change consideration - return to 100% equit

Postby gvsucavie03 » Mon Jul 15, 2013 7:54 pm

80/20 is "sub-optimal" probably in the year since you change your AA position, but you'd wish you had 70/30 or even 50/50 if the S&P went completely the opposite direction or worse. We just don't know and cannot predict when that happens. The "coin" flipped heads 6 times when you were expecting 3 heads and 3 tails...

I've only been back on this form for about a week or two and there are SO many market timing posts. You really need to read some of Bogle's books - The Little Book of Common Sense Investing is great. You are not shooting yourself in the foot for holding bonds.... an AA of stocks/bonds forces you to buy low and sell high and lower your risk.
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Re: (Planned) AA Change consideration - return to 100% equit

Postby Khanmots » Mon Jul 15, 2013 9:03 pm

gvsucavie03 wrote:Make an IPS and stick with it.

This is sticking with my IPS ;)

Any plan that doesn't allow for changes to the plan is a plan doomed to failure. This is true in program management or investment management. One should attempt to identify and proactively manage risks. One of the risks that my (and really any) investment plan has is that one's assessment of their risk-tolerance could be wrong; given that this is highly likely to occur and could have a strong impact, one should have a mitigation strategy. Mine is to allow my risk exposure to be reduced quicker than planned.

livesoft wrote:How about an Asset Allocation Plan that lets you change equity:fixed ratio based on some outside factor(s)?

Livesoft, I considered something like this, but not sure it's for me. Definitely agree that emotion has to stay out of it though!

For everyone else, I should probably qualify optimal for the sense I'm using it. Maximizing expected return (as opposed to actuals) with the constraint that the last unit of expected return doesn't come with more than X units of expected risk. From my self-analysis, the X that fits me (at this stage of my life) is for a small and value tilted 100% equity portfolio. Not a 100% tilted one and not one with leverage, throwing leverage in, or reducing diversification to the degree of excluding all growth and/or large equities starts drastically raising expected risk per unit of expected return past where I'm comfortable (i.e., past my X).

For those that may have played poker you'll understand there's a difference between making the optimal play from a statistical standpoint and winning a hand. It's the same with investing. Right now I'm not making the statistically correct play for my circumstances and that bugs me.
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Re: (Planned) AA Change consideration - return to 100% equit

Postby Khanmots » Mon Jul 15, 2013 9:28 pm

gkaplan wrote:You sure this isn't recency talking?

Not 100% ;)

One of the reasons (other than needing a plan) I took a year deliberating instead of jumping right back to 100% after the year experiment was up. I'm about as sure as I can be though, sadly we can never *truly* know ourselves. However, I'm pretty sure that If I moved to 100% equities tomorrow and then bonds jumped and equities dropped the next day I'd be ok and still think I was at the right place... but I would probably be cursing the fickle gods of fate :P
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Re: (Planned) AA Change consideration - return to 100% equit

Postby Khanmots » Tue Jul 16, 2013 1:21 pm

One thing that I should have mentioned is that I'm vested in my companies pension. It's well-funded, and I don't see myself leaving my company anytime soon. I'm also saving roughly 45% of my pre-tax income.

Figure these are worth mentioning as I think that these help mitigate the "retirement risk" that running such an AA has.
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Re: (Planned) AA Change consideration - return to 100% equit

Postby YDNAL » Tue Jul 16, 2013 1:36 pm

Khanmots wrote:When I discovered this forum and developed my AA I had received a lot of advice to move away from 100% equities. I decided to do so as an experiment to see what my emotional reaction was. So I went from 100% equities to 80% with a plan to reassess after a year.

That's ↑ not what your first post in the Forum says.
Link: viewtopic.php?f=1&t=76347&p=1080130#p1080130
Khanmots » Sat Jun 11, 2011 7:27 pm wrote:Basic story, around a month ago I woke up as to exactly whos interests my financial 'adviser' has been representing and resolved to educate myself. Started with reading up on taxes and then mutual fund costs. Did lots of thinking about market efficiency and information access and how that affects index vs active funds (well, so-long as both exist), and then stumbled across the bogleheads site... which mostly fits in with my thoughts. So... here's my situation and my plans. Any and all feedback welcome.

Emergency funds: 9-12 months of expenses (~20k)

Debt: $102k mortgage at 4.25% (over $50k equity and ~14 of 15 years remaining)

Tax Filing Status: Single

Tax Rate: 25%. Currently making ~$83k but expect to hit the 28% bracket within 5 years. Currently living in Texas, so 0% State.

Age: 31

Desired Asset allocation: 85/15 equities/bonds

So which is it.... 100%, 80/20, 85/15, something else ? Does it matter ?

I don't think it matters since your most important decision at 33 is the AMOUNT of money you spend versus save. Having a plan you can stick-to without changing every couple of years - absent significant life-changing events - is also of tremendous help.
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Re: (Planned) AA Change consideration - return to 100% equit

Postby DetroitRed » Tue Jul 16, 2013 1:46 pm

I also feel like the '08/09 downturn has "taught" a lot of people a bad lesson -- that you'll make up the downturn stock losses within a couple of years.

That hasn't always been the case.
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Re: (Planned) AA Change consideration - return to 100% equit

Postby G-Money » Tue Jul 16, 2013 1:54 pm

I don't like 100% of anything. I'd rather see you go 99/1 (or lower), just on principle. :)
Don't assume I know what I'm talking about.
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Re: (Planned) AA Change consideration - return to 100% equit

Postby Khanmots » Tue Jul 16, 2013 4:52 pm

YDNAL wrote:That's ↑ not what your first post in the Forum says.

YDNAL, why did I guess you'd be the one to hunt up the old posts? ;)

That post was made after a few months of lurking had me convinced that I needed to at least try abandoning my 100% and consider something like age-15 (hence 85/15); that post is detailing a proposed new allocation and doesn't list the old one. If one wishes to be exactly technical and I look back at my old 401k and Roth statements; I think I might have technically been at 95% or something due to a small allocation to a target date fund giving me a tiny exposure to bonds and some active funds having cash holdings, but in my head I was 100% equities and the portfolio sure acted like it in 2008.

I think it was grok on that thread as well as a later one that was primarily responsible for pushing me to go ahead to 20%, and I think I posted up that revised allocation not too long after that thread (few weeks or a month or so?)

In those posts I'd really just been posting my AA, not my plan. Which would be why you're not seeing it ;) I'd written that down on my computer and don't think I'd ever posted it.

YDNAL wrote:I don't think it matters since your most important decision at 33 is the AMOUNT of money you spend versus save.

If it makes you feel better despite having a pension I'm saving somewhere upwards of 40% of my gross pay and am trying to push that closer to 50%. I'm not trying to maximize return in order to make up for a minuscule savings rate :beer:

Having a plan you can stick-to without changing every couple of years - absent significant life-changing events - is also of tremendous help.

Agreed.

However a plan has to be a living breathing thing. Expecting it to be static and to survive is setting yourself up for failure. If you've had any exposure to large program management there's a reason that part of their plan is to evaluate and assess how well the plan is working and to track potential risks and mitigation strategies and have a method for adjusting the plan based on what happens as time progresses, both foreseen and unforeseen events. It strikes me that many of the reasons that a large program does all this in their planning apply to our investment plans as well.

DetroitRed wrote:I also feel like the '08/09 downturn has "taught" a lot of people a bad lesson -- that you'll make up the downturn stock losses within a couple of years.

That hasn't always been the case.

DetroitRed, this is a very solid point and one that is well worth considering. My experience with a market crash did have a rapid recovery... although I do remember that when it was crashing the expectation wasn't that it would recover soon; you're right that the rapid recovery may well be coloring my perceptions. I'll have to think on that and get introspective for a bit. Thanks.
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Re: (Planned) AA Change consideration - return to 100% equit

Postby ieee488 » Tue Jul 16, 2013 5:33 pm

It is always easy to be brave in an UP market.
You sound like one of those people.
You haven't experienced a DOWN market yet.
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Re: (Planned) AA Change consideration - return to 100% equit

Postby Khanmots » Tue Jul 16, 2013 5:54 pm

Ieee488, (GPIB?) I was invested at 100% equities in the 2008 crash and stayed the course. Staying the course was a bit difficult though, but not because I was thinking of selling... but because I was very close to dumping every bit of cash I could scrounge up *into* the market and I was needing to talk myself into maintaining my emergency fund and not running without one.
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Re: (Planned) AA Change consideration - return to 100% equit

Postby M_to_the_G » Tue Jul 16, 2013 11:15 pm

Since you have a pension, 100% might be okay... but it depends on your pension. What will your pension be upon retirement? As a fed with the FSPS (Foreign Service Pension System), I can count on a pretty hefty pension. With an 85/15 AA, I've calculated that I actually will be conservative upon retirement at 43/57 or so if you factor in my pension as fixed income, so I might just follow some advice I've seen recently and never change that AA. Your 100% stock allocation might be even more paradoxically "conservative" depending on the pension you will receive. Have you calculated what your pension will be? That's a very important thing to know if you're basing your AA around it.

But for someone who doesn't have a pension which is guaranteed to cover at least 30% of their retirement income needs, I think 100% stock AA is insanely risky.
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Re: (Planned) AA Change consideration - return to 100% equit

Postby ieee488 » Wed Jul 17, 2013 9:05 am

Khanmots wrote:Ieee488, (GPIB?) I was invested at 100% equities in the 2008 crash and stayed the course. Staying the course was a bit difficult though, but not because I was thinking of selling... but because I was very close to dumping every bit of cash I could scrounge up *into* the market and I was needing to talk myself into maintaining my emergency fund and not running without one.


You have asked for advice here and most have said you shouldn't be 100% invested in equities, but with bravado you have insisted you can.
Then why bother asking for advice when you don't believe it? Is it just to show off that you are braver than the timid souls here?
I don't understand it. It is just a waste of everybody's time including yours.
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Re: (Planned) AA Change consideration - return to 100% equit

Postby ofcmetz » Wed Jul 17, 2013 9:07 am

I've read most of the recommended books on this site. I don't remember anyone saying that 100% equities is the ideal portfolio. Wiser people than me recommend having some in bonds. I really don't understand how having 15% of your portfolio in bonds during a year when bonds have gone done and stocks have shot up teaches you anything. I caution against 100% of anything.
Showing up at the donut shop at 5 am to get them hot out of the oil is an example of successful market timing.
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Re: (Planned) AA Change consideration - return to 100% equit

Postby Khanmots » Wed Jul 17, 2013 1:49 pm

M_to_the_G wrote:Since you have a pension, 100% might be okay... but it depends on your pension. What will your pension be upon retirement? As a fed with the FSPS (Foreign Service Pension System), I can count on a pretty hefty pension. With an 85/15 AA, I've calculated that I actually will be conservative upon retirement at 43/57 or so if you factor in my pension as fixed income, so I might just follow some advice I've seen recently and never change that AA. Your 100% stock allocation might be even more paradoxically "conservative" depending on the pension you will receive. Have you calculated what your pension will be? That's a very important thing to know if you're basing your AA around it.

But for someone who doesn't have a pension which is guaranteed to cover at least 30% of their retirement income needs, I think 100% stock AA is insanely risky.

If I assume that I only work until my early 50s only get raises that just match inflation and take the pension as early as possible, then I'll be looking at around 20-25% of my target retirement income from the pension. If I work longer, or delay the pension, or have raises that beat inflation things improve. If I were to leave my current employer now, then of course the current value after 30 years of inflation will be very little (non-COLA pension).

I've not thought to run the math to include the pension as a bond allocation, although it's an interesting thought, are a *lot* of assumptions to place on it though.

ofcmetz wrote:I've read most of the recommended books on this site. I don't remember anyone saying that 100% equities is the ideal portfolio. Wiser people than me recommend having some in bonds. I really don't understand how having 15% of your portfolio in bonds during a year when bonds have gone done and stocks have shot up teaches you anything. I caution against 100% of anything.

Ideal is in the eye of the beholder. :) That said, the reason behind having bonds in a portfolio is to help manage risk.

I'm not abandoning the idea of managing risk, I'm simply running at a higher risk threshhold than most (but not all!) of us here... and even that's arguable if you count pension like M_to_the_G considers or home equity like some others do, or even just count the extra principal I'm paying off each month as a bond with maturity of my current mortgage payoff date.

Or in other words I'm still managing risk, I'm just doing so with other decisions than a stock/bond split: I'm not going to run with leverage; I'm not going to tile 100% to small and/or value; and I have other non-equity like sources of NW. I have a willingness, ability, and for my desired end-goal a need, to accept a high level of expected risk in exchange for a unit of expected return.

That said, I'm not accepting of a limitless amount of risk! I know that I could not do what markettimer (I think that's his name?) did and run a highly-leveraged portfolio through good times and bad all the way until my goal was reached or my portfolio reached total exhaustion. Although I suspect that my desired end-goal need would drive it, I don't think that I have the willingness... i.e., I'm not tolerant of that degree of risk. So I'm not even considering that ;)

ieee488 wrote:You have asked for advice here and most have said you shouldn't be 100% invested in equities, but with bravado you have insisted you can.
Then why bother asking for advice when you don't believe it? Is it just to show off that you are braver than the timid souls here?
I don't understand it. It is just a waste of everybody's time including yours.

But I didn't ask for advice in the way you're thinking of... ;)

I know how my mind works. When I am trying to come to a decision (or have reached a tentative one), I don't seek validation or ask for a solution. Instead I seek to gather input data (generally via debate) that will be fed into my own internal analysis. When I'm doing this I'll argue whichever position I feel will elicit the most useful information. In this case I knew the position of the forum as a whole and so am arguing the for 100% equity side (which also happens to be the side that I'm leaning towards). What I'm primarily seeking is what I posted in my OP; making sure that I've considered the pertinent facts and that I'm not overlooking anything.

So I posted here asking for assistance in ensuring I've thought things through; seeking thoughts or concerns that I haven't already considered; seeking the opportunity to examine my beliefs against externally generated criticism. The act of defending my position forces me to analyze my stance and potentially find holes in my logic or baseless assertions that need to be addressed. For instance DetroitRed's question regarding if the quickness of the recovery is affecting my perception is one that I couldn't immediately argue against. This tells me that I need to go think about that as the result could change my understanding of my risk tolerance level.
Last edited by Khanmots on Wed Jul 17, 2013 1:56 pm, edited 1 time in total.
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Re: (Planned) AA Change consideration - return to 100% equit

Postby Khanmots » Wed Jul 17, 2013 1:52 pm

Anyways at this point I'll be taking some additional introspective time to examine my motives in light of some of the points y'all have brought up. I'll also be thinking some about if I should state a equity/bond split but do something like treat extra payments on the house and projected future value of current pension accruals within the bond portion or something else along those lines. (Although then what do I do if I have too much in "bonds"?) I'll still be hanging around the thread though in case anyone else has more ideas for me to ponder :)

That said, I really do appreciate the feedback everyone gave even though some of you may not feel that I was receptive. :( It really has been helpful, though, so thanks! :beer
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Re: (Planned) AA Change consideration - return to 100% equit

Postby staythecourse » Wed Jul 17, 2013 2:03 pm

I'll give a different perspective. If you want to do it just do it. You seem to have read, spent time thinking about it, and even tried the other option. If you still feel strongly just do it!

In the end you will either be "right" or "wrong", but doesn't help sitting on the fence.

As I have said numerous times investing is NOT about what the "right" way is, but the way that will allow you to STAY THE COURSE! An extra 20% in stocks or bonds is NOT going to make the difference of you eating dog food vs. living in a mansion. Now NOT staying the course over and over again has led MANY to the poor house.

Good luck.
...we all think we're above average investors just like we all think we're above average dressers... -Jack Bogle
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Re: (Planned) AA Change consideration - return to 100% equit

Postby MoonOrb » Wed Jul 17, 2013 2:09 pm

I can almost guarantee that you would not have made the same post had you been thinking through these same decisions five years ago. This should tell you something about your motivations for making the change.

Very simply put, you believe that you'll have a greater return if you're fully invested in equities and it's irritating you that your portfolio balance is smaller now than it would be if you had been completely invested in equities this entire time. Fine. Except having an asset allocation that is not 100% equities is a tool to mitigate risk, and what you're saying is you want to forego this tool in order for you to achieve greater growth.

You can do what you want, but don't expect people in this community to agree with it, since a widely held community value here is that having an asset allocation that mitigates risk is a critical component to achieving lasting financial security. This value is based on research and evidence and the ideas of experienced, thoughtful investors, and if you want to deviate from it, I guess it will put you pretty squarely at odds with most people here.
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Re: (Planned) AA Change consideration - return to 100% equit

Postby Khanmots » Wed Jul 17, 2013 5:04 pm

MoonOrb wrote:Very simply put, you believe that you'll have a greater return if you're fully invested in equities and it's irritating you that your portfolio balance is smaller now than it would be if you had been completely invested in equities this entire time.


Almost. I'm actually not irritated about the past performance of my portfolio. It is what it is. The delta, whatever it is, (I actually don't know) is the cost of learning about myself.

I think it's very similar to when I'm playing a game with my friends (and just realized this similarity... thanks!). I don't really care if I win or lose (although winning is always better). I care that I made solid good decisions out of the options that are available to me. If my opponents have more luck, or they picked another solid strategy that is the paper to my rock, and they win, even if they stomp me, I'll have still had fun. If I wind up overlooking a bet, even if my opponent doesn't see it and capitalize on it, and even if I still win despite it, I'm still frustrated.

I find investing is triggering the same thing. Maximizing expected return that falls within the bounds of my willingness, need, and ability to take risk is what I'm trying to do. Running with a bond allocation is frustrating me because it's a sub-optimal play given the constraints of my system. If expectations are realized is something I don't have control over; all I can do is make decisions based on expectations of return and risk coupled with my personal constraints.

And I'm realizing something else from typing this out; why I was selecting a step function for my proposed future bond allocation. I have multiple constraints on my system (ability, willingness, need) that will be changing at different rates at different sometimes overlapping points in time and I was making some predictions about how the interrelationship between them would drive my future risk threshhold... and the step function is the tracking of that...

Fine. Except having an asset allocation that is not 100% equities is a tool to mitigate risk, and what you're saying is you want to forego this tool in order for you to achieve greater growth.
However I'm not saying I want to abandon *all* risk-management tools.

You can do what you want, but don't expect people in this community to agree with it, since a widely held community value here is that having an asset allocation that mitigates risk is a critical component to achieving lasting financial security. This value is based on research and evidence and the ideas of experienced, thoughtful investors, and if you want to deviate from it, I guess it will put you pretty squarely at odds with most people here.

I'll agree that having an allocation to bonds is a tool to manage risk.
I'll agree that this community does have (and IMO correctly has) a widely held value that managing risk is critical.

I don't believe that a bond allocation is the only tool for managing risk.
I disagree with the implied assumption that one's risk threshold should be low enough to necessitate the use of a bond allocation; that having a risk threshold at a level that can be managed exclusively with other risk management tools is inherently wrong.

staythecourse wrote:I'll give a different perspective. If you want to do it just do it. You seem to have read, spent time thinking about it, and even tried the other option. If you still feel strongly just do it!

In the end you will either be "right" or "wrong", but doesn't help sitting on the fence.

As I have said numerous times investing is NOT about what the "right" way is, but the way that will allow you to STAY THE COURSE! An extra 20% in stocks or bonds is NOT going to make the difference of you eating dog food vs. living in a mansion. Now NOT staying the course over and over again has led MANY to the poor house.

Good luck.

I think you're talking about what I call the "Right For Me" way :)

You're right that the difference between 80% or 100% isn't going to make or break me.

And... I think you managed to give me an insight! You're right that repeatedly not staying the course is what's dangerous. I guess one of my (just realized) concerns is that moving back to 100%, even as a planned reconsideration, is setting a bad mental precedent. I could unintentionally be setting myself up for rationalizing future waffling on my allocation. I think I can see some manifistations of this coming out in the way I was requiring myself to detail out under what conditions I'd be moving back to a bond allocation and when and why I could accelerate it in non-reversible ways...

Seems I need to make myself fully aware that I've done my trial, I learned from it, and if future me feels a need to run another "trial" that it won't be because I'm wanting a true trial to serve as a learning experience, it's because future me is really wanting to reduce risk and not wanting to admit it...
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Re: (Planned) AA Change consideration - return to 100% equit

Postby MoonOrb » Thu Jul 18, 2013 2:23 pm

Khanmots wrote:
MoonOrb wrote:Very simply put, you believe that you'll have a greater return if you're fully invested in equities and it's irritating you that your portfolio balance is smaller now than it would be if you had been completely invested in equities this entire time.


Almost. I'm actually not irritated about the past performance of my portfolio. It is what it is. The delta, whatever it is, (I actually don't know) is the cost of learning about myself.

I think it's very similar to when I'm playing a game with my friends (and just realized this similarity... thanks!). I don't really care if I win or lose (although winning is always better). I care that I made solid good decisions out of the options that are available to me. If my opponents have more luck, or they picked another solid strategy that is the paper to my rock, and they win, even if they stomp me, I'll have still had fun. If I wind up overlooking a bet, even if my opponent doesn't see it and capitalize on it, and even if I still win despite it, I'm still frustrated.

I find investing is triggering the same thing. Maximizing expected return that falls within the bounds of my willingness, need, and ability to take risk is what I'm trying to do. Running with a bond allocation is frustrating me because it's a sub-optimal play given the constraints of my system. If expectations are realized is something I don't have control over; all I can do is make decisions based on expectations of return and risk coupled with my personal constraints.


I think I hear what you're saying, but I still find myself a little bit confused. You seem to be equating optimality with return--if your return is not as high as it could have been had you chosen other investments, then it's sub-optimal. Otherwise, why would you say that your decision is a bad one? I tend to agree with the standard with which you evaluate past-decisions. I played a substantial amount of limit Hold'em poker for several years, and this idea resonates with me--poker is part luck and part skill, and even when you have the best hand after the flop, you're not guaranteed of winning: yet it still is the best decision to bet and raise in an effort to maximize the size of the pot, even when the turn or river cards could turn your, say, 70% chance of winning into a loss. Evaluating the hand, you'd say you played well if you were maximizing your expected value, even if, because of chance, an opponent caught a card on the river that deprived you of the pot.

So, is return the only metric that you're concerned with? The limit hold'em example maybe is not a good analogy since in LHE virtually the only way you evaluate your hand is by whether you maximized expected value. In investing, I'd argue it's not exactly the same: you obviously want to maximize your return, but you also want to mitigate against risk. Allocating part of a portfolio to bonds is primarily to mitigate against risk, since the return of bonds is, over time, almost certainly going to be lower than the return of equities.

I think of allocating part of a portfolio to bonds a bit like I think about insurance. It's worth the cost (the lower expected return on bonds) to make a catastrophic loss much less likely. That's why I think allocating a portion of a portfolio to bonds makes sense even if during some arbitrary period they don't produce as high of a return.

What is it about the decision to allocate a portion of your portfolio to bonds that you believe wasn't the best decision, and why? (If it's not based on the return?). Would you still be posing this question if the return on bonds had been more substantial?

Khanmots wrote:And I'm realizing something else from typing this out; why I was selecting a step function for my proposed future bond allocation. I have multiple constraints on my system (ability, willingness, need) that will be changing at different rates at different sometimes overlapping points in time and I was making some predictions about how the interrelationship between them would drive my future risk threshhold... and the step function is the tracking of that...

Fine. Except having an asset allocation that is not 100% equities is a tool to mitigate risk, and what you're saying is you want to forego this tool in order for you to achieve greater growth.
However I'm not saying I want to abandon *all* risk-management tools.

You can do what you want, but don't expect people in this community to agree with it, since a widely held community value here is that having an asset allocation that mitigates risk is a critical component to achieving lasting financial security. This value is based on research and evidence and the ideas of experienced, thoughtful investors, and if you want to deviate from it, I guess it will put you pretty squarely at odds with most people here.

I'll agree that having an allocation to bonds is a tool to manage risk.
I'll agree that this community does have (and IMO correctly has) a widely held value that managing risk is critical.

I don't believe that a bond allocation is the only tool for managing risk.
I disagree with the implied assumption that one's risk threshold should be low enough to necessitate the use of a bond allocation; that having a risk threshold at a level that can be managed exclusively with other risk management tools is inherently wrong.


I suppose this is the heart of it--what other risk management tools are you employing?

(And to circle back to your earlier point, if you believe that there are ways to mitigate risk that produce better overall returns than an allocation to bonds, and you opted to choose a bond allocation instead of these other risk mitigation tools, then, yes, I understand why you'd view a decision as sub-optimal. You would have ignored a more profitable but equally risky alternative. I guess I just share the conventional view that there really isn't another risk management tool out there).

I'm curious why you disagree with the implied assumption about risk thresholds. I mean, on one hand it's just a general principle and everyone's individual circumstances will inform the amount of risk that's appropriate for them. But on the other, I'm finding it hard to see how it could be disagreed with, except for someone to say "Well, my circumstances are different and here is why."
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Re: (Planned) AA Change consideration - return to 100% equit

Postby ibis888 » Thu Jul 18, 2013 3:11 pm

Doesn't modern portfolio theory state that the addition of a small amount of bonds to a 100% equity portfolio actually reduces risk while maintaining or increasing the return?

I know that all of these conclusions come from back testing, and past performance is no indicator of future performance etc. etc. but I've always thought that the consensus is to always have at least a small amount of bonds in a retirement portfolio.

Most of the target funds have somewhere in the neighborhood of 10% bonds in their most aggressive iterations...
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Re: (Planned) AA Change consideration - return to 100% equit

Postby Call_Me_Op » Thu Jul 18, 2013 6:41 pm

Will you be OK losing 90% of your equity value, with a possibility it may not recover before you're 65? That's the right stress test.
Best regards, -Op

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Re: (Planned) AA Change consideration - return to 100% equit

Postby czeckers » Thu Jul 18, 2013 9:43 pm

Portfolio design is not just about beta -- stock exposure vs bonds. You must think about risk adjusted returns. Going from 80% equity to 100% equity significantly increases the portfolio volatility which in turn reduces compound returns. You may be increasing volatility by 25% to get an extra 0.4% in return.

There are more intelligent ways to take on more risk. You're better off maintaining your bond allocation and then diversifying between US, developed international, and emerging markets and across risk factors such as small and value.

-K
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Re: (Planned) AA Change consideration - return to 100% equit

Postby czeckers » Thu Jul 18, 2013 9:47 pm

You may also consider value averaging as a strategy that allows you to go to 100% stock allocation when your portfolio value is down.

-K
The Espresso portfolio:

16% LCV, 16% SCV, 16% EM, 8% Int'l Value, 8% Int'l Sm, 8% US REIT, 8% Int'l REIT, 20% Inter-term US Treas

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Re: (Planned) AA Change consideration - return to 100% equit

Postby M_to_the_G » Thu Jul 18, 2013 9:50 pm

I do not recommend 100% allocation for you, OP. You explained it, and I still don't understand how your pension works or how you get those numbers. 50% of my retirement income will come from pension (and I can calculate it to the dollar, and it is guaranteed), and I would never go 100% stocks. 85/15 is plenty risky for *me*. For you, it's probably closer to foolhardy. Just my 2 cents.
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Re: (Planned) AA Change consideration - return to 100% equit

Postby Noobvestor » Thu Jul 18, 2013 9:58 pm

czeckers wrote:Portfolio design is not just about beta -- stock exposure vs bonds. You must think about risk adjusted returns. Going from 80% equity to 100% equity significantly increases the portfolio volatility which in turn reduces compound returns. You may be increasing volatility by 25% to get an extra 0.4% in return.

There are more intelligent ways to take on more risk. You're better off maintaining your bond allocation and then diversifying between US, developed international, and emerging markets and across risk factors such as small and value.

-K


I agree - except OP is already tilting toward small/value and diversified internationally, so I'm not sure how much further he can push in that direction. My two cents: per Ben Graham, never be below 25% in bonds. Period. End of story. Doesn't matter who you are or where you are. Things change, and a depression could impact not just your equities but your human capital and pension too, and, fortuitously if you have them, this is also the time when safe bonds will shine.
"In the absence of clarity, diversification is the only logical strategy" -= Larry Swedroe
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Re: (Planned) AA Change consideration - return to 100% equit

Postby czeckers » Thu Jul 18, 2013 10:10 pm

Noob, we are in agreement on this.

-K
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Re: (Planned) AA Change consideration - return to 100% equit

Postby Noobvestor » Sat Jul 20, 2013 3:06 am

czeckers wrote:Noob, we are in agreement on this.

-K


Yeah, I realized rereading I should have made two paragraphs - the second was aimed back at the OP, and you and I definitely *are* in agreement :)
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Re: (Planned) AA Change consideration - return to 100% equit

Postby letsgobobby » Sat Jul 20, 2013 10:21 am

- I don't like your proposed AA glidepath, because it is too 'cliffy' for my taste: it is 100/0 til age 46, then starts dropping off a cliff for a few short arbitrary years, then declines more slowly for a while, then plateaus for the rest of your life? What if at age 45 the stock market takes a huge drop and then stays down until you are 55, and then starts recovering at that point? You will have been actively and aggressively selling stocks into a terrible decline - the opposite of what you want. It doesn't make any sense to me at all. Your need/ability to take risk don't move about in this way, presumably it shifts more smoothly with age and other factors.

- Like others I think your comment about having a 'sub-optimal' allocation reveals a misunderstanding of asset allocation at its core. There is no optimal or sub optimal in a generic sense. Bonds are not inherently 'less optimal' than stocks. They serve a completely different purpose. True they have lower expected returns than stocks but over very long periods of time, they can and do serve as ballast and can and do have higher returns than stocks.

- Like others, I don't think the lesson of 2008-09 is "stocks may fall but they will always bounce back."

- Like others, I don't think the added returns of 100% stocks are really worth the added volatility but that's a personal opinion.

- You're already tilted to small and value. Why not tilt more to small and value and keep the 20% bonds?

- There are other respected forum members who are 100% stocks, and have articulated their reasons clearly. Nevertheless, my opinion is that 100% stocks is not ideal for almost anyone.
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Re: (Planned) AA Change consideration - return to 100% equit

Postby Khanmots » Sat Jul 20, 2013 11:20 am

Sorry for the lack of replies lately, been getting swamped. I'm still reading the responses, I just haven't had the time to really sit and think and reply. Hopefully that'll change in the next day or two.

The input is all appreciated, even if it did appear that I've stopped listening :(
Last edited by Khanmots on Sat Jul 20, 2013 11:51 am, edited 1 time in total.
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Re: (Planned) AA Change consideration - return to 100% equit

Postby parsi1 » Sat Jul 20, 2013 11:41 am

Khanmots wrote:Well, I now have a plan that I feel comfortable with. Namely...
Return to 100% equities.
At 46 move to 96%, 47 move to 92%, until at 55 I've moved to 60%.
Then the rule would be age - 15 until age 85 (so maintain 30% after that)


Target dated funds do exactly this and you don't have to mess with it at all.
If you like more equity choose a later date and leave it alone.
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Re: (Planned) AA Change consideration - return to 100% equit

Postby grok87 » Sun Jul 21, 2013 12:11 am

M_to_the_G wrote:Since you have a pension, 100% might be okay... but it depends on your pension. What will your pension be upon retirement? As a fed with the FSPS (Foreign Service Pension System), I can count on a pretty hefty pension. With an 85/15 AA, I've calculated that I actually will be conservative upon retirement at 43/57 or so if you factor in my pension as fixed income, so I might just follow some advice I've seen recently and never change that AA. Your 100% stock allocation might be even more paradoxically "conservative" depending on the pension you will receive. Have you calculated what your pension will be? That's a very important thing to know if you're basing your AA around .

Agree
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Re: (Planned) AA Change consideration - return to 100% equit

Postby Khanmots » Sat Sep 14, 2013 2:46 pm

Revive!

Depending on how early I retire and when I take my pension it should be between 25-50% of my income needs. As pension value stops accruing if I leave however, pensions have to be treated cautiously. So I'm thinking of tracking my pension as a current value that earns nothing (i.e., running with the assumption that I quit tomorrow). I still need to do some thinking on how to really treat it as cash-under-the-matress though... perhaps I could do something with discounted future value? (with 3.5% inflation as an assumption) Need to think on this a bit more.

Did some additional thinking, and I'm going to treat the extra payments I'm making on my mortgage as bonds... as they essentially are. If I could get a higher paying bond with the same behavior (home equity behaves somewhat differently than traditional bonds) I would be doing so. The fact that I'm not putting all I can (above and beyond tax-advantaged space) into mortgage payoff, but have some being directed to my current AA, tells me that I've been somewhat subconsciously treating this as part of my AA. So I'll track the accelerated portion of my mortgage payoff as bonds (with each additional payment as a separate bond of lesser duration)

I'll then structure an AA of something along the lines of Age-X but with these factored in (and the restriction of no leverage!). My liquid asset AA may (and likely will) wind up looking like a step-function as described in the OP, but my total AA including non-liquid assets will be on a smooth glide-path.

So I've got some work to do, but I think I've got a path forward.
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