New Member Looking for Super Aggressive Returns

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New Member Looking for Super Aggressive Returns

Postby evostevo85 » Fri Jul 26, 2013 3:28 pm

Hello,

I'm new to the forum. I've been reading about personal finance and investing since I started working when I was 15. I'm 27 now and have about 100k USD in a tax exempt retirement account. This will hopefully improve massively since I've started reading Early Retirement Extreme and Mr Money Mustache, and increased my savings rate. I have low-interest credit cards as a first line of defense for an emergency, and the account is a Roth, so withdrawing principal would be my 2nd option in a catastrophe. In 12 years I haven't had to do this, though, so I run without a cash emergency fund. No kids or anything to worry about.

I am looking to get more aggressive long term returns. I won't be touching this money for 32 years, so I would hope that the ups and downs will end up cancelling out. My current portfolio is:

Equity:
14% S&P500 (SPY)
14% US MicroCap (IWC)
26% Foreign Developed (VEA)
19% Emerging Markets (VWO)
7% Frontier Markets (FM)

Other:
5% US Real Estate (VNQ)
5% Intl Real Estate (RWX)
2% US Total Bond Mkt (BND)
2% Emerging Mkt Govt Bonds (PCY)
2% TIPS (TIP)
2% Gold (GLD)
2% Commodities (DBC)

A couple thoughts I've had:

1. Vanguard just released an international RE fund with a slightly lower fee, VNQI. I am considering selling RWX and buying VNQI with the proceeds, but since it's only worth about $5000 right now, I don't know if it's very important at the moment.

2. Gold and commodities were probably poor choices for buy and hold investments. It was an experiment I engaged in maybe a year or two ago. DBC, especially, is known for contango issues, which I still don't fully understand, but I gather that it's not good.

3. I bought PCY thinking it was an international bond index, but it's really emerging market government bonds. I've thought about investing in some sort of international corporate debt fund as well, but now doesn't seem like a great time to buy fixed income. Speaking of which, I also wanted to add either HYG or JNK, but haven't for the same reasons.

4. Should I maybe change SPY to VTIP to capture the entire US equity market? Maybe I'll just buy VTIP going forward and leave the SPY there, too.

5. Frontier markets are my shiny new purchase. I know it's pretty risky, but that's what I'm looking for, plus the correlations with other equity markets are low. Would like to hear if putting 7% in this is wise.

6. I would really like to do this "tilting" you guys talk about. In the future I would like to add small cap value to my US, intl, and emerging markets allocations. For maximum risk and return, should I do a 50/50 split between blend and SCV?

I would really like to go full bore and reach an expected return of, say, 10% after inflation (so 13.4% nominal?). Volatility is not an issue, as long as the portfolio does not lose 100% of its value :)
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Re: New Member Looking for Super Aggressive Returns

Postby MN Finance » Fri Jul 26, 2013 8:23 pm

I don't have specific investment selection advice but ifa model portfolios are a pretty good place to start for someone that wants to tilt. Here's their higher risk model. You'll see some big differences in your portfolio. http://www.ifa.com/portfolios/p100
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Re: New Member Looking for Super Aggressive Returns

Postby Johm221122 » Fri Jul 26, 2013 8:30 pm

Welcome to forum,
The rates you witch you hope are extremely high.The problem is by having all the funds(tilts) is your chance of achieving higher than market gains becomes less.I would recommend a three fund portfolio with small cap tilt and invest in as much as you can.Your savings amount is your biggest booster to portfolio value .Take advantage of employer retirement accounts and free match to max.Advance your earnings potential and make smart financial choices and you will do well
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Last edited by Johm221122 on Fri Jul 26, 2013 9:21 pm, edited 1 time in total.
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Re: New Member Looking for Super Aggressive Returns

Postby dbr » Fri Jul 26, 2013 8:33 pm

It is hard to establish reliable forecasts for returns but you could use the numbers here:

http://www.portfoliosolutions.com/2013marketforecast/

Note this author's forecast maxes out at 9%-10% nominal for a 100% SCV and emerging markets portfolio. That is presumably the answer you want unless you use some technique to leverage your investement.
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Re: New Member Looking for Super Aggressive Returns

Postby JoMoney » Fri Jul 26, 2013 9:07 pm

evostevo85 wrote:I am looking to get more aggressive long term returns. I won't be touching this money for 32 years, so I would hope that the ups and downs will end up cancelling out.
...
6. I would really like to do this "tilting" you guys talk about. In the future I would like to add small cap value to my US, intl, and emerging markets allocations. For maximum risk and return, should I do a 50/50 split between blend and SCV?

Be careful, it sounds like a recipe for disaster. I get the feeling you're trying to be very "ACTIVE" in your portfolio. Evidence shows that in the long run all this results in costing you more in expenses. A 100% equity position (no bonds or cash) is more risk then most people should take.
I don't find the evidence that focusing on more volatile sectors produces a higher long term return convincing. You can pick periods of time where some sectors out perform, but over long periods it seems to revert to the mean.
By being completely diversified in something like the "Total Stock Market" there is strong evidence that you cancel out the volatility from individual sectors, and reap the rewards of owning those assets. Further, owning the "Total Stock Market Index" has a very low expense ratio, spending less is the best way to improve your total return.

evostevo85 wrote:2. Gold and commodities were probably poor choices for buy and hold investments. It was an experiment I engaged in maybe a year or two ago. DBC, especially, is known for contango issues, which I still don't fully understand, but I gather that it's not good.

Gold yields nothing (in most cases it costs you to own and hold it). It's a shiny rock that people pay one guy to dig out of the ground, and then pay another guy to dig a whole in the ground to guard it. Focus on putting your money in things that create value. (i.e. Businesses, and your own career)
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
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Re: New Member Looking for Super Aggressive Returns

Postby grabiner » Fri Jul 26, 2013 11:02 pm

Welcome to the forum!

evostevo85 wrote:In 12 years I haven't had to do this, though, so I run without a cash emergency fund. No kids or anything to worry about.


This also implies that you know your risk tolerance, because you first entered the market in the 2001-2002 bear market, and were well established (presumably mostly stock) in the 2007-2009 bear market.

I would really like to go full bore and reach an expected return of, say, 10% after inflation (so 13.4% nominal?). Volatility is not an issue, as long as the portfolio does not lose 100% of its value :)


But this is probably asking too much, even if you have the psychological risk tolerance. The problem with holding very-high-risk investments is that doubling your expected return does not double your rate of growth. If you have a portfolio which drops 75% when the market drops 50%, and triples when the market doubles, then a 50% decline followed by 100% increase (about what happened in 2007-2012), which is break-even for the market investor, is still a 25% loss for you.

For example, the 10-year returns for a 2x-leveraged stock index fund (say RYTTX, Rydex S&P 500 2x Strategy) are lower than the index returns even though the index rose over the last 10 years.
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Re: New Member Looking for Super Aggressive Returns

Postby nedsaid » Fri Jul 26, 2013 11:32 pm

If you are looking for Super Aggressive Returns, this forum might not be the right place to look.

It is pretty much buy-hold-rebalance asset classes around here. Steady as she goes and all of that.

Some comments. Start work on building an emergency fund. Everybody needs savings. Aim for 3 months of expenses at first and slowly build to six. Things break, stuff happens, and it is always handy to have cash available to take care of these little surprises. Everyone needs good old fashioned money in the bank.

Tax advantaged retirement accounts (with the exception of the Roth) are good retirement vehicles but are poor savings accounts. I see people yank funds out of their retirement for various reasons and see them get insult (sometimes getting thrown into a higher tax bracket) added to injury (10% withdrawal penalty plus tax). Early withdrawals from Traditional IRA's and 401k's can be cut in almost half from the taxes!! Don't use your retirement accounts for emergency money.

Credit lines can be pared back or frozen if crazy things happen again in the credit markets as they did back in 2008. A credit line at a bank is a great idea (I have one) but don't count on them for emergency money.

Everyone is an investing stud when a young investor. We all think we are aggressive and have very high risk tolerance. In 1987, the stock market crashed 22% in one day. I had maybe a couple grand invested in a mutual fund and lost maybe a few hundred dollars. It felt like my world collapsed and that I had lost all the money in the world. It seems pretty silly today but emotions are pretty powerful even if the dollars temporarily lost are modest. You won't know your true risk tolerance until you have experienced your first bear market.

Your plan looks okay to me. Even younger investors should own some bond funds. This gives you experience of seeing how these act in real life. That will serve you well because as you get older you will want to own more bonds to dial down your risk. A 90% stocks/10% fixed income or even 80/20 is appropriate for somebody your age.

I actually like the funds you have picked. The problem with the IWC (Micro-Cap Index ETF) is that traders front run on the new stocks added to the index (they are quicker on the trigger than the ETF Indexers). The ETF also is forced to own the more liquid micro-cap stocks so you don't get as much of the liquidity premium. These two factors take away a lot of the premium from owning Micro-Caps. Morningstar says that the Small Cap Index funds and ETFs do as well as IWC. I have owned IWC for a few years trying to get the Micro-Cap premium and I wonder if I have captured any of it.

I like Emerging Markets and the idea of the Frontier Markets is a good one.

I suggest adding a small cap value fund or ETF and scrap the gold and commodities. You capture the small cap premium and the value premium at the same time. This area of the market is pretty volatile just like emerging and frontier markets. But it will put a tiger in your tank.

I also like that you have REITs and International REITs. Good job.

So I like what you have done. Maybe a bit more bonds. Add small cap value. Ditch the gold and commodities as they have zero real rate of return after inflation and don't generate cash flows. Gold and commodities are more like portfolio insurance. Not a bad idea. So far, I have judged that the cost of the insurance is more than the diversification benefit. Some disagree with me.

My two cents worth.
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Re: New Member Looking for Super Aggressive Returns

Postby dratkinson » Sat Jul 27, 2013 7:51 pm

When I read "super aggressive returns", I smiled and was reminded of the pilot training maxim: "There are old pilot, there are bold pilots, but there are NO old bold pilots."

Why? Because super aggressive returns MUST be paired with super high risks. And super high risks must come to fruition and most probably will lose your investment. Think: Bernie Madoff, Las Vegas, the lottery, ....

The academic literature says the highest, relatively safe return comes from a total market portfolio with a "small" and "value" tilt (~30% of equities).

The academic literature says commodities are expected to grow at the rate of inflation. This includes gold and other precious metals. The world stock market is expected to grow faster than inflation.

Suggest reading the Swedroe book on alternative investments and the Ferri book on asset allocation. I remember the conclusions of both as being similar.

The only other safe way to boost your return is by minimizing all costs, including financial advisor fees and taxes.



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Re: New Member Looking for Super Aggressive Returns

Postby dbr » Sun Jul 28, 2013 10:51 am

Actually I bet a case could be made that the most plausible may to use capital to achieve huge financial success is to found and operate a business. That is where the real possibility of ending up with tens or hundreds of million of dollars from tens or hundreds of thousands of dollars really exists. Of course risk vs return cannot be avoided. Almost everyone who attempts to do this will not actually succeed at accumulating that wealth in the end. In fact many will lose everything along with the time and effort devoted to the task and others will just eke out a minimal success.
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Re: New Member Looking for Super Aggressive Returns

Postby grap0013 » Sun Jul 28, 2013 3:56 pm

Actually the academic literature says the best combo is a global small cap value strategy with intermediate treasury bonds anywhere from 0-75% has the best risk adjusted returns. It also has the most consistent long term returns IMO.

High tilt strategies are not for most people. Maybe just go with the TrevH agnostic strategy? viewtopic.php?t=38374

I would read several books on the reading list here before you make any moves.
If you can't explain it simply, you don't understand it well enough.
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Re: New Member Looking for Super Aggressive Returns

Postby JoMoney » Sun Jul 28, 2013 4:26 pm

dbr wrote:Actually I bet a case could be made that the most plausible may to use capital to achieve huge financial success is to found and operate a business. That is where the real possibility of ending up with tens or hundreds of million of dollars from tens or hundreds of thousands of dollars really exists. Of course risk vs return cannot be avoided. Almost everyone who attempts to do this will not actually succeed at accumulating that wealth in the end. In fact many will lose everything along with the time and effort devoted to the task and others will just eke out a minimal success.


This would be similar to having a HUGE focus on a single stock. But there are differences, such as you having more control in your own business, and nobody is quoting you a buy/sell price on your business (if it's not publicly traded).
Lots of people have made "super aggressive returns" by being highly focused on a few stocks, and a lot more have lost everything. I've met a few working-class folks who retired very early because their retirement account was almost entirely in their company stock. I've also met folks who've lost everything, when they could least afford to, by following this strategy. Some have called "diversification" - "di-worse-ification"... but to be sure, the volatility and risks of being un-diversified are not worth it. Far more will fail at this strategy then will ever out-perform using it.... but owning (and not actively trading) a focused portfolio of just a handful of stocks offers greater potential losses or gains then being diversified. For most people, the huge risk just isn't worth the slim possibilities of a huge reward.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
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Re: New Member Looking for Super Aggressive Returns

Postby Phineas J. Whoopee » Mon Jul 29, 2013 6:30 pm

Looking for them?

You can target them. You try for them.

But you can't necessarily obtain them. You can end your life as a pauper from leveraging up for them. If that's OK with you, knock yourself out.

All you can do is increase your risk. Risk. Get it?

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Re: New Member Looking for Super Aggressive Returns

Postby dbr » Tue Jul 30, 2013 10:44 am

JoMoney wrote:
dbr wrote:Actually I bet a case could be made that the most plausible may to use capital to achieve huge financial success is to found and operate a business. That is where the real possibility of ending up with tens or hundreds of million of dollars from tens or hundreds of thousands of dollars really exists. Of course risk vs return cannot be avoided. Almost everyone who attempts to do this will not actually succeed at accumulating that wealth in the end. In fact many will lose everything along with the time and effort devoted to the task and others will just eke out a minimal success.


This would be similar to having a HUGE focus on a single stock. But there are differences, such as you having more control in your own business, and nobody is quoting you a buy/sell price on your business (if it's not publicly traded).
Lots of people have made "super aggressive returns" by being highly focused on a few stocks, and a lot more have lost everything. I've met a few working-class folks who retired very early because their retirement account was almost entirely in their company stock. I've also met folks who've lost everything, when they could least afford to, by following this strategy. Some have called "diversification" - "di-worse-ification"... but to be sure, the volatility and risks of being un-diversified are not worth it. Far more will fail at this strategy then will ever out-perform using it.... but owning (and not actively trading) a focused portfolio of just a handful of stocks offers greater potential losses or gains then being diversified. For most people, the huge risk just isn't worth the slim possibilities of a huge reward.


Yes, and the point is to challenge what a person wants to do when they ask for ways to seek "superaggressive" returns. What that could really mean is worth contemplating. For a young person willing to take risks to explore the options the suggested possibilities should be unlimited provided a person approaches them with eyes wide open. Personally I would suggest that there are things to be gained trying to build something (a business) as opposed to what amounts pretty much to speculation. One thing to consider is whether the individual in question actually has the characteristics of imagination and desire for hard work that are required to succeed in a business.

There is, of course, the unspoken message that a question like this is asked without an appreciation for the risk involved.
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Re: New Member Looking for Super Aggressive Returns

Postby linuxizer » Tue Jul 30, 2013 11:22 am

You might like a Swensen-esque portfolio with a strong emerging/value tilt and LT Treasuries:

One example of how to implement
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Re: New Member Looking for Super Aggressive Returns

Postby greg24 » Tue Jul 30, 2013 12:03 pm

Find a startup and invest everything you own in it. Maybe you'll strike gold. Maybe you'll go down to zero.
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Re: New Member Looking for Super Aggressive Returns

Postby Ged » Tue Jul 30, 2013 12:45 pm

evostevo85 wrote: I have low-interest credit cards as a first line of defense for an emergency, and the account is a Roth, so withdrawing principal would be my 2nd option in a catastrophe. In 12 years I haven't had to do this, though, so I run without a cash emergency fund. No kids or anything to worry about.


Did you notice how those credit cards interest rates jumped in 2008? This is the problem with this strategy. Economic bottoms coincide with the likelihood of job loss and banks doing what they can to conserve capital. If you have a backup plan that lets you avoid selling assets at low prices even in the event borrowing becomes prohibitively expensive and you have lost your job you are probably ok. I'd think carefully about this.

Mostly otherwise I think you are making good choices, it just probably won't reach the returns you are hoping for.
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Re: New Member Looking for Super Aggressive Returns

Postby evostevo85 » Wed Jul 31, 2013 11:29 am

Thanks everyone.

John, I am now eligible for a 401k and have set it to contribute the maximum amount, with a 3% employer match (that vests over 5 years...weak). I am doing lots of reading about frugality via mrmoneymustache.com and earlyretirementextreme to further boost my savings rate. Unfortunately, I am in a position where my earnings will not increase exponentially for quite some time. If I hit $80k by 30 I'll be extremely fortunate. The 40 year old guys are making $200k or so, but truthfully I would rather be doing something else well before that age, which will likely require a large salary cut.

Dbr et al, those are great links. Wow, I'm surprised at 9-10% nominal for 100% SCV and EM equities. Hasn't the S&P500 (large cap US equity) returned about 12% nominal, or 8% real, historically? Seems sort of low.

I am not an active investor, which is why I've held on to GLD and other useless investments for probably too long. I've never sold anything, even to rebalance (I just buy more of what is necessary to balance). I spend probably $15 in trade commissions per year through etrade.

Grabiner, I stay away from leveraged ETFs. The effect is not the same as using outside leverage (trading on margin) with a normal ETF. I did extensive googling and reading about this, and the leveraged ETFs actually decay over time due to some funky math that I can't really explain here. It seems they are meant to amplify short term trading gambles, which I don't engage in.

Nedsaid, I may be being young and foolish, but as a single, extremely healthy guy with no commitments and very low overhead, with all my liquid assets in Roth-type accounts (contributions can be withdrawn at any time), I just can't open my bank account app and see thousands of dollars staring me in the face, sitting there idly. I don't think I have the patience for a traditional emergency fund, as bad as that may sound. I've experienced some pretty nasty bear markets and I remember at one point my portfolio was $3k and I didn't flinch.

I'll probably go ahead and scrap gold/commodities. I may also roll IWC into a Vanguard SCV ETF.

Dratkinson, thank you for the reading list and the good advice about tilt %.

I actually am trying to kickstart side business ventures, but it's a slow process with a full time job and trying to maintain enough of a social life / hobbies to make life worthwhile. I dabbled in affiliate marketing and made wild profits at first, before screwing up and breaking even. I'll make another foray into it soon with a smaller budget and see where it goes. A buddy of mine who does maintenance for apartment companies and I are putting together a small business that will use subcontractors to clean vacant apartment units. Hopefully one of these takes off.
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Re: New Member Looking for Super Aggressive Returns

Postby Silence Dogood » Wed Jul 31, 2013 1:45 pm

Just remember: there are more important things in life than money.
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Re: New Member Looking for Super Aggressive Returns

Postby evostevo85 » Wed Jul 31, 2013 1:52 pm

Right you are, and coincidentally, this is why I'm shooting for these return numbers. To gain financial independence relatively early in life to focus on self-directed projects, charitable work (peace corps, etc), vocations that are rewarding but not currently financially viable, possibly military service, and spend more quality time with people I care about.
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Re: New Member Looking for Super Aggressive Returns

Postby JoMoney » Wed Jul 31, 2013 3:38 pm

evostevo85 wrote:Right you are, and coincidentally, this is why I'm shooting for these return numbers. To gain financial independence relatively early in life to focus on self-directed projects, charitable work (peace corps, etc), vocations that are rewarding but not currently financially viable, possibly military service, and spend more quality time with people I care about.


Love your reasons! It bothers me when people seem to want to hurry up and do nothing, especially when we're still physically capable at working towards SOMETHING. Financial independence to do what you want is one thing, the idea of early retirement to do nothing just doesn't sit right. I'm reminded of the movie "Office Space" when they're contemplating what they would do with a million dollars and one says "Nothing, I wouldn't do anything" to which the other replies "You don't need a million dollars to do nothing - my cousins broke - he don't do S***!"

Keep in mind that even at this point in your life earning money isn't everything. Yes, having financial goals are important. Achieving financial independence can help improve your quality of life and give you peace of mind... but you can still do the kind of work you want to do, and spend time with family without reaching some dollar amount in savings. You only get one life, and it goes by pretty quick.
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Re: New Member Looking for Super Aggressive Returns

Postby floydtime » Wed Jul 31, 2013 3:47 pm

80% Total Stock Market
20% Total Bond Market

Don't touch it (except to rebalance annually or so), and you'll likely (but not necessarily) be good-to-go in 32 years.
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Re: New Member Looking for Super Aggressive Returns

Postby dratkinson » Wed Jul 31, 2013 7:34 pm

evostevo85 wrote:... I don't think I have the patience for a traditional emergency fund, ....


You could try a non-traditional EF. Several on the forum have recently (last 2-3 years) begun playing an annual game with the IRS and our tax returns. We intentionally overpay our taxes by $5K, in the hope of receiving $5K in (paper) I bonds as a tax refund. I say "hope" because several IRS gotchas has bitten some of us and we just get the money back as a check, no I bonds.

If successful and we receive the I bonds, they go into a filing cabinet/safe deposit box and become an inflation indexed portion of our bond allocation, and can be cashed if needed to use as an EF. (Redemption restrictions apply for the first 5 years of a bond's life. Fed tax deferred until redeemed. State tax exempt.)

The annual purchase limit on (electronic) I bonds is $10K/year through TreasuryDirect.gov. If we play this game successfully, we up that limit by $5K more from the IRS. Beside, it makes filing a tax return almost fun.

Just starting out and with little desire for bonds, this small idea might suit your NEED for a small bond/EF allocation.
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Re: New Member Looking for Super Aggressive Returns

Postby DoWahDaddy » Wed Jul 31, 2013 9:47 pm

nedsaid wrote:You won't know your true risk tolerance until you have experienced your first bear market.


EvoStevo,

This is half true. You never truly know your risk tolerance. Each and every bear market affects you differently, mainly because you are always in a different phase of life. And that is where your aggressive stance needs some perspective.

I was once 100% stocks, and superaggressive (science and technology was the superaggressive of the day). I was in college, and managed to save maybe 10k or so. If Black Whateverday hit and I lost 25% in one day, I wouldn't have cared. If it was 2008 and I lost 50%, I wouldn't have cared. I had everything in front of me, and the amount of money was small. It was a lot to me, but over time it was small, I knew that.

But as you get older, and savings get larger, and responsibilities get greater, and bear markets occur, you realize that there were flaws in your thinking. When suddenly you are presiding over 100k, can you stomach dropping 25k in a day and maintain your exposure? If at 400k, would 100k in a day change your thinking? 200k in six months? When children are in the mix? At certain points, that dry powder (bonds) would have been sweet to use to rebalance into stocks. Never mind that over much of that time, bonds were the best performing assets.

The thing is, you look back on certain events in your history, and you wish that you spent more time planning out the possible future scenarios and developed an investment plan that would help maximize your ability to ride out storms, grow your net worth, and minimize the chance of abandoning your plan at the worst possible time.

nedsaid wrote:
My two cents worth.
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