(UPDATE: Scratch This Plan) 100% Equities until age 55-ish

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labguru7628
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(UPDATE: Scratch This Plan) 100% Equities until age 55-ish

Post by labguru7628 »

http://www.bogleheads.org/forum/viewtop ... 0#p1936393

Above is the link to the conclusion I reached on why my original post below is a flawed investment plan. It was a lively debate, over the last couple days and I thank everyone for helping me dig deeper into the data. I will be resetting my asset allocation from 80% Stock to 88% stock over the next month. Yay for what looks like the start of a real market correction. Thanks. labguru7628


Good morning board. I have been considering dropping my bond allocation for my retirement portfolio until I'm around 55-58 years old. I'm 37, and have been investing for the last 10 years with Vanguard and TSP. I've been keeping 20% of my portfolio in bonds. Over the last year I've really been thinking that there is a flaw to the way people plan out their investment life in order to reach a certain ballpark target number by the time their 65-67 years old. They figure what that number needs to be and then set out to contribute monthly, quarterly, or yearly an amount which when combined with an assumed rate of return (based on their asset allocation) will yield them the result they set out to achieve. My number is about $3 million dollars 30 years from now. Now the problem I have is that the mathematics of compounding says that half of the dollars they will have in their nest egg at retirement age will come from investment returns during the last 9-12 years of their investing life if you assume a smooth curved line on a graph representing your money growing. What happens if that decade is the same as the previous decade we just experienced? Well most people will fall short of their target and won't be able to retire with the standard of living they desired.

I think that a better plan would be for people to plan their contributions and investment risk so that it gives them the best chance to reach about 65-70% of their target dollar amount by the time they are 55-58 years old instead of the 50% current plans achieve. By the time someone is 55, this amount will allow their portfolio to grow without contributions to their target amount assuming a 4-5% nominal portfolio return during the next decade with a 60/40 stock/bond mix. I feel this is a conservative number if a rough bear market occurs during that decade. Any higher return will cause their portfolio to overshoot the target and that person will be able to withdrawal less than the 4% most experts say to start with in order to ensure that person doesn't outlive their nest egg.

The problem with trying to achieve 65-70% of their target dollar amount that early is the amount of monthly, annual contributions required will be higher and might not be achievable for some people unless they get risky with their investments. Now when I say risky, I'm not talking about futures, options, commodities, or a handful of blue chip stocks. I'm talking about index funds tracking the markets like everyone touts on these boards. What I'm also talking about is ditching bonds totally for the first 30-35 years of your investment life. Over that amount of time, your chance of beating bonds handily is almost 100%. I also think that individuals could up their stock allocation in small cap and international/emerging market stocks to achieve a higher probability. This will allow an investor to need less monthly in contributions and be able to enjoy more of the fruits of their labor while young. At age 55-58 an individual can then adjust their portfolio to about a 60/40 - 65/35 stock bond mix until retirement age to achieve their target nest egg amount.

I know this was a long post, but I really feel my thinking is pretty sound if not a little unsettling to some who might not be willing to go all in with stocks. Please respond back respectfully. Thanks.
Last edited by labguru7628 on Sat Jan 25, 2014 9:37 am, edited 11 times in total.
MapleHermit
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Re: 100% Equities until age 55-58

Post by MapleHermit »

100% in equities forever (even after retirement) is very easily done with a low withdrawal rate such as 3%. An online tool called "FIRECalc" shows you numerous historical scenarios if you invested during different time horizons and tells you if you will run out of money or not.
berntson
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Re: 100% Equities until age 55-58

Post by berntson »

Check out William Bernstein's "The Ages of the Investor." He makes a similar point. For a young accumulator, the effects of later market returns dominant the effects of early returns (i.e. a later bear market is much worse than an early one and a late bull market much better than an early one).

One way to counteract this is to have a much steeper stock/bond glide-path. An investor has much more equity (than age in bonds, say) when young, and much less when nearing retirement. Some authors have even suggested that young investors should buy equity on margin when starting out (that is, have more than 100% stocks!). Bernstein thinks that the problems involved with buying equities on margin are too great, but thinks that tilting a portfolio to small and value can be expected to have a similar effect (without margin calls, paying interest on margin, and so on).
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labguru7628
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Re: 100% Equities until age 55-58

Post by labguru7628 »

berntson wrote:Check out William Bernstein's "The Ages of the Investor." He makes a similar point.
Thanks. I will read this. One of my favorite investment books is "The Four Pillars of Investing" by William Bernstein.
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Re: 100% Equities until age 55-58

Post by technovelist »

I wonder how many of these threads we will see after the next 30% decline in the stock market. :mrgreen:
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Re: 100% Equities until age 55-58

Post by tigermilk »

technovelist wrote:I wonder how many of these threads we will see after the next 30% decline in the stock market. :mrgreen:
Well, I wasn't on this forum after the last 30% decline. I was 100/0 in the TSP (mix of C, S, and I). A few years later and at age 44, I'm still 100/0. Didn't mind at age 38/39 and don't mind now. Had I had a % in bonds as suggested at the time and held that position until today, I'd actually have less in my TSP than I do. I'm staying put at 100/0 for the next few years.
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labguru7628
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Re: 100% Equities until age 55-58

Post by labguru7628 »

I'm not talking about being 100% into equities 1-2 years prior to retirement age. At age 37 I'm actually hoping for a drop in the market so that I can purchase more shares with my monthly contributions. A 30% drop in the market is a different experience for investors at different times in their life.
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Re: 100% Equities until age 55-58

Post by Call_Me_Op »

I think 80% is plenty high. In fact, at 55 y/o, I would be afraid to hold 80%, never mind 100% in equities. Then again, I am a very conservative investor.
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Re: 100% Equities until age 55-58

Post by The Wizard »

I disagree with having 100% equities, especially after age 40. 80% equities is a fine high percentage and you have 20% bonds and CD's to rebalance with in the event of a major Buying Opportunity in stocks.

I also disagree with the OP's presumption on how folks plan out their retirement accumulation.
Especially on this forum, we don't aim to JUST achieve our desired retirement accumulation in the year of retirement projected 30 years ago.
We aim to EXCEED our goal on the early side, thus allowing various options in later working years.
We do this by increasing our savings rate most years...
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labguru7628
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Re: 100% Equities until age 55-58

Post by labguru7628 »

The Wizard wrote:I disagree with having 100% equities, especially after age 40. 80% equities is a fine high percentage and you have 20% bonds and CD's to rebalance with in the event of a major Buying Opportunity in stocks.

I also disagree with the OP's presumption on how folks plan out their retirement accumulation.
Especially on this forum, we don't aim to JUST achieve our desired retirement accumulation in the year of retirement projected 30 years ago.
We aim to EXCEED our goal on the early side, thus allowing various options in later working years.
We do this by increasing our savings rate most years...

Technically, my plan aims to EXCEED the goal but builds in a layer of protection in case of a bad bear market during the final decade before retirement. During this decade any catch up contributions or rebalancing will be much less effective than having built up a sizable investment base earlier in life. I just feel that taking on more risk capacity is to everyone's advantage. Bonds do soften the blow during down years, but then, if those years are earlier in your investment life, they really don't matter unless you are so stressed it causes you to sell some of your stocks. In this case I would say have some in bonds. But really, I think this will cause you to take more from your younger years (in the form of savings) than was mathematically necessary.
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Re: 100% Equities until age 55-58

Post by MichDad »

I've been 100 percent in equities (widely diversified, very low cost US and international stock funds) for the first 27 years of my retirement investing. I never flinched when the markets tumbled. I just kept purchasing slowly and steadily using the dollar cost averaging method. Over the past few years, I've diversified to include a commodities fund, two emerging markets funds, and a REIT fund -- still no bonds. Perhaps it's very dumb luck but this has worked out nicely, so far, for me.

I'm 58 years old and I have no plans to add bonds. However, I have to add the important caveat that I will receive a significant FERS pension and social security (both inflation adjusted). Also, my mortgage will be paid off before I retire. So, if most of the world's stock markets drop by 80 percent or so soon after I retire and the demand for commodities and commercial property evaporates, I should still be in pretty good shape.

I can report emphatically that the few big drops in equities markets and my portfolio value over the past 27 years have not fazed me. I always viewed those periods as allowing me to purchase more equities at "discount" prices.

MichDad
Last edited by MichDad on Fri Jan 24, 2014 12:22 pm, edited 2 times in total.
John3754
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Re: 100% Equities until age 55-58

Post by John3754 »

All you seem to be saying in this long post is that if you save more and take on more risk you'll be expected to reach your target number sooner. I have two responses:

A) Duh.

B) Not everyone has that much risk tolerance.
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Re: 100% Equities until age 55-58

Post by Random Musings »

Just don't hope the market craps out at ages 53-54 and then you are rebalancing into bonds at the wrong time.

Need of risk dominates exposure to equities, not age or some "glidepath" which doesn't consider need of risk.

RM
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Re: 100% Equities until age 55-58

Post by surfstar »

I'm planning to be retired by 55 (if not earlier), so I don't think 100% equities until 55-58 would work for me.

Each person is different - their goals, their plan, their risk tolerance, etc. Plan for yourself. No need to make a generalized rule that works for everyone.
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labguru7628
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Re: 100% Equities until age 55-58

Post by labguru7628 »

I think risk tolerance is a much more important factor as you are approaching retirement (within 10-12 years). If we all are smart people here who have studied the history of the markets and can do simple financial math then it shouldn't matter what your feelings say in your 20's-40s. You should be able to roll with the tides of the market if you're not looking at your portfolio grow too often. These tides are much more pronounced the last decade of investing before retirement when we will have the most dollars to lose and I feel should be managed when a person gets there with a more conservative allocation. Until then, mathematically sound investing is keeping your eggs in the highest return probability investments. Being overly concerned with risk tolerance in your early years will cause you to save too high a percentage of your income to achieve the same goal. I just think people can have their cake and eat it to when saving for retirement.
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Re: 100% Equities until age 55-58

Post by John3754 »

labguru7628 wrote:...it shouldn't matter what you're feelings say in your 20's-40s. You should be able to roll with the tides of the market...
Sounds great on paper, but we are not investing robots, everyone's life circumstances and tolerance for "riding the waves" different. It's very easy for you to say what everyone SHOULD do, its a very different thing for the 45 year old who has been saving diligently for 25 years and has a spouse and kids depending on him/her to watch the value of their 100% equity portfolio get slashed in half. What if I'm 45, in 100% equities, the market crashes, I lose my job, and now my family needs to live off of my portfolio...how does your plan work out then?
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Re: 100% Equities until age 55-58

Post by ogd »

I'll repost something I said in an older thread, because I don't think I can top it (one hit wonder, if you will):
ogd wrote:I feel that the deep but relatively short crisis of 2008 has spawned, among other classes of investors (the FDIC-only guys, the gold faithfuls and doomsday preppers, the VIX watchers and sector hoppers etc), this type of steely-eyed cowboy of the efficient frontier, who believes that stock prices don't mean anything except return opportunities and all you have to do is brace yourself, "drink some tea or do some yoga if you must" (approximate berntson quote from another thread), keep your finger firmly pressed on the buy button and you'll shortly be made good and then some. I don't buy it. I think prices depressed by half are a sign of things to come and while they may turn out to be wrong, you should at that point be scared for your investments.
There are other ways 2008 could have turned out. Imagine you lose your job and the economy is in the dumpster for 10 or 15 years, enough time for your skill set and remaining time in the workforce to fade away. At the bottom, the bond allocation looked like a floor on those never-ending losses, that I was very, very glad to have in place at the cost of like 1% expected return. The bad scenarios are so bad that making the good scenarios a little better is simply not worth it to me.
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Re: 100% Equities until age 55-58

Post by labguru7628 »

Random Musings wrote:Just don't hope the market craps out at ages 53-54 and then you are rebalancing into bonds at the wrong time.

Need of risk dominates exposure to equities, not age or some "glidepath" which doesn't consider need of risk.

RM

That's why I put a 3 year time period for when to do this. In case of a bad market correction at that age they could wait for the market to improve. But let's look at some math. If someone was hoping to retire at round 65-67 years old and was saving for a goal of $1 million, under the normal plan that person would have around $500,000 at about age 56 assuming a 7-8% nominal rate of return. If their is a 30% drop in the market at about age 54-55 then he/she would be down to $350,000 and would have a very slim chance of reaching $1,000,000 by the year they plan on retiring. Now, under my plan that person would have about $650,000 - $700,000 by that age and would be left with $455k -$490k with the same 30% market drop. The chance of this scenario reaching the $1 million goal is much better. The chance of a 30% market drop in any year is pretty slim. Since 1928, the S&P 500 has had a 20% or more drop during a year only 6 times. During the same time frame, the market has dropped over 15% for 2 consecutive years only 2 times. These numbers bode well for my plan. The chance of having a catastrophic drop during the year or two prior to reallocating to a conservative portfolio is very small based on history.
Last edited by labguru7628 on Wed Jan 22, 2014 12:53 pm, edited 1 time in total.
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Re: 100% Equities until age 55-58

Post by Ged »

Random Musings wrote: Need of risk dominates exposure to equities
Yes. Also there is a need to match liabilities.
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Re: 100% Equities until age 55-58

Post by berntson »

ogd wrote:I'll repost something I said in an older thread, because I don't think I can top it (one hit wonder, if you will):
ogd wrote:I feel that the deep but relatively short crisis of 2008 has spawned, among other classes of investors (the FDIC-only guys, the gold faithfuls and doomsday preppers, the VIX watchers and sector hoppers etc), this type of steely-eyed cowboy of the efficient frontier, who believes that stock prices don't mean anything except return opportunities and all you have to do is brace yourself, "drink some tea or do some yoga if you must" (approximate berntson quote from another thread), keep your finger firmly pressed on the buy button and you'll shortly be made good and then some. I don't buy it. I think prices depressed by half are a sign of things to come and while they may turn out to be wrong, you should at that point be scared for your investments.
.
I'm glad that I could inspire at least one of the tracks on the Bogleheads Greatest Hits album. :sharebeer

I think that question is: How much should an investor pay (in terms of reduced expected returns) to protect her portfolio from things that haven't happened yet? A crash has never reduced a globally diversified portfolio by more than 50% and the markets have, with regularity, recovered from those losses a decade or two. But that's no guarantee that financial Armageddon couldn't happen.

I think there is an open question about how much bonds will help in financial Armageddon. If the markets drop by 80% and stay there, it likely means that there is a global war of some kind going on (the largest historic losses in many developed countries came from the world wars). How likely is it that the US defaults if a Chinese missile hits Los Angelas? I have no idea. There is clearly room for disagreement about this.
Last edited by berntson on Wed Jan 22, 2014 1:07 pm, edited 1 time in total.
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labguru7628
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Re: 100% Equities until age 55-58

Post by labguru7628 »

ogd wrote:I think prices depressed by half are a sign of things to come and while they may turn out to be wrong, you should at that point be scared for your investments.
.[/quote]

Doesn't Buffett always say, "be fearful when others are greedy and greedy when others are fearful". When there is blood on the street, it's time to buy. I think I'll go with his advice first. The Great Depression did lead to about a decade of underperformance, but it wasn't a permanent thing. We got through it. I think optimism will always rule the day, or what's the point in saving and investing at all. Have faith and understand the numbers.
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Re: 100% Equities until age 55-58

Post by ogd »

labguru7628 wrote:Doesn't Buffett always say, "be fearful when others are greedy and greedy when others are fearful". When there is blood on the street, it's time to buy. I think I'll go with his advice first. The Great Depression did lead to about a decade of underperformance, but it wasn't a permanent thing. We got through it. I think optimism will always rule the day, or what's the point in saving and investing at all. Have faith and understand the numbers.
You are not Warren Buffett, in terms of having money to live should the worst come to pass, and even he keeps around plenty of cash for buying opportunities. His fixed income allocation, so to speak.

As for the Great Depression, you don't want to "get through it" the way people with no cash on hand did. And it was almost two decades, only definitively fixed by the economic extravaganza of World War II, a repeat of which is, shall we say, undesirable.

When you enter a recession with, say, $1M and it gets trimmed down to $500K (approx. a decade of savings) with no end in sight and your job situation starts to feel uncomfortable, you'll rue the day when you decided 0.5% more expected return was worth more than $200K of safe money. Another nice quote from the parallel "remember 2008" thread, written about 20% above what was to be the bottom:
Gekko wrote: "Dear Future Self -

This is your Past Self. It's January 21, 2009 and we have just completed one of the worst years ever in the market. The S&P 500 was down 37% in 2008 and the pain was bad. 2009 has not provided much relief so far. ...
The reason I am writing you this note is that I am afraid that you will forget this pain at the next market highs. I do not want you to be caught up in the euphoria again. I want to remind you to not be so greedy next time. I want you to be sure to take something off the table. I want you to follow your asset allocation and when your stock percentage exceeds your target, I want you to sell. It is not a sin to sell, it is not a bad thing to pay taxes - but it is a bad thing to lose your big gains. Remember the pain and do not let it happen again.

Good luck -
Your Past Self"
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Re: 100% Equities until age 55-58

Post by Random Musings »

labguru7628 wrote:
Random Musings wrote:Just don't hope the market craps out at ages 53-54 and then you are rebalancing into bonds at the wrong time.

Need of risk dominates exposure to equities, not age or some "glidepath" which doesn't consider need of risk.

RM

That's why I put a 3 year time period for when to do this. In case of a bad market correction at that age they could wait for the market to improve. But let's look at some math. If someone was hoping to retire at round 65-67 years old and was saving for a goal of $1 million, under the normal plan that person would have around $500,000 at about age 56 assuming a 7-8% nominal rate of return. If their is a 30% drop in the market at about age 54-55 then he/she would be down to $350,000 and would have a very slim chance of reaching $1,000,000 by the year they plan on retiring. Now, under my plan that person would have about $650,000 - $700,000 by that age and would be left with $455k -$490k with the same 30% market drop. The chance of this scenario reaching the $1 million goal is much better. The chance of a 30% market drop in any year is pretty slim. Since 1928, the S&P 500 has had a 20% or more drop during a year only 6 times. During the same time frame, the market has dropped over 15% for 2 consecutive years only 2 times. These numbers bode well for my plan. The chance of having a catastrophic drop during the year or two prior to reallocating to a conservative portfolio is very small based on history.
However, let's say you are 50% domestic (or higher) and remainder of int'l in equities. What happens if the "bad market correction" at that time turns into a Japan correction that drags on and on for the majority of your equity allocation........

Need of risk. Math works great when using history for future projections, but it's just history.

RM
I figure the odds be fifty-fifty I just might have something to say. FZ
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Re: 100% Equities until age 55-58

Post by ogd »

berntson wrote:I'm glad that I could inspire at least one of the tracks on the Bogleheads Greatest Hits album. :sharebeer
I'd merely call it "ogd Greatest Hits, Track 1/1" :sharebeer
berntson wrote: I think that question is: How much should an investor pay (in terms of reduced expected returns) to protect her portfolio from things that haven't happened yet? A crash has never reduced a globally diversified portfolio by more than 50% and the markets have, with regularity, recovered from those losses a decade or two. But that's no guarantee that financial Armageddon couldn't happen.

I think there is an open question about how much bonds will help in financial Armageddon. If the markets drop by 80% and stay there, it likely means that there is a global war of some kind going on (the largest historic losses in many developed countries came from the world wars). How likely is it that the US defaults if a Chinese missile hits Los Angelas? I have no idea. There is clearly room for disagreement about this.
I don't believe it's worth planning for military Armageddon, it's very unlikely that anything you invest in today will be relevant on the other side. Another instructive example is Communist takeover -- no investments whatsoever were spared, including gold; on the contrary, they probably got you into trouble.

I think the economy can drop 50% for the long term without any wars. Earnings drop, unemployment, the whole shebang. 80% is probably unlikely, but gosh that 50% hurts particularly if you lose your job. Again, I'm also looking at the asymmetry of the scenarios: a little more if my investments grow a lot, a lot less if I'm doing badly. The safety is worth it, in my mind.
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Re: 100% Equities until age 55-58

Post by John3754 »

labguru7628 wrote:The chance of having a catastrophic drop during the year or two prior to reallocating to a conservative portfolio is very small based on history.
The chances of me getting into a catastrophic car accident driving down the highway on any given day are small based on statistics....but I still wear my seatbelt.
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labguru7628
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Re: 100% Equities until age 55-58

Post by labguru7628 »

John3754 wrote:
labguru7628 wrote:The chance of having a catastrophic drop during the year or two prior to reallocating to a conservative portfolio is very small based on history.
The chances of me getting into a catastrophic car accident driving down the highway on any given day are small based on statistics....but I still wear my seatbelt.
Yeah, but the chance of death would correlate to your investments going down to zero in this analogy. Index funds don't evaporate like a life can in a car accident. An 80/20 stock bond mix as opposed to a 100% stock allocation is like saying I'm trying to save myself from a compound fracture of the pelvis instead of a fractured femur. Either injury will be severe and hurt like hell, but one is a little worse than the other, and both will almost always leave you alive looking at some rehab ahead. In my plan, you could already be at your destination and sitting in the parking lot under a lot of scenarios while getting there with less gasoline. I'm not saying my plan doesn't have flaws, I just think holding bonds early on in your investment life is just too overly protective.
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labguru7628
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Re: 100% Equities until age 55-58

Post by labguru7628 »

Bump.
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HomerJ
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Re: 100% Equities until age 55-58

Post by HomerJ »

labguru7628 wrote:Over the last year I've really been thinking
Possibly, 30% gain in stocks in the last year has colored your thinking?

This post would be stronger if you posted it after a 30% stock drop.
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Re: 100% Equities until age 55-58

Post by Flobes »

labguru7628 wrote:Bump.
My true story: In the autumn of 2008, I was 57.5 years old. On a path to retire at 60, when pension kicked in. And then...

**The stock market collapsed.
(48% of portfolio evaporated)

**I lost my job.
(Along with multitudes of others. News dominated by "No firms hiring older workers" and "No firms hiring the unemployed" headlines.) Dialogue in my head, "I'm gonna lose the house!"

**The terms of the pension changed drastically. (Age went to 65, the amount was reduced by over a third, and I suddenly needed more work time to be vested, and I no longer had the job.) Dialogue in my head, "I'm never gonna retire!"

Oooops... It could happen to you.

OK, so here's the rest of my story: Shortly thereafter, I received a surprise inheritance from a distant aunt. My portfolio quadrupled; I payed off the mortgage; I happily early retired. As the song says, "Fairy tales do come true. It could happen to you."
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Re: 100% Equities until age 55-58

Post by Billyboy »

I'd go for it. It worked for me. Of course, that doesn't mean it will for you. :sharebeer
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Re: 100% Equities until age 55-58

Post by Bengineer »

I too spent much of my investing life with a nearly 100% equity allocation. My tolerance for a 100% equity portfolio being cut in half, as in '00 and '08, was affected by the size of the loss relative tomy annual income. It's one thing to see a year or so's income evaporate and another to see a decade of income go poof.
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100% Equities until age 55-58

Post by wander »

I would go for it.
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Re: 100% Equities until age 55-58

Post by market timer »

labguru7628 wrote:Over the last year I've really been thinking that there is a flaw to the way people plan out their investment life in order to reach a certain ballpark target number by the time their 65-67 years old. They figure what that number needs to be and then set out to contribute monthly, quarterly, or yearly an amount which when combined with an assumed rate of return (based on their asset allocation) will yield them the result they set out to achieve. My number is about $3 million dollars 30 years from now. Now the problem I have is that the mathematics of compounding says that half of the dollars they will have in their nest egg at retirement age will come from investment returns during the last 9-12 years of their investing life if you assume a smooth curved line on a graph representing your money growing. What happens if that decade is the same as the previous decade we just experienced?
You should check out Lifecycle Investing by Ian Ayres and Barry Nalebuff. I agree with you in principle; however, my concern is that people tend to come around to this belief after a strong run in stocks, when valuations are not terribly attractive.
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labguru7628
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Re: 100% Equities until age 55-58

Post by labguru7628 »

market timer wrote:
labguru7628 wrote:Over the last year I've really been thinking that there is a flaw to the way people plan out their investment life in order to reach a certain ballpark target number by the time their 65-67 years old. They figure what that number needs to be and then set out to contribute monthly, quarterly, or yearly an amount which when combined with an assumed rate of return (based on their asset allocation) will yield them the result they set out to achieve. My number is about $3 million dollars 30 years from now. Now the problem I have is that the mathematics of compounding says that half of the dollars they will have in their nest egg at retirement age will come from investment returns during the last 9-12 years of their investing life if you assume a smooth curved line on a graph representing your money growing. What happens if that decade is the same as the previous decade we just experienced?
You should check out Lifecycle Investing by Ian Ayres and Barry Nalebuff. I agree with you in principle; however, my concern is that people tend to come around to this belief after a strong run in stocks, when valuations are not terribly attractive.
I was just thinking about valuations and considering the Schiller PE is about 25-26, returns should lag the historical average going forward for any money invested today. I'll probably wait until a major correction to reallocate my bond portfolio. I'm starting to consider maybe keeping 10% in bonds just for the behavioral / psychological aspects of it and to have something to invest in stocks in case of a major 25-35% drop in the future.
bhsince87
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Re: 100% Equities until age 55-58

Post by bhsince87 »

You mentioned you’d like to see a drop in equities so you could buy more. Good idea! Buy low, sell high!

You might want to consider the role of bonds as “dry powder” for such opportunities, and research the reasoning behind the rebalancing approach.

With your plan, you are buying high and buying low, and not selling along the way.

Multiple studies have shown that is not optimal, historically.
Time is what we want most, but what we use worst. William Penn
coldplay221
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Re: 100% Equities until age 55-58

Post by coldplay221 »

bhsince87 wrote:You mentioned you’d like to see a drop in equities so you could buy more. Good idea! Buy low, sell high!

You might want to consider the role of bonds as “dry powder” for such opportunities, and research the reasoning behind the rebalancing approach.

With your plan, you are buying high and buying low, and not selling along the way.

Multiple studies have shown that is not optimal, historically.
+1

I am 31 and my AA is 75-25.

I have not seen the rise and fall before and during 2008 and I probably have no doubts convincing myself that I can live off my emergency funds and be 100% in equities. Let's check the scenarios.
1. I still have my job and therefore I can DCA my paycheck buying fallen equities.
2. I don't have my job but I am the Marlboro man and I don't touch my equities until I can find money to invest.
3. I run out of my emergency fund and I have to sell depressed equities to pay rent.

Or I remain at 75:25 and have opportuntiies to rebalance when equities have fallen and something to dip in when I have no job or finished running through my emergency fund.
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joe8d
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Re: 100% Equities until age 55-58

Post by joe8d »

I would go with a 10-20 % FI until that age and then ramp up the FI expousure,with new money,as you approach retirement.
All the Best, | Joe
bhsince87
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Re: 100% Equities until age 55-58

Post by bhsince87 »

Here’s a hypothetical example that helped me understand this.

Take 3 investors: A, B, and C. A goes 50/50 stocks/bonds, B 80/20, and C 100 stocks.

Assume no dividends, no return or value change from bonds, and no tax effects, to keep the math simple.

Each contributes $10,000 a year, and re-balances every year, all at once (again to keep math simple).

And each has $100,000 in investment funds saved now.

So, A has $50,000 in stocks, $50,000 in bonds.

B has $80,000 in stocks, $20, 000 in bonds.

C has $100,000 in stocks.

The market tanks 50%.


Now:

A has 25K stock, 50k bond.
B has 40k stock, 20k bond
C has 50k stock

Now it’s time to invest and rebalance.

C now has a portfolio of $50k. C can’t rebalance. And he invests the full additional 10K into stocks. New net portfolio: $60k

C just bought $10k of stock at a bargain price!

B now has a portfolio of $60k ($40kstock, $20k bond). He rebalances to 80/20, and ends up with 48k stocks, 12k bonds. Then he invests his new $10k at his 80/20 split. So now he has $56k in stocks, $14k in bonds. Net portfolio $70k.

B just bought $16k of stock at a bargain price! $8k from rebalancing, and $8k of new money.

“Mr. Conservative” A now has a portfolio of $75k, ($25k stock, $50k bonds). He rebalances and now has $37.5k in stocks, and $37.5k in bonds. Then he invests his $10k at 50/50 split. Now he owns $42.5k in stocks and $42.5k in bonds.

A just bought $17.5k of stock at a bargain price! $12.5k from rebalancing, and $5k of new money.


Nobody knows how things will play out in the future. But this example shows how rebalancing can help people “buy low and sell high”. And it might explain why many studies show this approach is usually better than 100% equities over the long term.
Time is what we want most, but what we use worst. William Penn
Lafder
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Re: 100% Equities until age 55-58

Post by Lafder »

I was having the same dilemma, especially after a smart friend who has a CPA degree told me all her investments are stock funds, no bonds, since bonds "don't grow enough."

So I read and read and read on these boards to convince myself whether to adjust our asset allocation towards more stocks or bonds. We were at 80/20, and by age it was too "risky" but per my friend I was wasting opportunity by having bonds.

My other issues were that owning real estate as well as ongoing income from steady work are also part of one's net worth that made me more comfortable with more risk in stock/bond ratios, supporting my friend's advice to forego bonds.

The argument to have stocks and bonds that made the most sense to me has already been said above, but I will repeat it anyway. By having stocks and bonds, you have a reserve to buy the other when there are market drops or gains, via rebalancing. (unless you have a chunk of cash sitting there to buy in when the market seems to have dropped, but if you have cash you are making less then bonds in most cases, so you might as well have bonds.) The rebalancing allows you to grab the gain and sell the loss within your own accounts.

There are tables I saw of hypothetical stock to bond ratios showing it is not always better at the end point to have had all stocks because you lose more during the big drops in stocks that are not made up by the bigger growth overall. The stocks are the "hare" and the bonds are the "tortoise." And, the hare does not always win in the end due to the big breaks and drops. If it was better to have all stocks, why wouldn't everyone do it?And all models would show it is better. The models I have seen do not support an all stock model as best over years of investing.

I hope this makes sense and helps. I spent hours thinking about the same thing. I still lean a bit in the all stock direction. So we are at a 70/30 mix which is aggressive for our ages of 45 and 49. I sleep better at night with this than all stocks and feel I am capturing a bit more gain than age in bonds, but still with a buffer of a good chunk of bond funds. But you have to do what feels best to you.

I did not mean to imply timing the market by buying when stocks seem low. Disciplined rebalancing would be at preplanned times, not based on market performance.

Lafder
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Re: 100% Equities until age 55-58

Post by Lafder »

bhsince87 that does capture what I was trying to say. But in all fairness, run the numbers with stocks going up 30% in a year to see the final numbers. Then the primarily stock investor is way ahead. Run multiple scenarios over 20 years to see which does the best. It is not as clear as what you would see in a shorter time span.

I forget where I saw longer models. It seemed there is a sweet spot of a combination of stocks and bonds that beats 100% stocks most of the time if looking over years.

Someone must know what tables I saw, I spent most time searching these forums and links for my information when I was researching for myself.

Lafder
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Re: 100% Equities until age 55-58

Post by letsgobobby »

ogd wrote:I'll repost something I said in an older thread, because I don't think I can top it (one hit wonder, if you will):
ogd wrote:I feel that the deep but relatively short crisis of 2008 has spawned, among other classes of investors (the FDIC-only guys, the gold faithfuls and doomsday preppers, the VIX watchers and sector hoppers etc), this type of steely-eyed cowboy of the efficient frontier, who believes that stock prices don't mean anything except return opportunities and all you have to do is brace yourself, "drink some tea or do some yoga if you must" (approximate berntson quote from another thread), keep your finger firmly pressed on the buy button and you'll shortly be made good and then some. I don't buy it. I think prices depressed by half are a sign of things to come and while they may turn out to be wrong, you should at that point be scared for your investments.
There are other ways 2008 could have turned out. Imagine you lose your job and the economy is in the dumpster for 10 or 15 years, enough time for your skill set and remaining time in the workforce to fade away. At the bottom, the bond allocation looked like a floor on those never-ending losses, that I was very, very glad to have in place at the cost of like 1% expected return. The bad scenarios are so bad that making the good scenarios a little better is simply not worth it to me.
Everyone learned the wrong lesson from 08, that stocks always recover if you just hold on. It's going to hurt some people on this board and elsewhere very, very badly, eventually, in the US markets or elsewhere. Stock markets actually fall 80-100% and never recover once in a while. If that weren't true, stocks wouldn't be risky, and stratospheric prices would already reflect those outsized expectations, lowering future returns even further.

Advocating 100% stocks til age 58 following a 200% rise in the stock market is not insightful or clever. It's dangerous and irresponsible and frankly I hope almost no one listens to OP's advice.
cjking
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Re: 100% Equities until age 55-58

Post by cjking »

I think your overall intuition is correct. Your plan could work like this.

1. Set high savings rate based on low assumed return of (at most) 2% real.
2. Invest 100% equities. (Since US equities currently expensive, swap current bond holding for world-ex-US fund. Or move whole portfolio to a single all-world equity fund.)
3. If/when target balance reached, whether ten years before or after target date, liquidate portfolio overnight. (Makes volatility work in your favour, gets you out of equities opportunistically at a relatively good time to sell.)
4. If markets dictate that liquidation date is after retirement date, live on smoothed earnings yield (i.e. a low indefinitely sustainable withdrawal rate) in the mean time. This scenario very very unlikely due to high savings rate, but even if it happens, income should be similar to what a all-bond portfolio could sustain at the start of a 30-year period.
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Re: 100% Equities until age 55-58

Post by cjking »

letsgobobby wrote:Stock markets actually fall 80-100% and never recover once in a while. If that weren't true, stocks wouldn't be risky, and stratospheric prices would already reflect those outsized expectations, lowering future returns even further.
I would suggest the world equity index as an ideal fund, I don't agree that the risk of this staying down forever is big enough to be worth worrying about, in the unlikely event that forever is the timeframe the investor actually cares about.

Most investors plan to spend their money during the lifetime, and the effect of a "temporary" downturn is the same as a permanent one, for the holdings that have to be liquidated during that time. (It's also the same for holdings that don't have to be liquidated, but are anyway, by panic-sellers.)

The ordinary fluctuation of the stock-market from year-to-year is what gives the equity-risk premium, not the possibility of black swan events.

I suspect we aren't paid at all for any black swan risk we are taking.

People like to cite examples of stock-markets that have disappeared as a risk worth worrying about. Surely bond markets are much more likely to suffer this kind of risk? How many currencies have become worthless, taking bonds down with them, compared to stock-markets that have gone to zero? (Genuine question, I don't know the answer.)
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market timer
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Re: 100% Equities until age 55-58

Post by market timer »

cjking wrote:4. If markets dictate that liquidation date is after retirement date, live on smoothed earnings yield (i.e. a low indefinitely sustainable withdrawal rate) in the mean time.
cjking, what do you mean by "live on smoothed earnings yield"? Are you saying something like, if PE10 is 20, spend 5% of your portfolio?
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Re: 100% Equities until age 55-58

Post by Call_Me_Op »

cjking wrote:I think your overall intuition is correct. Your plan could work like this.

1. Set high savings rate based on low assumed return of (at most) 2% real.
2. Invest 100% equities. (Since US equities currently expensive, swap current bond holding for world-ex-US fund. Or move whole portfolio to a single all-world equity fund.)
3. If/when target balance reached, whether ten years before or after target date, liquidate portfolio overnight. (Makes volatility work in your favour, gets you out of equities opportunistically at a relatively good time to sell.)
4. If markets dictate that liquidation date is after retirement date, live on smoothed earnings yield (i.e. a low indefinitely sustainable withdrawal rate) in the mean time. This scenario very very unlikely due to high savings rate, but even if it happens, income should be similar to what a all-bond portfolio could sustain at the start of a 30-year period.
Or, it could work like this:

1. Hold 100% equities into late 50's with expectation of timely retirement.
2. Major market crash. No recovery in sight.
3. Lose job. Unable to find another due to ubiquitous age discrimination and tight labor market.
4. Meager emergency fund is exhausted. Equities being sold at fire-sale prices in order to maintain mortgage payments.
5. Need I continue this painful exercise?
Last edited by Call_Me_Op on Thu Jan 23, 2014 5:39 am, edited 1 time in total.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein
tphp99
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Re: 100% Equities until age 55-58

Post by tphp99 »

labguru7628 wrote:I think risk tolerance is a much more important factor as you are approaching retirement (within 10-12 years). If we all are smart people here who have studied the history of the markets and can do simple financial math then it shouldn't matter what your feelings say in your 20's-40s. You should be able to roll with the tides of the market if you're not looking at your portfolio grow too often. These tides are much more pronounced the last decade of investing before retirement when we will have the most dollars to lose and I feel should be managed when a person gets there with a more conservative allocation. Until then, mathematically sound investing is keeping your eggs in the highest return probability investments. Being overly concerned with risk tolerance in your early years will cause you to save too high a percentage of your income to achieve the same goal. I just think people can have their cake and eat it to when saving for retirement.
I think it's natural to take more risks early in life, but there should be a point where it becomes foolish to take that much risk with money saved when you're career in on the wane. That point however may not be age dependent.

But I wonder about this comment: "save too high a percentage of your income to achieve the same goal." What is your motivation? If it's to upgrade your lifestyle, I suggest that you concentrate on your career/business. That'll make a bigger impact.
cjking
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Re: 100% Equities until age 55-58

Post by cjking »

market timer wrote:
cjking wrote:4. If markets dictate that liquidation date is after retirement date, live on smoothed earnings yield (i.e. a low indefinitely sustainable withdrawal rate) in the mean time.
cjking, what do you mean by "live on smoothed earnings yield"? Are you saying something like, if PE10 is 20, spend 5% of your portfolio?

My rule of thumb for "smoothed earnings yield" is 83%/PE10, because in Shillers data that is what has preserved capital for a retirement that spans the entire 130 or so years of data.

(I think the definition of preserving capital was that a regression line through balance had zero slope, but not 100% sure that is the way I measured.)

However I'm aware the 83% coefficient is mined from historical data, so don't want to suggest it is anything more than a rule-of-thumb that gives an estimate of where the boundary of what is sustainable lies.

I think dividend yields nowadays are roughly half earnings yields, so any rule of thumb that gives a withdrawal rate somewhere between the dividend yield and the 100%/PE10 qualifies as a smoothed earnings yield.

Rick Ferri's rule of taking dividend yield plus 1% probably counts as taking a smoothed earnings yield, at least while dividend yields are half earnngs yields and earnings yields are over 2%. (Edit: although it's a bit less smoothed.)
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labguru7628
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Re: 100% Equities until age 55-58

Post by labguru7628 »

letsgobobby wrote:
ogd wrote:I'll repost something I said in an older thread, because I don't think I can top it (one hit wonder, if you will):
ogd wrote:I feel that the deep but relatively short crisis of 2008 has spawned, among other classes of investors (the FDIC-only guys, the gold faithfuls and doomsday preppers, the VIX watchers and sector hoppers etc), this type of steely-eyed cowboy of the efficient frontier, who believes that stock prices don't mean anything except return opportunities and all you have to do is brace yourself, "drink some tea or do some yoga if you must" (approximate berntson quote from another thread), keep your finger firmly pressed on the buy button and you'll shortly be made good and then some. I don't buy it. I think prices depressed by half are a sign of things to come and while they may turn out to be wrong, you should at that point be scared for your investments.
There are other ways 2008 could have turned out. Imagine you lose your job and the economy is in the dumpster for 10 or 15 years, enough time for your skill set and remaining time in the workforce to fade away. At the bottom, the bond allocation looked like a floor on those never-ending losses, that I was very, very glad to have in place at the cost of like 1% expected return. The bad scenarios are so bad that making the good scenarios a little better is simply not worth it to me.
Everyone learned the wrong lesson from 08, that stocks always recover if you just hold on. It's going to hurt some people on this board and elsewhere very, very badly, eventually, in the US markets or elsewhere. Stock markets actually fall 80-100% and never recover once in a while. If that weren't true, stocks wouldn't be risky, and stratospheric prices would already reflect those outsized expectations, lowering future returns even further.

Advocating 100% stocks til age 58 following a 200% rise in the stock market is not insightful or clever. It's dangerous and irresponsible and frankly I hope almost no one listens to OP's advice.

Actually, according to Jeremy Siegel in "Stocks for the Long Run, 5th Edition", since 1802, stocks in the U.S. Equity markets have always come back after a huge crash. The longest period it took someone to get back to even was 15 years during the great depression and the next longest was the dot-com crash from 2000-2004. If you look at this book's graph it shows a $1 dollar investment in 1802 would be worth over $700k today and the slope of the graph is a consistent line upward giving the investor an average real geometric return of 6.6% per year. If I wanted to plan for armageddon, which is what would happen if the U.S. market lost 100% of it's value, I'd go live off the grid.
cjking
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Re: 100% Equities until age 55-58

Post by cjking »

Call_Me_Op wrote:Or, it could work like this:

1. Hold 100% equities into late 50's with expectation of timely retirement.
2. Major market crash. No recovery in sight.
3. Lose job. Unable to find another due to ubiquitous age discrimination and tight labor market.
4. Meager emergency fund is exhausted. Equities being sold at fire-sale prices in order to maintain mortgage payments.
5. Need I continue this painful exercise?
Yes you need to be sure that there are no likely circumstances where you will be a forced seller of equities. That's not an impossible goal.

A job loss in late fifties is unlikely to be a problem, as by then indefinitely sustainable investment income should be close to matching outgoings anyway.

I think the risks created by leveraged property exposure are more of an issue at a younger age. Bond fund investment/being ahead on the mortgage are the most obvious options for dealing with this.

Obviously this a non-issue for a renter, so yours is not a generic argument why bonds are necessary.
cherijoh
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Re: 100% Equities until age 55-58

Post by cherijoh »

labguru7628 wrote:
Random Musings wrote:Just don't hope the market craps out at ages 53-54 and then you are rebalancing into bonds at the wrong time.

Need of risk dominates exposure to equities, not age or some "glidepath" which doesn't consider need of risk.

RM

That's why I put a 3 year time period for when to do this. In case of a bad market correction at that age they could wait for the market to improve. But let's look at some math. If someone was hoping to retire at round 65-67 years old and was saving for a goal of $1 million, under the normal plan that person would have around $500,000 at about age 56 assuming a 7-8% nominal rate of return. If their is a 30% drop in the market at about age 54-55 then he/she would be down to $350,000 and would have a very slim chance of reaching $1,000,000 by the year they plan on retiring. Now, under my plan that person would have about $650,000 - $700,000 by that age and would be left with $455k -$490k with the same 30% market drop. The chance of this scenario reaching the $1 million goal is much better. The chance of a 30% market drop in any year is pretty slim. Since 1928, the S&P 500 has had a 20% or more drop during a year only 6 times. During the same time frame, the market has dropped over 15% for 2 consecutive years only 2 times. These numbers bode well for my plan. The chance of having a catastrophic drop during the year or two prior to reallocating to a conservative portfolio is very small based on history.

You need to seriously reexamine your "math". You have ignored quite a few things:
1) The "normal investor" with the $500K portfolio would not be 100% in equities so their portfolio would not have shrunk to $350K with a 30% drop in stocks. If they were 60/40 they would have only dropped 18% from the stock loss and they may have earned something on the bond side. 70/30 would have been a 21% drop.

2) Returns are based on geometric (not arithmetic) means! If you have a 50% decline in the value of your portfolio, you need a 100% return to just get back to where you started. A 33.3% decline in your portfolio, requires a 50% recovery, a 25% decline requires a 33.3% recovery, etc. Do you notice a trend here?

3) When your nest egg is in 6 or 7 figures, any brand new contributions you can scrape up will be a drop in the bucket. By holding some significant percentage in bonds, you can rebalance your portfolio and inject a big chuck of money into stocks when they are down, which really helps turbocharge your recovery.

And that still ignores the non-math issues mentioned by other posters such as being propelled into early retirement by job loss - which puts an immediate burden on that decimated 100% stock portfolio.
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