Considering a more aggressive AA than age = bonds
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Considering a more aggressive AA than age = bonds
My AA is age - 10 = bonds + pension balance. As my portfolio and income grows, I'm considering becoming more aggressive. I know I don't want to be 100% stocks, but I feel that I have the ability and willingness to be more aggressive. It seems like age +/- x = bonds is the most common AA, but what are others doing?
Re: Considering a more aggressive AA than age = bonds
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Last edited by mosu on Thu Mar 12, 2015 9:17 pm, edited 1 time in total.
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Re: Considering a more aggressive AA than age = bonds
How do you figure your pension balance for that?
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Re: Considering a more aggressive AA than age = bonds
I was just curious what others are doing but that doesn't mean I'm looking to follow them.mosu wrote:What other people are doing shouldn't have any effect on you. You need to look at your need, willingness and ability to take risk in equities. The only question you should be asking is how much of a drop in your porfolio could you stomach.ThankYouJack wrote:but what are others doing?
I feel I could stomach a 50%. Easy to say, tougher to sit through. My annual savings to portfolio ratio is about 1:5, so even a 50% drop wouldn't take all that long to make up.
It's a cash balance pension plan which I plan to lump sum upon separation from my employer. So I just take whatever the balance is and add it to my AA spreadsheet.trueblueky wrote:How do you figure your pension balance for that?
Re: Considering a more aggressive AA than age = bonds
My bond allocation is based upon savings targets, not on my age, especially since I'm planning to retire early. I'm at age - 15 right now, but I will add that 15 back as soon as reach my first savings goal of 1/2 my minimum retirement savings, which should (hopefully) happen within the next 3-4 years. Once I reach my minimum retirement savings goal, I will go to more than my age in bonds, and then go more conservative yet once I reach my "never have to work again" savings goal. Basically I agree with whoever said that once you've won the game, it's time to stop playing. But since I've just started, and I still have a long way to go, right now I'm playing hard.
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Re: Considering a more aggressive AA than age = bonds
I'm in a similar boat, but I don't consider it a single game. Going on that analogy, I would consider it as:Ganacel wrote:Once I reach my minimum retirement savings goal, I will go to more than my age in bonds, and then go more conservative yet once I reach my "never have to work again" savings goal. Basically I agree with whoever said that once you've won the game, it's time to stop playing. But since I've just started, and I still have a long way to go, right now I'm playing hard.
scrimmage: be able to work part-time
preseason: be financially independent for basic living
regular season: be able to splurge on some of the finer things (long vacations) and help family
playoffs: be able to move to a California beach town
championship: own a beach house in the California beach town
I'll probably never "win" the championship and that's fine. However, I feel that staying aggressive will help me win more games.
Re: Considering a more aggressive AA than age = bonds
66 and retired. Have glided down to 45/55 and do not expect to get any more conservative. I may even let it drift up to 50/50.
Re: Considering a more aggressive AA than age = bonds
Age, age minus 10 and age minus 20 are only numbers that give you a place to start your consideration.
Another approach is to figure out how much you can stand to lose and double that to give you a number for stocks. If you can lose 50% without losing sleep, you can probably tolerate 100% stocks. However, keep in mind that there is no guarantee that the stock market won't actually drop more than 50%.
Another approach is by experience. You say you can watch half your money disappear, but that is much more of a gut wrench when it happens than when you imagine it. You might start with some bonds and once you have gone through the real experience, consider if you are willing to decrease the amount of bonds. Or not.
Another method is to figure out how much risk you NEED to take to achieve your goal. Taking more risk than you need, when there is a possible downside for doing it, is just kinda dumb. If there is no downside (you have more money than you can possibly spend no matter what the market does), that's a different matter.
Using an AA that is more aggressive than age in bonds is not unusual. You just have to figure out what is right for you, realizing that it is better to start on the side of too conservative than to start too aggressive and do something stupid when the bottom falls out.
Another approach is to figure out how much you can stand to lose and double that to give you a number for stocks. If you can lose 50% without losing sleep, you can probably tolerate 100% stocks. However, keep in mind that there is no guarantee that the stock market won't actually drop more than 50%.
Another approach is by experience. You say you can watch half your money disappear, but that is much more of a gut wrench when it happens than when you imagine it. You might start with some bonds and once you have gone through the real experience, consider if you are willing to decrease the amount of bonds. Or not.
Another method is to figure out how much risk you NEED to take to achieve your goal. Taking more risk than you need, when there is a possible downside for doing it, is just kinda dumb. If there is no downside (you have more money than you can possibly spend no matter what the market does), that's a different matter.
Using an AA that is more aggressive than age in bonds is not unusual. You just have to figure out what is right for you, realizing that it is better to start on the side of too conservative than to start too aggressive and do something stupid when the bottom falls out.
Link to Asking Portfolio Questions
Re: Considering a more aggressive AA than age = bonds
Personally, the logic of age in bonds (or variations of it) totally escapes me. This makes little sense when you run backtesting scenarios with various withdrawal methods. Bonds are actually quite risky on the long term (inflation risk; principal erosion when decumulating). And giving up on long term growth (a permanent loss) to avoid short-term volatility (wrenching, but temporary) seems a tad silly when you think at a strategic level. I also suspect quite a few people have a bit of a recency bias with the 'golden age' of bonds we've seen in the past few decades, but that seems very unlikely to happen again, or at least not anytime soon.
I agree with a goal-driven strategy though. Here the underlying logic is clear *IF* you acknowledge that the long-term risk of bonds are still there.
Personally, I am 52, I am at 75/25 (stock/bonds), and I have no plan of changing that unless I reach the 'playoffs', as you put it.
I agree with a goal-driven strategy though. Here the underlying logic is clear *IF* you acknowledge that the long-term risk of bonds are still there.
Personally, I am 52, I am at 75/25 (stock/bonds), and I have no plan of changing that unless I reach the 'playoffs', as you put it.
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Re: Considering a more aggressive AA than age = bonds
FWIW, as I recall polls show bogleheads average about age-15 in bonds (with a very wide spread).ThankYouJack wrote:My AA is age - 10 = bonds + pension balance. As my portfolio and income grows, I'm considering becoming more aggressive. I know I don't want to be 100% stocks, but I feel that I have the ability and willingness to be more aggressive. It seems like age +/- x = bonds is the most common AA, but what are others doing?
This is an AA poll of BH "seniors".......... couldn't find a more general one but I have seem some.
http://www.bogleheads.org/forum/viewtop ... 1&t=110856
JW
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Re: Considering a more aggressive AA than age = bonds
1) Having less than age in bonds is not really considered aggressive any more, if it ever was. It is a kind of benchmark of last resort -- if you can't figure anything out about how much risk to take on, use that as your benchmark. But once you start thinking about risk explicitly, it is meaningless.
2) You are pivoting off of your increased ability to take on risk. Your safe investments are growing large enough that you can tolerate more volatility in the risky investments, so you are thinking why not ratchet up that risk. That's quite logical.
3) What you aren't talking about is your need for risk. That's going down as your portfolio goes up. Many people respond to such a transition by ratcheting down their risk. That's more or less what I have found myself doing the past three years. I seem to be on target to meet my goals with low levels of risk, so why not aim for more safety?
4) As you can see, the two logics run in different direction, even though both are valid. To figure out what makes sense for you, you need to run through some scenarios under different assumptions. You want to stress test your alternative portfolios and think hard about how you'd react. The key thing is getting very concrete about outcomes you most want to make likely, outcomes you most want to avoid, and the tradeoffs you are willing to endure in order to navigate towards and around those conditions.
5) I would suggest spending some time with a tool such as FireCalc to help with (4).
2) You are pivoting off of your increased ability to take on risk. Your safe investments are growing large enough that you can tolerate more volatility in the risky investments, so you are thinking why not ratchet up that risk. That's quite logical.
3) What you aren't talking about is your need for risk. That's going down as your portfolio goes up. Many people respond to such a transition by ratcheting down their risk. That's more or less what I have found myself doing the past three years. I seem to be on target to meet my goals with low levels of risk, so why not aim for more safety?
4) As you can see, the two logics run in different direction, even though both are valid. To figure out what makes sense for you, you need to run through some scenarios under different assumptions. You want to stress test your alternative portfolios and think hard about how you'd react. The key thing is getting very concrete about outcomes you most want to make likely, outcomes you most want to avoid, and the tradeoffs you are willing to endure in order to navigate towards and around those conditions.
5) I would suggest spending some time with a tool such as FireCalc to help with (4).
Re: Considering a more aggressive AA than age = bonds
Husband's age - 20. (Or my age - 16)
There is no absolute right answer.
Just do what you can sleep best with at night.
If I start worrying about it, I just shift ongoing contributions more to bonds.
lafder
There is no absolute right answer.
Just do what you can sleep best with at night.
If I start worrying about it, I just shift ongoing contributions more to bonds.
lafder
Re: Considering a more aggressive AA than age = bonds
Wife and I are 57. This means we are at age - 17 in bonds. Age in bonds = conservative. -10 is moderate. -20 is aggressive.
KISS & STC.
Re: Considering a more aggressive AA than age = bonds
I am 65 and retired. I am 50/50, but have some additional money, about 25% of net worth, invested in real estate investments with my brother.
When the stock market was heading up I thought I should have more in stocks.
When it was crashing I thought I should have more in bonds.
When the stock market was heading up I thought I should have more in stocks.
When it was crashing I thought I should have more in bonds.
. |
The most important thing you should know about me is that I am not an expert.
Re: Considering a more aggressive AA than age = bonds
I think you should pick your asset allocation based on liability matching. For example figure out what you are going to need over a 10 year period and make sure that part is in something that is stable and liquid. For people doing a 4% withdrawal that's 40%.
Age in bonds is a useful simplification but its a pretty blunt tool.
Age in bonds is a useful simplification but its a pretty blunt tool.
Re: Considering a more aggressive AA than age = bonds
I would just add one thing. Going one way or another (glide or not glide, aggressive or not, goal-driven or not, etc) is YOUR decision.
Now just make sure it is WELL GROUNDED on a keen knowledge of history. I'm not speaking of the past 30 years. Solid US data is available since 1926. Decent US data is available since 1871. Look at what happened in the various time periods again & again, play with those numbers for a while, and truly internalize it. This is just SO important for you to be on solid ground with such a referential. Extend such knowledge by taking a look at international data (e.g. triumph of the optimists), and you will be in a much better position to make a decision that you will stick to.
Now just make sure it is WELL GROUNDED on a keen knowledge of history. I'm not speaking of the past 30 years. Solid US data is available since 1926. Decent US data is available since 1871. Look at what happened in the various time periods again & again, play with those numbers for a while, and truly internalize it. This is just SO important for you to be on solid ground with such a referential. Extend such knowledge by taking a look at international data (e.g. triumph of the optimists), and you will be in a much better position to make a decision that you will stick to.
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Re: Considering a more aggressive AA than age = bonds
Thanks for the responses. I'll put a lot more thought into it but I may consider 10-20% bonds while income / savings is high, 1/3 bonds while early semi-retirement, 50% fixed income while fully retired.
The need for risk is something I have trouble wrapping my head around. Basing need off of projections that no one knows if they'll be accurate seems off to me. Instead of "need for risk" I think it's more "desire for risk" or even "desire for reward/ return". I don't have a need to take a lot of risk, but I have the ability to take risk. If the market crashes I will need to work full time longer, if the markets soars, I will be able to work part time sooner or can save more for a house in a very HCOLA.
The approach by experience is a great recommendation too. When it comes to investing I get more excited about making money than I am concerned about losing money. I haven't been through any big bear markets yet but downturns but I did start aggressively investing in early 2009 and didn't pay attention to the noise. Downturns that I have been through don't have me at all concerned. I don't consider it a loss unless I sell and I don't plan to sell for a long time. What I may do is stay where I am until the next big bear market. If i pass the stomach test and I still want to get more aggressive I may make a tactical shift then.
fire calc is a great tool and I'll explore it more - I do believe success tends to improve when equity increases.
That's also an interesting poll about 62+ retire's AAs. I bet most early retire's are even more aggressive.
The triumph of the optimists looks like a great book too. Thinking about another Great Depression is a scary thought but worth considering.
The need for risk is something I have trouble wrapping my head around. Basing need off of projections that no one knows if they'll be accurate seems off to me. Instead of "need for risk" I think it's more "desire for risk" or even "desire for reward/ return". I don't have a need to take a lot of risk, but I have the ability to take risk. If the market crashes I will need to work full time longer, if the markets soars, I will be able to work part time sooner or can save more for a house in a very HCOLA.
The approach by experience is a great recommendation too. When it comes to investing I get more excited about making money than I am concerned about losing money. I haven't been through any big bear markets yet but downturns but I did start aggressively investing in early 2009 and didn't pay attention to the noise. Downturns that I have been through don't have me at all concerned. I don't consider it a loss unless I sell and I don't plan to sell for a long time. What I may do is stay where I am until the next big bear market. If i pass the stomach test and I still want to get more aggressive I may make a tactical shift then.
fire calc is a great tool and I'll explore it more - I do believe success tends to improve when equity increases.
That's also an interesting poll about 62+ retire's AAs. I bet most early retire's are even more aggressive.
The triumph of the optimists looks like a great book too. Thinking about another Great Depression is a scary thought but worth considering.
Re: Considering a more aggressive AA than age = bonds
I have settled on a "permanent?" asset allocation of 60/40.
For most of my investing life, I followed the "age in bonds" rule of thumb, even though equity market ups and downs didn't really bother me.
As I approached 40, the idea of putting nearly 50% of my assets in bonds didn't make much sense to me. The idea of having over half my assets in bonds as I neared retirement made even less sense. So, I decided that once I hit 40, I was going to stick with a "permanent?" AA of 60/40.
I'm two years into the experiment, and I see no need to change.
This is one version of a more agressive AA.
For most of my investing life, I followed the "age in bonds" rule of thumb, even though equity market ups and downs didn't really bother me.
As I approached 40, the idea of putting nearly 50% of my assets in bonds didn't make much sense to me. The idea of having over half my assets in bonds as I neared retirement made even less sense. So, I decided that once I hit 40, I was going to stick with a "permanent?" AA of 60/40.
I'm two years into the experiment, and I see no need to change.
This is one version of a more agressive AA.
Re: Considering a more aggressive AA than age = bonds
I agree 100%. It's a matter of risk tolerance. For me the perfect AA = 60/40. I love it.
greg24 wrote:I have settled on a "permanent?" asset allocation of 60/40.
For most of my investing life, I followed the "age in bonds" rule of thumb, even though equity market ups and downs didn't really bother me.
As I approached 40, the idea of putting nearly 50% of my assets in bonds didn't make much sense to me. The idea of having over half my assets in bonds as I neared retirement made even less sense. So, I decided that once I hit 40, I was going to stick with a "permanent?" AA of 60/40.
I'm two years into the experiment, and I see no need to change.
This is one version of a more agressive AA.
KISS & STC.
Re: Considering a more aggressive AA than age = bonds
I'm 39 years old. and I'm at 60/40. Yes it's conservative to some, but it works just fine for me. The reasons I am at 60/40 are 1) to protect me and my family from myself 2) My ability, willingness, and need to take risk dictates that I should be at 60/40.. It allows me to stick to my IPS. Everyone is different.
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Re: Considering a more aggressive AA than age = bonds
What is your age? Did you have a significant amount of money in the market in 2008 - 09? What did you do then? In my opinion, the best test of anyone's risk tolerance is how they tolerated the last big market crash.ThankYouJack wrote:My AA is age - 10 = bonds + pension balance. As my portfolio and income grows, I'm considering becoming more aggressive. I know I don't want to be 100% stocks, but I feel that I have the ability and willingness to be more aggressive. It seems like age +/- x = bonds is the most common AA, but what are others doing?
Here are my favorite resources for anyone new and wanting to decide on an asset allocation:
1. wiki, on risk. " ome rules of thumb exist to guide your decision. A rule of thumb is just: (1) a method of procedure based on experience and common sense ; (2) a general principle regarded as roughly correct but not intended to be scientifically accurate". [2] . Any rule of thumb is only a starting point for decision making, not the end.";
2. " % Stocks vs Age". An aggregation of Boglehead asset allocations, plotted by age; and
3. "An Efficient Frontier: the power of diversification". Graph plots portfolio volatility (risk) vs performance.
We are both 69 years old, our asset allocation is 50/50.
"Everything should be as simple as it is, but not simpler." - Albert Einstein |
Wiki article link: Bogleheads® investment philosophy
Re: Considering a more aggressive AA than age = bonds
I am 65 and my husband is 11 years older and we are both retired. we always had 70 to 75 % in stocks and stayed invested through all the crash and dips and bumps. only recently we went to 60:40, and that too was motivated by relocating our assets between taxable and tax deferred. so right now our bond allocation is slightly over at 49 but we are investing all new money (MRD) and dividend income into equity in taxable asset. we will probably stay at 60 in stock.
Re: Considering a more aggressive AA than age = bonds
In addition to the points already made, my AA began to change to a more conservative approach when the zeros started racking up. I was fine with an aggressive approach until I reached 3/4 million. Then I started getting the jitters about the potential size of losses and went more conservative. YMMV
The mightiest Oak is just a nut who stayed the course.
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Re: Considering a more aggressive AA than age = bonds
ruralavalon wrote:What is your age? Did you have a significant amount of money in the market in 2008 - 09? What did you do then? In my opinion, the best test of anyone's risk tolerance is how they tolerated the last big market crash.ThankYouJack wrote:My AA is age - 10 = bonds + pension balance. As my portfolio and income grows, I'm considering becoming more aggressive. I know I don't want to be 100% stocks, but I feel that I have the ability and willingness to be more aggressive. It seems like age +/- x = bonds is the most common AA, but what are others doing?
Here are my favorite resources for anyone new and wanting to decide on an asset allocation:
1. wiki, on risk. " ome rules of thumb exist to guide your decision. A rule of thumb is just: (1) a method of procedure based on experience and common sense ; (2) a general principle regarded as roughly correct but not intended to be scientifically accurate". [2] . Any rule of thumb is only a starting point for decision making, not the end.";
2. " % Stocks vs Age". An aggregation of Boglehead asset allocations, plotted by age; and
3. "An Efficient Frontier: the power of diversification". Graph plots portfolio volatility (risk) vs performance.
We are both 69 years old, our asset allocation is 50/50.
I'm in my mid 30s. I didn't have a lot of money invested during the 08-09 crash but early 09 is when I had the opportunity to start investing significant amounts - which I did.
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Re: Considering a more aggressive AA than age = bonds
I say pick an asset allocation you like and stick with it. No reason to change course just because you're now a year older. I'm 90/10 and plan to stay there, possibly straight through retirement. You may want to set aside an extra few years of cash in the years right before retirement. But no reason to think of that as a "new" asset allocation.ThankYouJack wrote:My AA is age - 10 = bonds + pension balance. As my portfolio and income grows, I'm considering becoming more aggressive. I know I don't want to be 100% stocks, but I feel that I have the ability and willingness to be more aggressive. It seems like age +/- x = bonds is the most common AA, but what are others doing?
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Re: Considering a more aggressive AA than age = bonds
Something in the area of 25 - 30% bonds would be fairly typical for the mid 30s.ThankYouJack wrote:I'm in my mid 30s. I didn't have a lot of money invested during the 08-09 crash but early 09 is when I had the opportunity to start investing significant amounts - which I did.
Any rule of thumb is just a starting point for your decision making.
"Pension balance" is almost irrelevant to asset allocation.
"Everything should be as simple as it is, but not simpler." - Albert Einstein |
Wiki article link: Bogleheads® investment philosophy
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Re: Considering a more aggressive AA than age = bonds
The reason I include pension balance is because I plan to lump sum my pension directly into my portfolio when I leave my employer (probably in about 5 years). So I feel it should be factored into my income in my situation. Why would it be irrelevant?ruralavalon wrote:Something in the area of 25 - 30% bonds would be fairly typical for the mid 30s.ThankYouJack wrote:I'm in my mid 30s. I didn't have a lot of money invested during the 08-09 crash but early 09 is when I had the opportunity to start investing significant amounts - which I did.
Any rule of thumb is just a starting point for your decision making.
"Pension balance" is almost irrelevant to asset allocation.
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Re: Considering a more aggressive AA than age = bonds
I agree that a vested pension balance that you have access to as a lump sum upon retirement is relevant. It is a bit of an odd duck; not the same as bonds but closer to bonds than stocks. You could think of it as similar to a high-risk bond. Pension funds go bankrupt.ThankYouJack wrote:The reason I include pension balance is because I plan to lump sum my pension directly into my portfolio when I leave my employer (probably in about 5 years). So I feel it should be factored into my income in my situation. Why would it be irrelevant?ruralavalon wrote:[...]
"Pension balance" is almost irrelevant to asset allocation.
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Re: Considering a more aggressive AA than age = bonds
I said "almost irrelevant".ThankYouJack wrote:The reason I include pension balance is because I plan to lump sum my pension directly into my portfolio when I leave my employer (probably in about 5 years). So I feel it should be factored into my income in my situation. Why would it be irrelevant?ruralavalon wrote:Something in the area of 25 - 30% bonds would be fairly typical for the mid 30s.ThankYouJack wrote:I'm in my mid 30s. I didn't have a lot of money invested during the 08-09 crash but early 09 is when I had the opportunity to start investing significant amounts - which I did.
Any rule of thumb is just a starting point for your decision making.
"Pension balance" is almost irrelevant to asset allocation.
You didn't previously mention anything about cashing out in 5 years, that makes pension balance a little less irrelevant. You say "plan", "probably, and "about". In all, still not a certain thing. If you had said you were going to cash out in two years then I think it becomes more relevant, because your leaving the employer is a more certain event and because it's unlikely that a well funded plan could go bust over a short period of time.
"Everything should be as simple as it is, but not simpler." - Albert Einstein |
Wiki article link: Bogleheads® investment philosophy
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Re: Considering a more aggressive AA than age = bonds
I could also get laid off tomorrow or find a different job much sooner than 5 years. I'm not sure how that changes relevance because the money is still going to be lump summed into my portfolio whether it's tomorrow or 5 years from now.ruralavalon wrote:I said "almost irrelevant".ThankYouJack wrote:The reason I include pension balance is because I plan to lump sum my pension directly into my portfolio when I leave my employer (probably in about 5 years). So I feel it should be factored into my income in my situation. Why would it be irrelevant?ruralavalon wrote:Something in the area of 25 - 30% bonds would be fairly typical for the mid 30s.ThankYouJack wrote:I'm in my mid 30s. I didn't have a lot of money invested during the 08-09 crash but early 09 is when I had the opportunity to start investing significant amounts - which I did.
Any rule of thumb is just a starting point for your decision making.
"Pension balance" is almost irrelevant to asset allocation.
You didn't previously mention anything about cashing out in 5 years, that makes pension balance a little less irrelevant. You say "plan", "probably, and "about". In all, still not a certain thing. If you had said you were going to cash out in two years then I think it becomes more relevant, because your leaving the employer is a more certain event and because it's unlikely that a well funded plan could go bust over a short period of time.
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Re: Considering a more aggressive AA than age = bonds
There are two reasons. You're not sure if you will leave the employer. And you are not sure if you will get the lump sum, the more years off it is the greater the possibility that you wind up under the Pension Benefit Guaranty Corporation with a very substantially reduced entitlement.ThankYouJack wrote:I could also get laid off tomorrow or find a different job much sooner than 5 years. I'm not sure how that changes relevance because the money is still going to be lump summed into my portfolio whether it's tomorrow or 5 years from now.ruralavalon wrote:I said "almost irrelevant".ThankYouJack wrote:The reason I include pension balance is because I plan to lump sum my pension directly into my portfolio when I leave my employer (probably in about 5 years). So I feel it should be factored into my income in my situation. Why would it be irrelevant?ruralavalon wrote:Something in the area of 25 - 30% bonds would be fairly typical for the mid 30s.ThankYouJack wrote:I'm in my mid 30s. I didn't have a lot of money invested during the 08-09 crash but early 09 is when I had the opportunity to start investing significant amounts - which I did.
Any rule of thumb is just a starting point for your decision making.
"Pension balance" is almost irrelevant to asset allocation.
You didn't previously mention anything about cashing out in 5 years, that makes pension balance a little less irrelevant. You say "plan", "probably, and "about". In all, still not a certain thing. If you had said you were going to cash out in two years then I think it becomes more relevant, because your leaving the employer is a more certain event and because it's unlikely that a well funded plan could go bust over a short period of time.
Remember that the bond side of your allocation is meant to be the more stable, more certain, more able-to-be -counted-on-for-sure side of your allocation.
In short don't count the cash (the pension balance) as part of your asset allocation until you have it or are fairly close to having it. Just my opinion.
"Everything should be as simple as it is, but not simpler." - Albert Einstein |
Wiki article link: Bogleheads® investment philosophy
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Re: Considering a more aggressive AA than age = bonds
I'm about 90% certain I'll lump sum. I would rather factor it in now but I can see how it's a personal choice and there isn't a right or wrong answerruralavalon wrote: There are two reasons. You're not sure if you will leave the employer. And you are not sure if you will get the lump sum, the more years off it is the greater the possibility that you wind up under the Pension Benefit Guaranty Corporation with a very substantially reduced entitlement.
Remember that the bond side of your allocation is meant to be the more stable, more certain, more able-to-be -counted-on-for-sure side of your allocation.
In short don't count the cash (the pension balance) as part of your asset allocation until you have it or are fairly close to having it. Just my opinion.
Re: Considering a more aggressive AA than age = bonds
I agree. I count the lump sum value of my pension into my allocation calculation as well.ThankYouJack wrote:I'm about 90% certain I'll lump sum. I would rather factor it in now but I can see how it's a personal choice and there isn't a right or wrong answerruralavalon wrote: There are two reasons. You're not sure if you will leave the employer. And you are not sure if you will get the lump sum, the more years off it is the greater the possibility that you wind up under the Pension Benefit Guaranty Corporation with a very substantially reduced entitlement.
Remember that the bond side of your allocation is meant to be the more stable, more certain, more able-to-be -counted-on-for-sure side of your allocation.
In short don't count the cash (the pension balance) as part of your asset allocation until you have it or are fairly close to having it. Just my opinion.
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Re: Considering a more aggressive AA than age = bonds
There is no right answer. I am 69 and sitting at 60/40 with my liquid investments. Almost all index funds with some Wellington and Wellseley in the mix which I use to re-balance. However when I look at net worth totally I am more like 40/60. I have two DB pensions, SS, and a couple rental properties plus other real estate. Am I concerned that a 50% drop in stocks is a 30% loss of investments and a 20% loss of net worth? Sure. And I am slowly trying to move to a 50/50 on investments. And I will hit RMD's long before I need the income. However it has been difficult to make those moves, avoid the tax man, and buy into the low returns bonds provide. So the same conundrum every one else faces.
So I am actually sitting at age - 29 in bonds. What would seem to be a very risky position. I can still sleep well, but I do watch the market more closely than I should. So your AA really needs to be tailored to your personal situation, goals, and willingness to take risk. I want to move to less risk and I will, just not today.
So I am actually sitting at age - 29 in bonds. What would seem to be a very risky position. I can still sleep well, but I do watch the market more closely than I should. So your AA really needs to be tailored to your personal situation, goals, and willingness to take risk. I want to move to less risk and I will, just not today.
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Re: Considering a more aggressive AA than age = bonds
Getting back to the OP's question, I think a key point is to determine an AA that you are comfortable with for the remainder of your life, once retired. For some of us, myself included, that's 50/50.
So you start our more aggressively, maybe 75% or 80% in stock and then eventually taper down to your terminal AA but no further...
So you start our more aggressively, maybe 75% or 80% in stock and then eventually taper down to your terminal AA but no further...
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Re: Considering a more aggressive AA than age = bonds
1) Thankyoujack, I cannot overemphasize this: this is your personal decision. Your job is to dig into things like charts of what the stock market has done over time, use what YOU know about YOU, and your personal style in financial risk-taking, and decide for yourself how much risk YOU want to take. "You are not in this world to live up to my expectations," and, to quote a Richard Feynman book title, "What do you care what other people think?"
2) Calculations supposedly based on economic theory are pretty consistent in suggesting curves that are not straight lines, in which relatively more of the reduction in stock allocation is done between ages 40 and 60 than before or after. Below are the curves Morningstar uses, and I think they're a reasonable measuring stick. Instead of comparing an asset allocation to "age in bonds," compare it to the curves Morningstar calls "conservative, moderate, or aggressive." Notice just how wide the difference is between "conservative" and "aggressive." If someone proposes being far outside the range of "conservative" to "aggressive"--for example, 100% stocks at age 50, or 70% stocks at age 75--I would challenge them, but within that range it's all personal choice and nobody can say what is "right" or "wrong."
3) In assessing risk tolerance, I would ask you to throw two things onto the balance at whatever weight you think is appropriate. First, a period like 2008-2009 is not experienced as a percentage number. It is more like watching something overloaded, bending far beyond its design limits, and wonder how close it is to breaking. Second, Burton Malkiel, author of A Random Walk Down Wall Street, has described himself as "one who has been smitten with the gambling urge since birth," and financial advisor, columnist, and Boglehead Allan Roth "beneath my dull exterior beats the heart of a gambler who just can’t resist acting on the thrill-seeking urge." It is my belief that the financial profession attracts people who like financial risk. Be aware of the possibility that the people who are giving you advice are coming from a self-selected group of people with higher risk tolerance than average.
2) Calculations supposedly based on economic theory are pretty consistent in suggesting curves that are not straight lines, in which relatively more of the reduction in stock allocation is done between ages 40 and 60 than before or after. Below are the curves Morningstar uses, and I think they're a reasonable measuring stick. Instead of comparing an asset allocation to "age in bonds," compare it to the curves Morningstar calls "conservative, moderate, or aggressive." Notice just how wide the difference is between "conservative" and "aggressive." If someone proposes being far outside the range of "conservative" to "aggressive"--for example, 100% stocks at age 50, or 70% stocks at age 75--I would challenge them, but within that range it's all personal choice and nobody can say what is "right" or "wrong."
3) In assessing risk tolerance, I would ask you to throw two things onto the balance at whatever weight you think is appropriate. First, a period like 2008-2009 is not experienced as a percentage number. It is more like watching something overloaded, bending far beyond its design limits, and wonder how close it is to breaking. Second, Burton Malkiel, author of A Random Walk Down Wall Street, has described himself as "one who has been smitten with the gambling urge since birth," and financial advisor, columnist, and Boglehead Allan Roth "beneath my dull exterior beats the heart of a gambler who just can’t resist acting on the thrill-seeking urge." It is my belief that the financial profession attracts people who like financial risk. Be aware of the possibility that the people who are giving you advice are coming from a self-selected group of people with higher risk tolerance than average.
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Re: Considering a more aggressive AA than age = bonds
I think that the most important is to stick to one's AA, whatever it is (fixed, glide, agressive, conservative). What can really harm a portfolio is to continuously change AA (other than sticking to a preselected glide).
Our emotions tend to make us consider a new AA just at the wrong moment, like adding bonds after stocks crashed, or getting more aggressive after stocks soared.
Of course, it makes sense to change AA due to changes in personal circumstances, or due to having acquired significant new knowledge (like discovering index investing).
Our emotions tend to make us consider a new AA just at the wrong moment, like adding bonds after stocks crashed, or getting more aggressive after stocks soared.
Of course, it makes sense to change AA due to changes in personal circumstances, or due to having acquired significant new knowledge (like discovering index investing).
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Re: Considering a more aggressive AA than age = bonds
Interesting thought!nisiprius wrote:It is my belief that the financial profession attracts people who like financial risk. Be aware of the possibility that the people who are giving you advice are coming from a self-selected group of people with higher risk tolerance than average.
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Re: Considering a more aggressive AA than age = bonds
Thanks for the additional input, especially nisiprius for the detailed post.
The gambling thing is interesting. I don't gamble, but I see how getting too excited about the market (whether up or down) can be a bad thing.
Has anyone considered AA based on annual portfolio contributions vs portfolio size. Then you could estimate how long it would take to recoup say if stocks dropped by 50% and stayed there for 5 years. It could be structured something like:
Annual Portfolio Contribution : Portfolio Size
1:3 or greater (100% stocks -- 1.5 years to recoup from 50% drop)
1:5 (80% stocks -- 2 years to recoup)
1:10 (70% stocks -- 3.5 years to recoup)
I think this makes more sense for new investors, but there would be some considerations -- job loss being a big one.
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I'm not going to rebalance until the beginning of the year, but I'll see how my AA looks then. I just ran a few estimates and even if I become more aggressive by 5 or so points, it'll like have a small affect on my overall net worth. So I'll most likely just stick with age - 10.
The gambling thing is interesting. I don't gamble, but I see how getting too excited about the market (whether up or down) can be a bad thing.
Has anyone considered AA based on annual portfolio contributions vs portfolio size. Then you could estimate how long it would take to recoup say if stocks dropped by 50% and stayed there for 5 years. It could be structured something like:
Annual Portfolio Contribution : Portfolio Size
1:3 or greater (100% stocks -- 1.5 years to recoup from 50% drop)
1:5 (80% stocks -- 2 years to recoup)
1:10 (70% stocks -- 3.5 years to recoup)
I think this makes more sense for new investors, but there would be some considerations -- job loss being a big one.
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I'm not going to rebalance until the beginning of the year, but I'll see how my AA looks then. I just ran a few estimates and even if I become more aggressive by 5 or so points, it'll like have a small affect on my overall net worth. So I'll most likely just stick with age - 10.
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Re: Considering a more aggressive AA than age = bonds
You are correct, a 05% tweak will not have a material impact especially in the short run.ThankYouJack wrote:I'm not going to rebalance until the beginning of the year, but I'll see how my AA looks then. I just ran a few estimates and even if I become more aggressive by 5 or so points, it'll like have a small affect on my overall net worth. So I'll most likely just stick with age - 10.
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Re: Considering a more aggressive AA than age = bonds
Just remember your overall asset structure drives your portfolio asset analysis. e.g. what percentage of your overall assets are in your portfolio?
We are retired so calculation is easy. We have no human capital.
In our case for example DW and I both have pensions and social security and we own our house. Combined the present value of these are substantially larger than our investment portfolio. Our investment portfolio is about 60% stocks 40% fixed income. but stocks represent only about 24% of our overall assets
We are retired so calculation is easy. We have no human capital.
In our case for example DW and I both have pensions and social security and we own our house. Combined the present value of these are substantially larger than our investment portfolio. Our investment portfolio is about 60% stocks 40% fixed income. but stocks represent only about 24% of our overall assets
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Re: Considering a more aggressive AA than age = bonds
Most of our overall assets are in our portfolio. Maybe 20% or so of our net worth is in home equity. Social Security is a ways away so I'm only considering that as a nice plus when the time comes. Human capital is good for us right now but will decrease when we reduce our work hours or switch professions.Professor Emeritus wrote:Just remember your overall asset structure drives your portfolio asset analysis. e.g. what percentage of your overall assets are in your portfolio?
We are retired so calculation is easy. We have no human capital.
In our case for example DW and I both have pensions and social security and we own our house. Combined the present value of these are substantially larger than our investment portfolio. Our investment portfolio is about 60% stocks 40% fixed income. but stocks represent only about 24% of our overall assets