Thinking about increasing risk. Any advice?

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Thinking about increasing risk. Any advice?

Postby C4NT » Fri Mar 29, 2013 10:39 am

As our (wife and myself) time to rebalance approaches I have been thinking about our AA. The recent recovery of stocks from the 2008 drop has caused me to rethink our AA. We currently hold roughly an age in bonds AA, with 4-5% of that bond allocation in REIT. I am confident and optimistic that the market will recover from any drop in 10 years or less. So, I am discussing dropping our bond allocation significantly to ~10% and keeping it that way (regardless of market happenings) for an extended period of time. We are ~30 years from retirement, so I think we could adjust our IPS to keep this bond allocation until we are 10 years from retirement and then have a steeper (3-4%) increase in bonds per year.

My hesitations stem from the thought that perhaps the recent recovery has given me a false sense of how much risk I can take. We did not blink in our investing since 2008, but our investments were/are smaller than they will be in the future. I think we will stay the course in future downturns, but I don't know if we will act the same with a larger portfolio.

Questions -

(1) What additional factors should I think about before decreasing bond allocation?
(2) For those of you who have been investing longer, has your risk tolerance been constant or inversely proportional to your net worth?
(3) Do you have any other advice or options to consider?

Thanks.
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Re: Thinking about increasing risk. Any advice?

Postby Boglenaut » Fri Mar 29, 2013 10:44 am

"In general, if you are thinking of increasing risk in a bull market, that should raise red flags."


Hmm... clever pun! Too bad I didn't do it on purpose.


PS - I agree with livesoft above.
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Re: Thinking about increasing risk. Any advice?

Postby livesoft » Fri Mar 29, 2013 10:52 am

This doesn't answer your your questions directly, but I also don't see this too often on the forum:

Are you emotionally ready to be unemotional about losses?

Can you make yourself buy more of an asset class that you have losses in? Did you already do so? Let me give an example: Emerging markets is an asset class that goes up and down. If you bought shares in an emerging markets fund in say Spring of 2011, it has made no money for you in the past 2 years. Did you buy more shares in Fall of 2011 after its big drop? Did you continue to buy shares? Are you buying shares now? Remember: You have made no money in 2 years in this asset class.

How about bond funds? Are you thinking of getting out of bond funds because they have gone nowhere in 6 months?

Anyways, when one can rebalance into equities as they keep dropping, then I think one is ready for higher risk in equities. Rebalancing into equities when they are reaching record highs is not quite the same thing.
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
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Re: Thinking about increasing risk. Any advice?

Postby Grt2bOutdoors » Fri Mar 29, 2013 10:55 am

Hey, thanks for letting me know, when you buy, remember, I'll be on the other side of the trade selling to you.

What do I think? Well, IMO, the lemmings are looking at the half-eaten cake and saying, I got to get me some of that. Just before, the smart money says "sell boys", the lemmings are coming to pick up the crumbs while we get to have our cake and eat it. If you want to increase risk but have your cake, at least buy the most undesirable piece of cake out there today - international. No need to go whole hog, a little can go a long way. Remember, bulls and bears make money, the hogs get slaughtered at the trough.
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Re: Thinking about increasing risk. Any advice?

Postby STC » Fri Mar 29, 2013 10:57 am

C4NT wrote: with 4-5% of that bond allocation in REIT. .


REIT's are equities. NOT NOT NOT NOT NOT Bonds
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Re: Thinking about increasing risk. Any advice?

Postby garlandwhizzer » Fri Mar 29, 2013 1:23 pm

I would agree that rebalancing into equities when they are at all time highs is a herd reaction, based on emotion rather than reason. The perception of risk is subjective, and it is often inversely proportional to objective risk. Objectively, the lowest risk environment for adding to equity exposure was in the total panic of 2008-09, when the pervasive fears of total financial collapse were baked into equity market prices. Savvy, seasoned investors like Warren Buffett who aren't ruled by their emotions, use such times to increase equity exposure because the risk/reward tradeoff is highly favorable when fear dominates the market. The converse is also true. Now the markets are at all time highs, and average investors who have been pulling money out of equity funds and putting it into cash and bonds, "safe assets," for 4 years even as the S&P has risen 130%, one of the greatest bull runs in history. Now, ironically, they decide is the time to buy stocks and equity fund outflows have recently reversed. Who is it that refuses to buy when something is on sale and insists on buying it when its price is marked up? Apparently most of us. Emotions, particularly fear, can be your biggest enemy when it comes to long term investment results in my opinion.

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Re: Thinking about increasing risk. Any advice?

Postby Balanthalus » Fri Mar 29, 2013 1:35 pm

STC wrote:
C4NT wrote: with 4-5% of that bond allocation in REIT. .


REIT's are equities. NOT NOT NOT NOT NOT Bonds


This. See the wiki ("REITs should be treated as equity") and/or Vanguard's profile of its REIT funds (characterizing its REIT funds as "Stock - Sector-Specific" and "more volatile than more broadly diversified stock funds").

So you're not currently age in bonds. You are age minus five in bonds, with a small tilt to a particular sector in your equity allocation.
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Re: Thinking about increasing risk. Any advice?

Postby downshiftme » Fri Mar 29, 2013 1:45 pm

I personalty like a somewhat more risky AA than many. If someone has a 90% equity portfolio that's more than I like but that could be right for them. I am comfortable weathering the ups and downs and confident that I can reduce expenses comfortably (and radically) if needed. However, even with that attitude towards risk, I would be uncomfortable if I concluded that I was more tolerant of risk than my previous attitude when in the midst of a big bull market. It's far to easy to be influenced by recent success and discount the possibility of risk, that is the likelihood of a BAD result and what that BAD result might be. Changes in risk attitude are likely unreliable when the inspiration strikes in periods of euphoria (or gloom).

Any "lessons learned" from this relatively painless recent crisis and immediate recovery should be highly suspect. Not all bad cycles dissipate in only a few years. Not all views from the vantage point of new market highs are reliable.
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Re: Thinking about increasing risk. Any advice?

Postby bobcat2 » Fri Mar 29, 2013 1:47 pm

I am confident and optimistic that the market will recover from any drop in 10 years or less.
For the most recent 13 year period 2000-2012 the real return on the total US stock market was -0.2% per year before expenses. So given the experience of the last 13 years, why are so sure that the stock market will recover from any drop in 10 years or less?

Source for data is Credit Suisse Global Investment Returns Yearbook 2013 .

Link - data for US is on page 57.
http://www.investmenteurope.net/digital_assets/6305/2013_yearbook_final_web.pdf

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Re: Thinking about increasing risk. Any advice?

Postby C4NT » Fri Mar 29, 2013 2:23 pm

Hello All,

Thanks for the replies. I agree with many of your statements.

I think I will test out my new found risk tolerance by adjusting my AA much more slowly.

Balanthalus wrote:So you're not currently age in bonds. You are age minus five in bonds, with a small tilt to a particular sector in your equity allocation.


Yes, that is a more clear way of saying our AA...age in bonds minus 5 (w/REIT taking that extra 5).

So what I'm thinking about doing now is slowly increasing stock AA by going bonds minus 1 additional year (with that 1% going to stocks) each year for the next few years and see how the market and my emotions mix.
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Re: Thinking about increasing risk. Any advice?

Postby greg24 » Fri Mar 29, 2013 2:39 pm

You could always raise your risk profile (relative to AIB) by leaving your bond percentage static as you age.
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Re: Thinking about increasing risk. Any advice?

Postby Call_Me_Op » Fri Mar 29, 2013 2:48 pm

Sorry to say - but this sounds like performance chasing to me.
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Re: Thinking about increasing risk. Any advice?

Postby Cut-Throat » Fri Mar 29, 2013 3:02 pm

This sounds exactly like "Buying High and Selling Low" to me.
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Re: Thinking about increasing risk. Any advice?

Postby mickeyd » Fri Mar 29, 2013 3:05 pm

C4NT wrote:My hesitations stem from the thought that perhaps the recent recovery has given me a false sense of how much risk I can take. We did not blink in our investing since 2008, but our investments were/are smaller than they will be in the future. I think we will stay the course in future downturns, but I don't know if we will act the same with a larger portfolio.


Thanks.


You seem unsure about making the move. That alone should be a red flag. My idea of my AA is that it was made when I was 100% sure that it was the plan for me at that time in my life. When troubled times/good times come along (as they always do) be cautious of making big alterations to your long term plans.
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Re: Thinking about increasing risk. Any advice?

Postby Garco » Fri Mar 29, 2013 3:06 pm

There is nothing magical about "age in bonds." It's a useful reference point based on experience but does it have a financial risk foundation behind it? I've used it as a first approximation, but frankly when I was the age of the OP it just didn't matter to me. It becomes relevant, it seems to me, when one is reaching one's 50's and beyond. (The idea of moving the line precisely 1% each year makes no sense to me in part because the "noise" in one's portfolio can produce shifts of a few percentage points.)

To my mind there is so much else to focus on, such as what kind of bonds (fixed income), and what kind of non-bonds -- equities, real estate, commodities, or whatever.

As I reached age 60, I started to pay a lot more attention to AA precisely because of the risk of a major market meltdown for my lifetime accumulation and retirement. But I didn't move to 60% bonds, and am below that level even now. I have a very balanced overall AA, with a focus on safety as much as increasing return. And even at a 50-50-ish AA (more complicated because the non-equities aren't only FI) I've benefited greatly from the "great recovery" since March 2009. My main concern, however, as I approach retirement, is increasingly on securing my gains rather than increasing them. I don't have to put all my money under the mattress to do this. I still accept risk; just not as much as I did in my "yute."
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Re: Thinking about increasing risk. Any advice?

Postby slowlrnr » Fri Mar 29, 2013 3:15 pm

livesoft wrote:How about bond funds? Are you thinking of getting out of bond funds because they have gone nowhere in 6 months?


Sorry for digressing from the topic and piggybacking but, does this mean it is a good time to invest in bonds?
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Re: Thinking about increasing risk. Any advice?

Postby livesoft » Fri Mar 29, 2013 3:19 pm

^ Only folks who can predict the future know the answer to that.

I would say just follow your asset allocation plan. If your AA plan calls for bond funds and you are underweight bond funds, then now is a good time to invest in bond funds.
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
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Re: Thinking about increasing risk. Any advice?

Postby nisiprius » Fri Mar 29, 2013 3:27 pm

C4NT wrote:I am confident and optimistic that the market will recover from any drop in 10 years or less.
Can you state, in your own words, why you are confident and optimistic about this now, when you apparently were not before? What has changed?

What evidence do you have that varying your asset allocation according to your degree of confidence and optimism works better than blindly staying the course?

Do you have evidence that confident, optimistic investors fare better than others?

Do you feel that the fact that the U.S. stock market recovered from the 2008-2009 drop in less than ten years means that you can always count on it to do so in the future?

Have you ever, in your life, rolled a double six on a pair of dice? During the period 1926 through 2009 inclusive, there were a total of 75 (overlapping) ten year periods. Stocks made money in 71 of those periods and lost money in 4 of them. That means the chances of ending up with a smaller number of dollars ten years later was higher than the chances of rolling a double six. If the future resembles the past, the odds are good that you will make money over the next ten years investing in the total stock market, but are you seriously taking into account the possibility that you might not? Or, having decide that it is unlikely, are you dismissing it?

In the late 1980s, do you think any investors in the Japanese stock market were confident and optimistic "that the market will recover from any drop in 10 years or less?"

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Re: Thinking about increasing risk. Any advice?

Postby backofbeyond » Fri Mar 29, 2013 3:48 pm

You have received feedback from some heavy hitter of this form, or as I like to say, the Rock Stars. You should feel blessed that they took the time to answer..seriously.

With +30 years to invest, I can understand why you believe you can recover. But as pointed about above, you may not be so lucky.

You will most likely do what you want to do prior to beginning this thread, but pls reconsider. These guys are very very smart and have forgotten more about investing than you or I will ever know. I'd heed their advice.

Good Luck
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Re: Thinking about increasing risk. Any advice?

Postby umfundi » Fri Mar 29, 2013 3:50 pm

C4NT wrote:As our (wife and myself) time to rebalance approaches I have been thinking about our AA. The recent recovery of stocks from the 2008 drop has caused me to rethink our AA. We currently hold roughly an age in bonds AA, with 4-5% of that bond allocation in REIT. I am confident and optimistic that the market will recover from any drop in 10 years or less. So, I am discussing dropping our bond allocation significantly to ~10% and keeping it that way (regardless of market happenings) for an extended period of time. We are ~30 years from retirement, so I think we could adjust our IPS to keep this bond allocation until we are 10 years from retirement and then have a steeper (3-4%) increase in bonds per year.

My hesitations stem from the thought that perhaps the recent recovery has given me a false sense of how much risk I can take. We did not blink in our investing since 2008, but our investments were/are smaller than they will be in the future. I think we will stay the course in future downturns, but I don't know if we will act the same with a larger portfolio.

Questions -

(1) What additional factors should I think about before decreasing bond allocation?
(2) For those of you who have been investing longer, has your risk tolerance been constant or inversely proportional to your net worth?
(3) Do you have any other advice or options to consider?

Thanks.

In my opinion, you should set your Asset Allocation (AA) at 70/30% stocks/bonds and forget about it. It is not an effective knob for adjusting or tuning a retirement plan.

Then, look at your plan and examine the tradeoff between savings rate and age at retirement. Realize that savings rate is absolutely the variable you can most control. Retirement age may not be your choice, if you get laid off around age 60 and cannot find another job.

Risk Tolerance (RT), by the way, is not AA. It has two components. One is psychological, the other is real. The real part is the opposite of what you say in the OP. The less you have, the lower your real RT is. If you have less money (including earning potential or human capital) than you need, you cannot afford to risk any of it. See Zvi Bodie.

As your net worth grows, your real RT also grows, because losing some of your money matters less.

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Re: Thinking about increasing risk. Any advice?

Postby garlandwhizzer » Fri Mar 29, 2013 7:09 pm

bobcat2 wrote [quote]For the most recent 13 year period 2000-2012 the real return on the total US stock market was -0.2% per year before expenses. So given the experience of the last 13 years, why are so sure that the stock market will recover from any drop in 10 years or less?

True in real inflation adjusted dollars. By cherry-picking from the onset of the dot com bust through the two greatest bear markets since the Great Depression, one after the other, 12 year results can look less than promising. Is today's stock market analogous to 2000 in terms of valuations--certainly not. Also it's important to keep in mind that if we're cherry picking, consider that from 1940 (low interest rate environment, like today) through 1980, a full 40 years, Treasuries suffered considerable real losses. 40 years is a long time to wait to get back to the purchasing power you started with. Yet, this fact does not seem to disturb many on this forum who consider bonds "safe."

Likewise Nisi shows scary charts of Japan's long market collapse which was precipitated by PEs in the 60 -100 range. That has little relevance to the US market at with current market valuations.

Simply put, if you are extremely risk averse, you can mine enough data to find something somewhere to support your argument and load up on bonds. Likewise, if you are not extremely risk averse, there is an incredible wealth of data to back up the view that, yes, stocks do in fact beat bonds in the long run if you can hold on and ride out the inevitable ups and downs. Loss of hard earned dollars carries a greater psychological impact than gain of a similar amount, especially when it happens quickly as with stocks rather than death by a thousand paper cuts as in the bond bear market from 1940 - 1980. Psychology rather than a realistic view of long term expected return is, I believe, a major driving force behind the never ending love affair with bonds.


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Re: Thinking about increasing risk. Any advice?

Postby petrico » Fri Mar 29, 2013 7:12 pm

C4NT wrote:The recent recovery of stocks from the 2008 drop has caused me to rethink our AA.

C4NT,

That is just about the worst reason I can think of for changing your AA towards more equities.

Seriously, if you could accomlish that passively, by simply not re-balancing into fixed income, or using only your ongoing contributions, that would be bad enough. But if the move you contemplate is large enough to require actually selling fixed income, you could be making a bigger mistake.

1) You should think about your rationale for deciding on your AA in the first place. What has changed?

You should think about how well you could tolerate -- psychologically and financially -- a 50% or more drop in the value of all equities.

You should also think about what it will take to transition so steeply towards fixed income as you near retirement. If you have to sell equities, the timing could be bad in a volatile market. A more gradual transition might be accomplished largely with new contributions.

2) My risk tolerance has been inversely proportional to net worth, but not due to net worth. The driving factor in the decreasing risk tolerance is my increasing age: losing human capital, and getting closer to the withdrawal phase.

3) I think 10% fixed income is too low for most people. I happen to agree with Keith (umfundi) and settled into that strategy sort of late. I ended up with a static 30% fixed income allocation (sort of late), and am now transitioning somewhat steeply during my last decade of working to a static 44% fixed income allocation. David Swensen seems to advocate this sort of thing. If I had it to do over again, I'd have just picked a 30% fixed income AA and stuck with it until starting a final glide path.

But back to what started this thread. The one pearl of wisdom I can give you, endorsed by the Bogleheads, is this:

"Never change your long term investment plan based on short term results."

You are contemplating exactly that, and I believe you would be making a mistake.

--Pete
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Re: Thinking about increasing risk. Any advice?

Postby FinancialDave » Fri Mar 29, 2013 7:26 pm

Cut-Throat wrote:This sounds exactly like "Buying High and Selling Low" to me.


I echo this, but then again I don't own any bonds, and I'm over age 53, so my knowledge on investing matters has certainly peaked - at least according to "some" experts.

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Re: Thinking about increasing risk. Any advice?

Postby C4NT » Fri Mar 29, 2013 7:27 pm

nisiprius wrote:Can you state, in your own words, why you are confident and optimistic about this now, when you apparently were not before? What has changed?

What evidence do you have that varying your asset allocation according to your degree of confidence and optimism works better than blindly staying the course?

Do you have evidence that confident, optimistic investors fare better than others?


Do you feel that the fact that the U.S. stock market recovered from the 2008-2009 drop in less than ten years means that you can always count on it to do so in the future?

During the period 1926 through 2009 inclusive, there were a total of 75 (overlapping) ten year periods. Stocks made money in 71 of those periods and lost money in 4 of them. That means the chances of ending up with a smaller number of dollars ten years later was higher than the chances of rolling a double six. If the future resembles the past, the odds are good that you will make money over the next ten years investing in the total stock market, but are you seriously taking into account the possibility that you might not? Or, having decide that it is unlikely, are you dismissing it?



I am confident and optimistic (not certain) that the market can recover from dips in 10 years based on similar arguments that you list yourself - 71/75 isn't bad I thought I read somewhere that there were fewer than 4, but I am still optimistic. I am not dismissing the risk, but think I can take higher risk than I am now. I do not think that optimistic investors fare better, I think investors that stay the course fare better. I am trying to figure out my course. We set out AA as roughly age in bonds since I found the bogleheads roughly 2 years ago. Prior to that I had no concept of AA, but always understood the importance of buy and hold - and have never strayed from it. I am just questioning if I have the right AA.

umfundi wrote:In my opinion, you should set your Asset Allocation (AA) at 70/30% stocks/bonds and forget about it. It is not an effective knob for adjusting or tuning a retirement plan.

Then, look at your plan and examine the tradeoff between savings rate and age at retirement. Realize that savings rate is absolutely the variable you can most control. Retirement age may not be your choice, if you get laid off around age 60 and cannot find another job.

Risk Tolerance (RT), by the way, is not AA. It has two components. One is psychological, the other is real. The real part is the opposite of what you say in the OP. The less you have, the lower your real RT is. If you have less money (including earning potential or human capital) than you need, you cannot afford to risk any of it. See Zvi Bodie.

As your net worth grows, your real RT also grows, because losing some of your money matters less.

Keith


Thanks for the comments, I have never thought about RT in that sense. I'm not sure I agree with some of the logic though. For instance, if stocks decreased by 50% tomorrow I wouldn't lose any sleep because I know that I have time to make it up and know that future contributions alone are greater than what I lost. Later, however, that same drop will impact the amount of money we have in retirement the further we are in the accumulation phase. So I would think that my RT should decrease as a function of time, not increase.
backofbeyond wrote:You have received feedback from some heavy hitter of this form, or as I like to say, the Rock Stars. You should feel blessed that they took the time to answer..seriously.

With +30 years to invest, I can understand why you believe you can recover. But as pointed about above, you may not be so lucky.

You will most likely do what you want to do prior to beginning this thread, but pls reconsider. These guys are very very smart and have forgotten more about investing than you or I will ever know. I'd heed their advice.

Good Luck


I am always grateful for responses in this forum (Thank you all again). I have not made any decisions, and am honestly looking for advice. I've even pretty much abandoned the idea of going down to 10% bonds. Maybe I should start over and rephrase the question.

How does one responsibly adjust their AA if they feel they started out a little conservative with respect to risk tolerance? I have always read that your RT should depend on needs and ability to sleep at night. Thirty years from retirement I don't really know what our needs will. I think there are too many variables, so we just save as much as we can. I slept fine at night with the ups and downs of the last market cycle, so I wonder if I could/should adjust AA to increase risk.

Thanks again.
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Re: Thinking about increasing risk. Any advice?

Postby FinancialDave » Fri Mar 29, 2013 7:29 pm

"Never change your long term investment plan based on short term results."


I would add to this:

"Never change your investment plan based on what someone else thinks."


I don't mean to imply you shouldn't listen and read - but in the end you have to be comfortable with your own decisions.

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Re: Thinking about increasing risk. Any advice?

Postby Johm221122 » Fri Mar 29, 2013 7:41 pm

slowlrnr wrote:
livesoft wrote:How about bond funds? Are you thinking of getting out of bond funds because they have gone nowhere in 6 months?


Sorry for digressing from the topic and piggybacking but, does this mean it is a good time to invest in bonds?

There are other options besides bonds if you need more non equity investments.Stable value, CD's, high yield savings accounts or savings bonds could be used to balance your portfolio. But some sort of fixed income should be used in most peoples investment plan
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Re: Thinking about increasing risk. Any advice?

Postby umfundi » Sat Mar 30, 2013 2:55 am

C4NT wrote:
umfundi wrote:In my opinion, you should set your Asset Allocation (AA) at 70/30% stocks/bonds and forget about it. It is not an effective knob for adjusting or tuning a retirement plan.

Then, look at your plan and examine the tradeoff between savings rate and age at retirement. Realize that savings rate is absolutely the variable you can most control. Retirement age may not be your choice, if you get laid off around age 60 and cannot find another job.

Risk Tolerance (RT), by the way, is not AA. It has two components. One is psychological, the other is real. The real part is the opposite of what you say in the OP. The less you have, the lower your real RT is. If you have less money (including earning potential or human capital) than you need, you cannot afford to risk any of it. See Zvi Bodie.

As your net worth grows, your real RT also grows, because losing some of your money matters less.

Keith


Thanks for the comments, I have never thought about RT in that sense. I'm not sure I agree with some of the logic though. For instance, if stocks decreased by 50% tomorrow I wouldn't lose any sleep because I know that I have time to make it up and know that future contributions alone are greater than what I lost. Later, however, that same drop will impact the amount of money we have in retirement the further we are in the accumulation phase. So I would think that my RT should decrease as a function of time, not increase.

I am always grateful for responses in this forum (Thank you all again). I have not made any decisions, and am honestly looking for advice. I've even pretty much abandoned the idea of going down to 10% bonds. Maybe I should start over and rephrase the question.

How does one responsibly adjust their AA if they feel they started out a little conservative with respect to risk tolerance? I have always read that your RT should depend on needs and ability to sleep at night. Thirty years from retirement I don't really know what our needs will. I think there are too many variables, so we just save as much as we can. I slept fine at night with the ups and downs of the last market cycle, so I wonder if I could/should adjust AA to increase risk.

Thanks again.

I think you're saying your emotional/psychological risk tolerance is high. And, you have 30 years of human capital (earnings years before retirement). OK then, set your AA to the "risky" side. In my opinion, the max would be 80/20% stocks/bonds. I am a 70/30 guy myself.

It's very reasonable to assume you want your standard of living to continue into retirement. The ballpark estimates are easy to do. Think in today's dollars.

If you save 15% of your income it will provide 1/3 of your income in 30 years. Calculate your current savings rate. If it is 30%, you are done. Stay the course, you'll be fine.

If you save a third of your income, you are living on 2/3. And, in time, those savings will replace 2/3 of your income, when you do not have to save any more.

Your "number", when you know you are done, is about 17x current income.

Now, consider Social Security. That will lower the savings numbers. In the end, my rule of thumb is to save 25% of your income for retirement. You'll be fine.

If you're saving less than 15%, you have a serious issue.

Good luck with this.

Keith
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Re: Thinking about increasing risk. Any advice?

Postby Trev H » Sat Mar 30, 2013 6:58 am

C4NT,

1970-2012 (annual rebalancing)

35% TSM
35% Tot Intl
30% Total Bond
==============
10K Growth
$554,430.12
CAGR
9.79
StDev
13.38 <------***
Sharpe
0.40
Bear Market
1973...-10.76
1974...-15.77
2000....-5.75
2001....-8.36
2002...-10.14
2008...-26.88


30% TSM
30% Tot Intl
10% REIT
30% Total Bond
==============
10K Growth
$601,536.64
CAGR
10.00
StDev
12.67 <------***
Sharpe
0.44
Bear Market
1973...-10.67
1974...-15.40
2000....-1.80
2001....-5.57
2002....-7.96
2008...-26.53

Yes - REIT = Equity - but their low correlation to US and Intl Markets works nicely in the portfolio. For this timeframe producing higher returns and lower volatility.


20% TSM
20% Tot Intl
10% REIT
10% US Small Value
10% International Small Market
30% Total Bond
==============
10K Growth
$902,905.79
CAGR
11.04
StDev
12.94 <------***
Sharpe
0.51
Bear Market
1973...-11.37
1974...-15.01
2000.....2.74
2001....-3.34
2002....-7.16
2008...-26.29


Starting with a combination of US and Intl Markets and adding in slices of US Small Value, REIT and International Small Market (all components you can get at Vanguard)...
Those components alone have higher risk (measured in StDev) than the Large Markets... but in the mix actually decrease volatility.

Notice the last mix increased performance nicely (compared to large markets only) and did so with lower volatility - and the bond allocation stayed the same.

You could just keep your bond allocation as it is and trade in some of your Large Market for slices of US SV and Intl Small Market.

Best of Luck !

Trev H
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Re: Thinking about increasing risk. Any advice?

Postby nisiprius » Sat Mar 30, 2013 7:55 am

C4NT wrote:
nisiprius wrote:Can you state, in your own words, why you are confident and optimistic about this now, when you apparently were not before? What has changed? ...What evidence do you have that varying your asset allocation according to your degree of confidence and optimism works better than blindly staying the course? ...Do you have evidence that confident, optimistic investors fare better than others?...Do you feel that the fact that the U.S. stock market recovered from the 2008-2009 drop in less than ten years means that you can always count on it to do so in the future?...During the period 1926 through 2009 inclusive, there were a total of 75 (overlapping) ten year periods. Stocks made money in 71 of those periods and lost money in 4 of them. That means the chances of ending up with a smaller number of dollars ten years later was higher than the chances of rolling a double six. If the future resembles the past, the odds are good that you will make money over the next ten years investing in the total stock market, but are you seriously taking into account the possibility that you might not? Or, having decide that it is unlikely, are you dismissing it?
I am confident and optimistic (not certain) that the market can recover from dips in 10 years based on similar arguments that you list yourself - 71/75 isn't bad I thought I read somewhere that there were fewer than 4, but I am still optimistic. I am not dismissing the risk, but think I can take higher risk than I am now. I do not think that optimistic investors fare better, I think investors that stay the course fare better. I am trying to figure out my course. We set out AA as roughly age in bonds since I found the bogleheads roughly 2 years ago. Prior to that I had no concept of AA, but always understood the importance of buy and hold - and have never strayed from it. I am just questioning if I have the right AA.
OK. I'm not an expert, and actually I'm not sure there's much expertise on determining risk tolerance. I'm risk-averse myself and I tend to project that. The only thing I have going for me is that I'm not selling risky investments. I think that "Wall Street" is biassed toward the marketing of risk, so one has to be careful.

On the "71/75 isn't bad," is the glass 71/75 full or 4/75 empty? In discussions of things like safe withdrawal rates, one constantly sees an implied assumption that, say, a 95% success rate is good and a 5% failure rate is negligible. Here's the problem: most of the time, if you take a chance with a 95% chance of success, you win and you never find out how you would have felt if you'd lost.

There are people, and they are not extremely rare, who really can "watch the things you gave your life to, broken/And stoop and build'em up with worn-out tools." Just be sure you have assessed yourself correctly and that you are one of them. Do not let other people talk you into taking more risk than you can tolerate--by mustering clever statistical arguments for the risk not really being that large, by setting implied expectations that young persons are expected to be risk-tolerant. My (anecdotal) evidence is that people overestimate their risk tolerance more often than the underestimate it. People talk a good line about being willing to take the risk, but then when it shows up they write things like this:
Ben Stein wrote:they're a catastrophe.... My losses are staggering even in the most plain vanilla index funds. In the emerging markets and developed markets, investments that had once provided immense gains, the losses are worse. Even in my beloved RQI, the high-income, leveraged REIT index fund, the losses are beyond belief. Instead of just jumping off my balcony, which wouldn't get me more than a broken leg, I am going to try to make some sense of what has happened…. I am more than the mere composite of the stocks and bonds I own. I hate myself for being so dependent on how much money I have for my self image. As for retirement, well, I get sick and bored if I am not on the road most of the time anyway. The reason I am not suicidal right now is that I have a wife who would be fine with it if we had to live a more modest life style.
71/75 of the time, it may not matter. The stock market recovers and Ben Stein regains his self-esteem. but, as Samuel Butler wrote, "It is only on having actually lost money that one realises what an awful thing the loss of it is.... Suicide is a common consequence of money losses; it is rarely sought as a means of escape from bodily suffering." David Crockett wrote: "I leave this rule for others when I'm dead/Be always sure you're right—then go ahead!" Just be sure to know thyself
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
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Re: Thinking about increasing risk. Any advice?

Postby Dandy » Sat Mar 30, 2013 9:11 am

As others have pointed out your new found appetite for risk and confidence in the equity market are based on recent performance. You have waited until the bull market has been happening for 3 or 4 years to finally become bullish. It is very similar to the confidence that people had just before the real estate market crashed. They were getting into bidding wars in excess of the asking price and buying several condos with the intent to flip them quickly for profit. The current US equity market is at an all time high - and you want to become much more aggressive? I would carefully step up your aggressive approach to make sure that your risk tolerance has really changed.
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Re: Thinking about increasing risk. Any advice?

Postby z3r0c00l » Sat Mar 30, 2013 10:26 am

The recent recovery of stocks from the 2008 drop has caused me to rethink our AA.
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Re: Thinking about increasing risk. Any advice?

Postby InvestorNewb » Sat Mar 30, 2013 10:39 am

I hold 0 bonds.
Current Holdings: VTI, VXUS, VNQ, VCE (largest to smallest)
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Re: Thinking about increasing risk. Any advice?

Postby HardKnocker » Sat Mar 30, 2013 10:41 am

Attention! All passengers please move to the boarding area. The H.M.S. Titanic will depart in 30 minutes.
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Re: Thinking about increasing risk. Any advice?

Postby Peter Foley » Sat Mar 30, 2013 11:37 am

umfundi wrote:

In my opinion, you should set your Asset Allocation (AA) at 70/30% stocks/bonds and forget about it.


I am of the same opinion. I think that 70% is about as high an equity position as most investors should set. My reasoning for the 70/30 is that it provides some funds for rebalancing should there be a large market correction. The exception to this, IMHO, would be individuals starting out who have very little saved and whose savings over the next 3-5 years would be vastly greater than potential earnings. This exception would apply mainly to 20 somethings.
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Re: Thinking about increasing risk. Any advice?

Postby Fallible » Sat Mar 30, 2013 11:52 am

Boglenaut wrote:"In general, if you are thinking of increasing risk in a bull market, that should raise red flags."

Hmm... clever pun! Too bad I didn't do it on purpose. ...


The best humor is often intuitive, so your pun may well have been intended. :)
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Re: Thinking about increasing risk. Any advice?

Postby Garco » Sat Mar 30, 2013 11:52 am

petrico wrote:
C4NT wrote:The recent recovery of stocks from the 2008 drop has caused me to rethink our AA.

C4NT,

That is just about the worst reason I can think of for changing your AA towards more equities.

Seriously, if you could accomlish that passively, by simply not re-balancing into fixed income, or using only your ongoing contributions, that would be bad enough. But if the move you contemplate is large enough to require actually selling fixed income, you could be making a bigger mistake.

... [edited to focus on following remarks]...

2) My risk tolerance has been inversely proportional to net worth, but not due to net worth. The driving factor in the decreasing risk tolerance is my increasing age: losing human capital, and getting closer to the withdrawal phase.

3) I think 10% fixed income is too low for most people. I happen to agree with Keith (umfundi) and settled into that strategy sort of late. I ended up with a static 30% fixed income allocation (sort of late), and am now transitioning somewhat steeply during my last decade of working to a static 44% fixed income allocation. David Swensen seems to advocate this sort of thing. If I had it to do over again, I'd have just picked a 30% fixed income AA and stuck with it until starting a final glide path.

But back to what started this thread. The one pearl of wisdom I can give you, endorsed by the Bogleheads, is this:

"Never change your long term investment plan based on short term results."

You are contemplating exactly that, and I believe you would be making a mistake.

--Pete

Pete. Thank you! for what you said about risk tolerance! That's what I also meant to say. And what you did with your AA is close to what I have done. My AA has shifted sharply away from stocks, but not to "age in bonds" and not on a 1% year-by-year basis; instead in several large steps toward the end of my career, which is coming to a close. I'm happy where it is now at about 48% equities.
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Re: Thinking about increasing risk. Any advice?

Postby umfundi » Sat Mar 30, 2013 12:23 pm

FWIW, I went through the decade of 200x with 70 - 80% stocks. I stayed the course, but it was a little more exciting than I wanted. I semi-retired at the end of 2008 but have not needed to tap any savings. I have since dialed back and our portfolio is 50/50.

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Re: Thinking about increasing risk. Any advice?

Postby yukon50 » Sat Mar 30, 2013 3:13 pm

When did you develop your AA? If you developed it in 2007, then stocks are cheaper now (going by P/E) and bonds are more expensive.

If this is the case, is increasing stocks really that bad?

Bonds have a lot of purchasing power risk, especially for young people, and that risk is higher now than it's ever been.
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Re: Thinking about increasing risk. Any advice?

Postby petrico » Sat Mar 30, 2013 11:07 pm

C4NT,

I hope I didn't come across as overly critical of your thoughts. Staying the course is something many (most?) of us struggle with. Even professionals, the results show, are not immune from behavioral issues.

So let me tell you, I was thinking along similar lines back in about the third quarter of 2012 as you are now. Okay, maybe not to the same extreme as you, but I was seriously considering temporarily suspending the transition to a lower equity exposure. The market was clicking along nicely, and I started wondering how much of that I'd miss out on as I continued to ratchet down my risk exposure in the final years before retirement.

Well, after much thought, I just kept coming back around to the realization that I had already worked out a reasonable, level-headed, and responsible plan. It had spent well over a year reasoning it out. The fact was, there was just no good justification for changing my plan. And in the big picture, the small tweaks I was considering just wouldn't matter that much.

C4NT wrote:I have not made any decisions, and am honestly looking for advice. I've even pretty much abandoned the idea of going down to 10% bonds. Maybe I should start over and rephrase the question.

How does one responsibly adjust their AA if they feel they started out a little conservative with respect to risk tolerance? I have always read that your RT should depend on needs and ability to sleep at night. Thirty years from retirement I don't really know what our needs will. I think there are too many variables, so we just save as much as we can. I slept fine at night with the ups and downs of the last market cycle, so I wonder if I could/should adjust AA to increase risk.

Thanks again.

Tough question!

It's probably best not to make large, sudden changes. Mull it over for a long time. With any luck, the market conditions will change as you contemplate your move, and it may become apparent if the move is a reasonable, objective revision to your AA, or an emotional reaction to the market. If there is a market "correction" and you still want more equities, maybe the move is right for you.

Good luck with your decision.

--Pete
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Re: Thinking about increasing risk. Any advice?

Postby livesoft » Sun Mar 31, 2013 12:44 am

One way to increase asset allocation towards equities is simply to let nature take its course and not rebalance from equities into fixed income.

Then suppose after a run-up in the stock market one has a portfolio that is 80:20, then a correction happens. It should be relatively easy for one to rebalance from bonds to stocks at that time.
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
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Re: Thinking about increasing risk. Any advice?

Postby umfundi » Sun Mar 31, 2013 12:54 am

livesoft wrote:One way to increase asset allocation towards equities is simply to let nature take its course and not rebalance from equities into fixed income.

Then suppose after a run-up in the stock market one has a portfolio that is 80:20, then a correction happens. It should be relatively easy for one to rebalance from bonds to stocks at that time.

+1 :!:
Stop rebalancing! If your market feelings turn out to be correct, your stock allocation will drift upwards.

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Re: Thinking about increasing risk. Any advice?

Postby Dandy » Sun Mar 31, 2013 8:56 am

There is no sure fire way to adjust your portfolio to your new risk tolerance. Better to not do it all at once. Set a new target for equities and move toward it - I wouldn't just let it drift toward an unspecified target.

Also, in my opinion, risk tolerance often changes as the portfolio gets larger and when your earning power declines. When young, making contributions and the portfolio is small a market hit to equities is easier on the mind. e.g. a 40% hit to a $100,000 in equities = $40,000. You might feel fine at 30 with 30 more years of contributing and time for the market to rebound - hey you might rightfully even see it as a buying opportunity.

At 50 with a $1million in equities a 40% hit is $400,000. You might not sleep as well -- at 60 you might really be concerned about your retirement. Also, unfortunately job security is pretty uncertain, lots of people who had high paying jobs don't have them. So, my message is to keep reviewing your risk tolerance as you age AND as your portfolio grows to make sure
the success of your investments doesn't create a dollar loss that you are unprepared for.
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Re: Thinking about increasing risk. Any advice?

Postby petrico » Sun Mar 31, 2013 8:57 am

livesoft wrote:One way to increase asset allocation towards equities is simply to let nature take its course and not rebalance from equities into fixed income.

Then suppose after a run-up in the stock market one has a portfolio that is 80:20, then a correction happens. It should be relatively easy for one to rebalance from bonds to stocks at that time.

I thought the OP was asking about the thought process, not the mechanics. After a barrage of criticism for developing a new-found affinity for risk in a sharply climbing market, it seemed like the OP was asking about AA changes in general.

How does one truly know if a portfolio revision is an appropriate response to gaining new insight, or simply a behavioral misstep?

It's a tough question. We all agree we should stay the course; then many of us end up tweaking our portfolios. Sometimes that's an appropriate response to changing conditions (age, economic situation, employment, etc.), but not always.

What is the difference between sound justification and thin rationalization?

As I see it, one test is time. If your good intentions remain after thinking things over for six months or a year, it's more likely to be a sound move. And even then, all moves should be gradual.

--Pete
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Re: Thinking about increasing risk. Any advice?

Postby JW Nearly Retired » Sun Mar 31, 2013 10:26 am

Two things to think about. On one side, Vanguard acts like they think just 10% bonds is dandy for those with 30 years to retirement. Their 2040 and 2045 Target Retirement Funds both have only 10% bonds. They don't start inching it up slowly until TR 2035 (14% bonds).

One the other side, it isn't just about you being optimistic that the market will recover from a bear market so you are sure you can weather it without panic selling. Selling at the bottom may be forced. It is entirely possible that you may need to liquidate some of your retirement assets in any dire financial crisis situation. Personal job loss is a commom event in such things as recessions/depressions/wars and accompanying market crashes. In this latest one there are plenty of people still out of a job and burning their retirements assets. You need to have a lot more than 10% bonds if want your nest egg to stand a chance of surviving something like this.

In answer to your risk tolerance question, my own has been about constant as net worth grew. Always have been stock heavy but not above 70/30 for a long time. AA is at 60/40 right now and I doubt I will let it get higher. I admit rebalancing down was easier when bonds might actually return something.
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Re: Thinking about increasing risk. Any advice?

Postby linenfort » Sun Mar 31, 2013 11:27 am

To the OP: Check out the article that Mr Ferri posted: viewtopic.php?f=10&t=113797
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Re: Thinking about increasing risk. Any advice?

Postby C4NT » Thu Apr 04, 2013 2:29 pm

Hello All,

Thanks for all of the replies and comments. Been a bit busy, so haven't had time to put my thoughts back together on this topic.

I've been reading up on bond allocation and have a quick question.

From the wiki:

For instance, Graham's timeless advice was to never hold less than 25% of your portfolio in bonds (or more than 75%).


Can someone who has read his book give me an brief synopsis of why he came to that number? I would like to read his book The Intelligent Investor, but have a few more ahead on the list in the investing category before I get to his. I understand age in bonds as a mechanism to get more conservative as a function of time, but why put a floor (and ceiling) on it?

Right now my AA is 51/18/27/4 % US/Intl/Bond/Reit. I am a little low per IPS on Intl and Bond allocation. I may just rebalance international and sit on that bond allocation for awhile yet and think/read some more.

Thanks again.
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Re: Thinking about increasing risk. Any advice?

Postby FinancialDave » Fri Apr 05, 2013 1:02 pm

C4NT wrote:Hello All,


From the wiki:

For instance, Graham's timeless advice was to never hold less than 25% of your portfolio in bonds (or more than 75%).


Can someone who has read his book give me an brief synopsis of why he came to that number?
Thanks again.


I am not really sure of the "timeless" advice, but I don't have the 1949 version of the book to review, however in the version I have (2006) the quote (paraphrased) is "six years ago we recommended a 25% to 75% range in bonds."

Though I have not fully read the book, it appears more or less what I would call a "swag" and comes from the fact that no one really knows where the market is going so why not just reduce our short term risk by using a 50/50 allocation and then allowing you to adjust it 25% either way based on what you (or Schiller for that matter) think of market valuations.

:?

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