Unknown Time Horizon

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
assumer
Posts: 432
Joined: Fri Dec 21, 2012 11:11 pm

Unknown Time Horizon

Post by assumer » Tue Jul 08, 2014 12:42 pm

Does anybody else have an unknown time horizon? Typically one would say "I want to retire around 62 years old, give or take a few years" and based on that, you can come up with a reasonable risk tolerance, and therefore a reasonable AA, and reasonable savings rate to achieve your goals.

I'm young. I'm 27. I want to take a risk in the startup culture of entrepreneurship. If I succeed I may want to retire in my 30's or pursue hobbies or activities which don't bring much income. If I fail I will live a perfectly happy life putting away 20% of my salary and comfortably retiring at a ripe age of 65. If it's somewhere in the middle I can be happy. If my income tanks, I can cut expenses (I lived on <$25k / year for every year of my life up to now during school & phd) and be (slightly less) happy.

As such I honestly have a flexible time horizon and risk tolerance.

Right now I have all my Roth IRA contributions in Vanguard Target Retirement 2050, and all of my money I've made from working so far (first job since doctorate in December is my own startup company) in Vanguard Lifestrategy Income (80% bonds, 20% stocks).

I have seen no compelling reason to direct my money otherwise.

What is a rational way to come up with an AA or risk tolerance when I have such a long (or potentially short) time horizon where so much can change?

I'm inclined to simply stay the course, and sock as much money away into Vanguard Lifestrategy until things pan out a little more. In fact, at this point in my life, my savings rate is far more important than my asset allocation anyway.

Thoughts?

steve_14
Posts: 1507
Joined: Wed Jun 20, 2012 12:05 am

Re: Unknown Time Horizon

Post by steve_14 » Tue Jul 08, 2014 12:46 pm

Sounds to me like in all states of the world you will need to finance life after age 65. So I might save toward that goal.

User avatar
mhc
Posts: 3694
Joined: Mon Apr 04, 2011 10:18 pm
Location: NoCo

Re: Unknown Time Horizon

Post by mhc » Tue Jul 08, 2014 12:53 pm

I agree that your AA is not so important when you are first starting out. Your saving rate will dominate early on. Your plan sounds good to me.

Mike Scott
Posts: 843
Joined: Fri Jul 19, 2013 2:45 pm

Re: Unknown Time Horizon

Post by Mike Scott » Tue Jul 08, 2014 12:54 pm

Considering current ages of myself and spouse, statistics and family history; at least one of us is likely to still be alive 50 years from now. That's a long time and suggests to me that we need to plan more along the lines of an "endowment" or "stable cash flow" mentality rather than a 30 year draw down.

123
Posts: 3386
Joined: Fri Oct 12, 2012 3:55 pm

Re: Unknown Time Horizon

Post by 123 » Tue Jul 08, 2014 1:16 pm

My take on this situation is different. If you want to take a risk in the startup culture of entrepreneurship I do not think you can have any equity exposure (except perhaps in an IRA/ROTH for retirement purposes). You need cash to make that happen without stock market risk. You can't risk a stock market decline that erodes your capital to launch your endeavor. It's probably not realistic to assume a positive continuing stock market rally for a couple of years that would then help to fund your endeavor. If you want to engage in the startup culture of entrepreneurship that time is probably now or very soon. If the stock market declines like a low tide all the boats in the harbor ride much lower, some could be beached.
The closest helping hand is at the end of your own arm.

dbr
Posts: 27207
Joined: Sun Mar 04, 2007 9:50 am

Re: Unknown Time Horizon

Post by dbr » Tue Jul 08, 2014 1:19 pm

I think you should pick up one of Larry Swedroe's books and read about "need, ability, and willingness" to take risk. Probably he reviews that in one of the recent generic books, but I am not sure which one exactly.

How much to allocate to stocks and to bonds may be influenced by time factors but is not a computation you can make from some kind of a "time horizon." A better concept is that your investing life is a path across a plain of indefinite extent. Like the geographical horizon, the investment horizon always recedes to infinity.

assumer
Posts: 432
Joined: Fri Dec 21, 2012 11:11 pm

Re: Unknown Time Horizon

Post by assumer » Tue Jul 08, 2014 1:24 pm

123 wrote:If you want to take a risk in the startup culture of entrepreneurship I do not think you can have any equity exposure (except perhaps in an IRA/ROTH for retirement purposes). You need cash to make that happen without stock market risk. You can't risk a stock market decline that erodes your capital to launch your endeavor.
I was thinking along the same lines which is why my roth ira retirement account has 90% equity, whereas all my other monetary assets which I will use are in lifestrategy (80% bonds, 20% stocks).

livesoft
Posts: 61327
Joined: Thu Mar 01, 2007 8:00 pm

Re: Unknown Time Horizon

Post by livesoft » Tue Jul 08, 2014 1:26 pm

assumer wrote:What is a rational way to come up with an AA or risk tolerance when I have such a long (or potentially short) time horizon where so much can change?
Trial and error is a rational way to come up with an AA or risk tolerance. I suppose you are doing that already and it is a good way. When you get miffed that you didn't make enough money with your investments, I think you will increase their risk level. When you get miffed that you lost too much money with your investments, I think you will decrease their risk level. At some point you will reach equilibrium for a little while and then the experiment will continue.
Wiki This signature message sponsored by sscritic: Learn to fish.

assumer
Posts: 432
Joined: Fri Dec 21, 2012 11:11 pm

Re: Unknown Time Horizon

Post by assumer » Tue Jul 08, 2014 1:31 pm

livesoft wrote:When you get miffed that you didn't make enough money with your investments, I think you will increase their risk level. When you get miffed that you lost too much money with your investments, I think you will decrease their risk level. At some point you will reach equilibrium for a little while and then the experiment will continue.
It's unfortunate that so much of our investment asset allocation is dependent on our emotions.

But in that vein I suppose that the purpose of money in our lives in general is to make us happier, or more comfortable, or more excited, or more peaceful with a family, or whatever emotion we are trying to produce

yb
Posts: 52
Joined: Thu Feb 14, 2008 10:33 am

Re: Unknown Time Horizon

Post by yb » Tue Jul 08, 2014 3:01 pm

It seems like the early retirement scenario involves you receiving a lot of new money in the next few years (and is not dependent on investment returns). If that happens, you can always allocate your new assets according to your new plan for your new situation.

Do you have a separate emergency fund or is the Lifestrategy Income fund serving that purpose?

assumer
Posts: 432
Joined: Fri Dec 21, 2012 11:11 pm

Re: Unknown Time Horizon

Post by assumer » Tue Jul 08, 2014 6:44 pm

yb wrote:It seems like the early retirement scenario involves you receiving a lot of new money in the next few years (and is not dependent on investment returns). If that happens, you can always allocate your new assets according to your new plan for your new situation.
Good point.
yb wrote:Do you have a separate emergency fund or is the Lifestrategy Income fund serving that purpose?
I see no need to keep a separate bank account for my emergency fund, so the Lifestrategy is part of that. I simply won't use all the lifestrategy money for any ventures, and will use part of it for emergencies. Also in a true emergency I have several credit cards with which I have no money on, and I can really pull my contributions from my Roth in a dire situation.

User avatar
BolderBoy
Posts: 3923
Joined: Wed Apr 07, 2010 12:16 pm
Location: Colorado

Re: Unknown Time Horizon

Post by BolderBoy » Tue Jul 08, 2014 6:49 pm

Since you can't predict the future and are presently young and full of vigor, I'd be saving the legal limits in retirement plans, and saving anything else outside of what I didn't spend beyond that, in efficient, taxable investment funds. In fact I did just that from age 27 onward - maxed out all available retirement options which for me, for many years was a paltry $2k/yr and no workplace retirement plan available. That improved as the tax laws changed and my employment situations changed, but #1 every year was max out all available retirement space, regardless of how miniscule.

By the time I was 47 I could have retired, but loved the work and was still "young" and vigorous, so plowed ahead until one day... it just wasn't as much fun and I wanted to slow down, then quit. Guess what - had I not been focused on maxing out the available retirement space EVERY YEAR, first, before anything else I spent money on, I doubt I'd have been *able* to retire, when I was *wanted* to retire.

That is my wisdom for you, regardless of how else you sail your life. AA and the like is less important now than is the amount of savings that you do from every paycheck. There will be time for AA adjustments. But no time later, for saving now.

MathWizard
Posts: 2877
Joined: Tue Jul 26, 2011 1:35 pm

Re: Unknown Time Horizon

Post by MathWizard » Wed Jul 09, 2014 2:18 pm

assumer wrote:Does anybody else have an unknown time horizon? Typically one would say "I want to retire around 62 years old, give or take a few years" and based on that, you can come up with a reasonable risk tolerance, and therefore a reasonable AA, and reasonable savings rate to achieve your goals.

I'm young. I'm 27. I want to take a risk in the startup culture of entrepreneurship. If I succeed I may want to retire in my 30's or pursue hobbies or activities which don't bring much income. If I fail I will live a perfectly happy life putting away 20% of my salary and comfortably retiring at a ripe age of 65. If it's somewhere in the middle I can be happy. If my income tanks, I can cut expenses (I lived on <$25k / year for every year of my life up to now during school & phd) and be (slightly less) happy.

As such I honestly have a flexible time horizon and risk tolerance.

Right now I have all my Roth IRA contributions in Vanguard Target Retirement 2050, and all of my money I've made from working so far (first job since doctorate in December is my own startup company) in Vanguard Lifestrategy Income (80% bonds, 20% stocks).

I have seen no compelling reason to direct my money otherwise.

What is a rational way to come up with an AA or risk tolerance when I have such a long (or potentially short) time horizon where so much can change?

I'm inclined to simply stay the course, and sock as much money away into Vanguard Lifestrategy until things pan out a little more. In fact, at this point in my life, my savings rate is far more important than my asset allocation anyway.

Thoughts?
Your time horizon is your expected lifespan, so you should invest based on that lifespan.
What you earn while working has little to do with this other than some dangerous occupations.
According to you, you have the ability to take downside risk (you can live frugally) but do you
have the temperament to handle huge drops in the market? If so, then that would allow you
to have a higher equity allocation than average for you age.

Retiring young requires more money to be saved and at a greater rate, due to
less time for compounding,
more non-working life to fund,
less time to save the larger amount in, and
less in the way of old age benefits (SS, but more importantly Medicare coverage of health costs.)

Post Reply