Is it reasonable to have 100% in the stock market?

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ruralavalon
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Re: Is it reasonable to have 100% in the stock market?

Post by ruralavalon »

An including 20% bonds in an asset allocation has historically produced a significant reduction in portfolio volatility (reduced risk)with only a relatively small reduction in portfolio gain.

thepianoman: You mentioned $185k in your 401k. What bond funds are offered in your 401k?
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy
staythecourse
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Re: Is it reasonable to have 100% in the stock market?

Post by staythecourse »

runner3081 wrote:
staythecourse wrote:If you don't meet the requirements below either forget about 100% equities OR address the deficiency.

1. Recession proof job.
2. Long time horizon for the money (>10 years min)
3. No need for liquidity of money during that time frame above
4. EF at least 1 year if not 2.
5. Ability to stay the course
These are great things to think of. I don't think the OP is out of line for going 100% in stocks. My wife and I are in our mid-30's and haven't left the 100% stock allocation either.

Of course, we do meet all 5 guidelines.
I'm 100% equities as well and meet all the requirements, but would say I am NOT 100% equities. WIth 1 yr. EF that makes me less then 100% equities. I do asset allocation the opposite way then most. I figure how much liquid cash I need to survive in case worst case happens (wife and I are both out of recession proof jobs for 1 year) and still cover expenses during that time period. Then the rest goes in stocks.

So, if one does meet the above criteria I would agree with the counterargument that you are NOT 100% equities, but 100% equities in one bucket and 1 yr. cash in another. That is a bucket/ mental accounting approach.

What the OP is suggesting is being 100% equities with little to no EF and that I think is simply not responsible.

Good luck.

p.s. So I guess in the end no one SHOULD be 100% equities, but at BEST 1 yr. EF and then rest in stocks (whatever % of equties that comes to).
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle
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thepianoman
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Re: Is it reasonable to have 100% in the stock market?

Post by thepianoman »

sperry8 wrote: Easily go? Everyone always talks about picking up and moving so easily. People live where they live for a reason. I assume the OP likes Cali. He owns a condo. Has friends there. Possibly family. Now because he made $1.2 million you've got him moving so he can "win the game". For many that isn't winning.
Hey! OP here. Sadly, you are right. I like California, have amazing friends here, and for right now I basically need to be here for work. And you are also right that it certainly doesn't feel like $1.2M is enough to "win the game" out here. Hopefully though if I keep saving at my current rate and keep working then I'll reach that point.
ruralavalon wrote:An including 20% bonds in an asset allocation has historically produced a significant reduction in portfolio volatility (reduced risk)with only a relatively small reduction in portfolio gain.

thepianoman: You mentioned $185k in your 401k. What bond funds are offered in your 401k?
I can invest in Vanguard total bond fund (VBTLX) which seems like a good choice (low cost, diversified). Other options are intermediate term investment grade (VFICX), intermediate term index (VBILX), long term index (VBLTX), long term corporate (VLTCX), and high yield corporate (VWEHX).

Maybe just invest in VBTLX? Since this is a total bond fund I don't gain any addition diversification from adding other bond funds do I? Thanks again for all the help from this forum :)
Lobster
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Re: Is it reasonable to have 100% in the stock market?

Post by Lobster »

willthrill81 wrote:
BrandonBogle wrote:
willthrill81 wrote: I personally don't think that one should let potential capital gains taxes drive the AA bus. Your AA is what it is because you want to keep your risk in check, and failing to do this can have more drastic consequences than capital gains taxes. I agree that it's better to buy funds in order to get your AA squared up when you can, but that might not be possible with large portfolios.
I think Lobster was using that to mean/lead to that if you must sell taxable stock index funds to rebalance (and not change the AA), don't sell and just use some stock index funds in the 401k alongside the municipal bonds in taxable, since the bond total for certain allocations would be larger than the 401k currently is. The 401k can then be strictly bond purchases going forward and whatever necessary in taxable to maintain the AA.
That makes sense, but that would mean that he can't go lower than 80% into equities without incurring some capital gains. It seems, though, that this is his new goal anyway.
OP has described shifting from 100/0 to 80/20, which means that currently the entire taxable and 401k are in equity. The OP gets 2/3 of the way to the new AA by rebalancing the 401k to a bond index fund. Rather than sell $92k equity and pay cap gains, I'm suggesting that he allocate all new contributions (401k) into the bond index. If new funds get added to taxable as well, those go into munis until the AA is reached. Getting to his 80/20 target in a couple years is no problem at 27 years of age and his current net worth. Even LTCG is ~31% at the OPs marginal tax rate (20% federal, 11% state). Given what the market has done in the OPs investing lifetime (all post 2008), taking that hit is not worth given he can achieve his desired AA with new contributions in a short period of time.
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grabiner
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Re: Is it reasonable to have 100% in the stock market?

Post by grabiner »

Lobster wrote:OP has described shifting from 100/0 to 80/20, which means that currently the entire taxable and 401k are in equity. The OP gets 2/3 of the way to the new AA by rebalancing the 401k to a bond index fund. Rather than sell $92k equity and pay cap gains, I'm suggesting that he allocate all new contributions (401k) into the bond index. If new funds get added to taxable as well, those go into munis until the AA is reached.
And in his tax bracket, I would recommend CA munis in the taxable account in preference to bonds in the 401(k). Thus, as new money comes in (dividends from the existing funds, and uninvested salary) add those to a muni fund, and move money back from bonds to stock in the 401(k) if necessary to keep the correct bond allocation.

I do agree with the recommendation not to sell taxable stock for a capital gain once he is close to the target allocation.
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Re: Is it reasonable to have 100% in the stock market?

Post by financial.freedom »

Just my thoughts...

1. I wouldn't be more aggressive than 80/20. As others have mentioned, it will decrease volatility, allow you to buy stocks at a bargain as the market declines (rebalancing) and will not adversely affect returns that much compared with 100/0.

2. Just keep it simple and pick a Target Date fund in your 401k, assuming there is one at a reasonable expense ratio. This way, it will rebalance for you and maintain your AA. When you harvest losses in taxable, you will not have to worry about conflicts with your 401k.

3. Obviously munis in taxable. Split national munis and CA munis -- some do intermediate term for both and split it 50/50, others do long term CA and limited term for national munis to blend maturities and benefit a little more from reduction in CA state taxes. But you are wealthy early in life and will probably accumulate a lot in munis, so best not to have it all in CA bonds.

4. Consider Backdoor Roth. It's not a lot to contribute for your income, but nice to start it young and can get you on the path toward Roth conversions in the future. Still time to contribute 2016 and 2017 (11k). Can also do target date in Roth so it won't conflict with TLH in your taxable account.

Congrats on your early success, and keep up the great work!

PS - Listening to the piano music I recorded and put up on Spotify as I type this, earning about $12 a month.
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ruralavalon
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Re: Is it reasonable to have 100% in the stock market?

Post by ruralavalon »

thepianoman wrote: I can invest in Vanguard total bond fund (VBTLX) which seems like a good choice (low cost, diversified). Other options are intermediate term investment grade (VFICX), intermediate term index (VBILX), long term index (VBLTX), long term corporate (VLTCX), and high yield corporate (VWEHX).

Maybe just invest in VBTLX? Since this is a total bond fund I don't gain any addition diversification from adding other bond funds do I? Thanks again for all the help from this forum :)
Vanguard Total Bond Market Index Fund Admiral Shares (VBTLX) is an excellent choice for your bond fund, you can use it by itself for your bond allocation in the 401k. That's 13% of the 20% bonds.

Then the remainder of the bond allocation (7% of the 20%) can be in Vanguard California Intermediate-term Tax-Exempt Bond Fund in the taxable account.

Please see Grabiner's good advice about minimizing taxes as you move forward. Buy the bond fund in the taxable account using new contributions and dividends, rather than by selling stock funds.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy
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nedsaid
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Re: Is it reasonable to have 100% in the stock market?

Post by nedsaid »

Miriam2 wrote:
nedsaid wrote:100% stock is reasonable for a very young investor but that is assuming that young investors all have high risk tolerances. I started out as a very cautious investor, my IRA was in FDIC Insured Certificates of Deposit until a friend went into the brokerage business. I moved my account to him and it was off to the races buying my very first stock, AST Research. But even then, I bought a brokered CD and three zero coupon treasuries paying 8% for my brokerage IRA. When the stock market crash hit in October 1987, I lost a few hundred dollars and I was devastated emotionally. Do you really have a high risk tolerance? I know I did not at age 27.
Nedsaid, really appreciate so much your stories of your past life 8-) Great wisdom for all of us.
I do believe that investors need to get used to stock market volatility. I suppose after the 1987 crash, I was starting to develop immunity. 2000-2002 and 2008-2009 were painful but bearable, having some bonds in the portfolio really helped. It also helped knowing that I had many years until retirement. Now at age 57, those "many years" are not so many indeed. I wonder if I am starting to get risk averse again.

I have been in a program of what I call "mild rebalancing" since July of 2013. So I am 3 1/2 years into a program of selling stocks and buying bonds. Even at that, my asset allocation has stayed around 67% stocks and 33% bonds and cash. If I had done nothing, I would likely be 74-75% stocks now. I hit the "sell" button three times just last week and if the market keeps going up, I will have to hit the "sell" button some more.
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runner3081
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Re: Is it reasonable to have 100% in the stock market?

Post by runner3081 »

staythecourse wrote:
runner3081 wrote:
staythecourse wrote:If you don't meet the requirements below either forget about 100% equities OR address the deficiency.

1. Recession proof job.
2. Long time horizon for the money (>10 years min)
3. No need for liquidity of money during that time frame above
4. EF at least 1 year if not 2.
5. Ability to stay the course
These are great things to think of. I don't think the OP is out of line for going 100% in stocks. My wife and I are in our mid-30's and haven't left the 100% stock allocation either.

Of course, we do meet all 5 guidelines.
I'm 100% equities as well and meet all the requirements, but would say I am NOT 100% equities. WIth 1 yr. EF that makes me less then 100% equities. I do asset allocation the opposite way then most. I figure how much liquid cash I need to survive in case worst case happens (wife and I are both out of recession proof jobs for 1 year) and still cover expenses during that time period. Then the rest goes in stocks.

So, if one does meet the above criteria I would agree with the counterargument that you are NOT 100% equities, but 100% equities in one bucket and 1 yr. cash in another. That is a bucket/ mental accounting approach.

What the OP is suggesting is being 100% equities with little to no EF and that I think is simply not responsible.

Good luck.

p.s. So I guess in the end no one SHOULD be 100% equities, but at BEST 1 yr. EF and then rest in stocks (whatever % of equties that comes to).
Excellent point, completely missed that. We have huge cash reserves at the moment and are technically 85-15 when you count those. Ideally, we will find some RE to invest in or if the market turns down we will lighten the cash load and can look at some bonds then, perhaps.
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