Is 60/40 too conservative for 31 year old?

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FactualFran
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Re: Is 60/40 too conservative for 31 year old?

Post by FactualFran »

Part of one of John Bogle's Twelve Pillars of Wisdom is:
Pillar 2. When all else fails, fall back on simplicity.

There are an infinite number of strategies worse than this one: Commit, over a period of a few years, half of your assets to a stock index fund and half to a bond index fund. Ignore interim fluctuations in their net asset values. Hold your positions for as long as you live, subject only to infrequent and marginal adjustments as your circumstances change. When there are multiple solutions to a problem, choose the simplest one.
Using a 50/50, or a 60/40 allocation, for as long as you live is a simple but reasonable approach.
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segfault
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Re: Is 60/40 too conservative for 31 year old?

Post by segfault »

I'm a couple of years older and am using age in bonds until age 40. After age 40, I plan to hold a fixed 40% bond allocation.

I'd look at the $500k saved and the $70k per year in savings as a percentage of your goal amount. E.g., if $500k is 50% of the goal amount, you have less need to take risk than if it's 10% of the goal amount. If you're relatively close to meeting your goal for your age, I think 60/40 is reasonable.
VaR
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Re: Is 60/40 too conservative for 31 year old?

Post by VaR »

1. Do you plan to retire early? How early?
2. How much of your 60% equity is domestic vs international?
3. What are you bond holdings? Is it a total bond market fund? Treasuries? Cash? CDs? What term?
Yohanson
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Re: Is 60/40 too conservative for 31 year old?

Post by Yohanson »

I'm glad I was 100% equities from age 25 to 52. I'm about 92/8 right now.
RetiredinKaty
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Re: Is 60/40 too conservative for 31 year old?

Post by RetiredinKaty »

Just for fun I generated the table below for my work years (1975-2011), my salary progression (15K to 150K, assume linear), and a constant 18% investment rate (employee and company match). I used Portfolio Visualizer Asset Class Backtest for All Stock (Total US) and for 60/40 Total US Stock / Intermediate Treasury.

My actual was about $2.1 MM, with many mistakes along the way.

Code: Select all

Year	  All Stock	    60 / 40
1975 	    3,721.14 	    3,392.28 
1976 	    8,974.49 	    8,214.12 
1977 	   12,586.87 	   12,067.90 
1978 	   18,774.72 	   17,721.55 
1979 	   30,037.09 	   26,980.53 
1980 	   48,083.24 	   40,013.72 
1981 	   52,557.66 	   47,357.62 
1982 	   72,279.11 	   68,341.32 
1983 	   98,593.02 	   88,434.96 
1984 	  109,719.38 	  104,325.73 
1985 	  156,433.64 	  145,246.10 
1986 	  190,826.23 	  178,350.48 
1987 	  206,888.68 	  193,292.88 
1988 	  256,184.27 	  230,343.39 
1989 	  343,789.87 	  297,490.89 
1990 	  334,932.68 	  310,750.33 
1991 	  461,290.03 	  407,971.77 
1992 	  518,779.89 	  458,366.96 
1993 	  590,301.39 	  525,034.21 
1994 	  604,796.48 	  530,666.98 
1995 	  843,251.12 	  709,013.04 
1996 	1,040,408.56 	  822,721.51 
1997 	1,385,819.91 	1,026,643.73 
1998 	1,730,625.76 	1,235,034.83 
1999 	2,166,087.84 	1,415,441.64 
2000 	1,954,638.28 	1,424,541.02 
2001 	1,758,243.04 	1,393,356.46 
2002 	1,406,254.42 	1,316,413.18 
2003 	1,875,486.77 	1,602,404.59 
2004 	2,135,361.55 	1,768,788.67 
2005 	2,287,378.58 	1,872,546.08 
2006 	2,669,440.23 	2,096,406.75 
2007 	2,841,626.57 	2,275,306.27 
2008 	1,804,812.35 	1,911,763.76 
2009 	2,355,805.05 	2,257,862.00 
2010 	2,789,236.07 	2,585,699.68 
2011 	2,843,271.94 	2,730,009.90 
Vanguard Fan 1367
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Re: Is 60/40 too conservative for 31 year old?

Post by Vanguard Fan 1367 »

RetiredinKaty wrote:Just for fun I generated the table below for my work years (1975-2011), my salary progression (15K to 150K, assume linear), and a constant 18% investment rate (employee and company match). I used Portfolio Visualizer Asset Class Backtest for All Stock (Total US) and for 60/40 Total US Stock / Intermediate Treasury.

My actual was about $2.1 MM, with many mistakes along the way.

Code: Select all

Year	  All Stock	    60 / 40
1975 	    3,721.14 	    3,392.28 
1976 	    8,974.49 	    8,214.12 
1977 	   12,586.87 	   12,067.90 
1978 	   18,774.72 	   17,721.55 
1979 	   30,037.09 	   26,980.53 
1980 	   48,083.24 	   40,013.72 
1981 	   52,557.66 	   47,357.62 
1982 	   72,279.11 	   68,341.32 
1983 	   98,593.02 	   88,434.96 
1984 	  109,719.38 	  104,325.73 
1985 	  156,433.64 	  145,246.10 
1986 	  190,826.23 	  178,350.48 
1987 	  206,888.68 	  193,292.88 
1988 	  256,184.27 	  230,343.39 
1989 	  343,789.87 	  297,490.89 
1990 	  334,932.68 	  310,750.33 
1991 	  461,290.03 	  407,971.77 
1992 	  518,779.89 	  458,366.96 
1993 	  590,301.39 	  525,034.21 
1994 	  604,796.48 	  530,666.98 
1995 	  843,251.12 	  709,013.04 
1996 	1,040,408.56 	  822,721.51 
1997 	1,385,819.91 	1,026,643.73 
1998 	1,730,625.76 	1,235,034.83 
1999 	2,166,087.84 	1,415,441.64 
2000 	1,954,638.28 	1,424,541.02 
2001 	1,758,243.04 	1,393,356.46 
2002 	1,406,254.42 	1,316,413.18 
2003 	1,875,486.77 	1,602,404.59 
2004 	2,135,361.55 	1,768,788.67 
2005 	2,287,378.58 	1,872,546.08 
2006 	2,669,440.23 	2,096,406.75 
2007 	2,841,626.57 	2,275,306.27 
2008 	1,804,812.35 	1,911,763.76 
2009 	2,355,805.05 	2,257,862.00 
2010 	2,789,236.07 	2,585,699.68 
2011 	2,843,271.94 	2,730,009.90 
Thanks for posting that. Interesting how well either approach worked.
John Bogle: "It's amazing how difficult it is for a man to understand something if he's paid a small fortune not to understand it."
randomguy
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Re: Is 60/40 too conservative for 31 year old?

Post by randomguy »

RetiredinKaty wrote:Just for fun I generated the table below for my work years (1975-2011), my salary progression (15K to 150K, assume linear), and a constant 18% investment rate (employee and company match). I used Portfolio Visualizer Asset Class Backtest for All Stock (Total US) and for 60/40 Total US Stock / Intermediate Treasury.

My actual was about $2.1 MM, with many mistakes along the way.

Code: Select all

Year	  All Stock	    60 / 40
1975 	    3,721.14 	    3,392.28 
1976 	    8,974.49 	    8,214.12 
1977 	   12,586.87 	   12,067.90 
1978 	   18,774.72 	   17,721.55 
1979 	   30,037.09 	   26,980.53 
1980 	   48,083.24 	   40,013.72 
1981 	   52,557.66 	   47,357.62 
1982 	   72,279.11 	   68,341.32 
1983 	   98,593.02 	   88,434.96 
1984 	  109,719.38 	  104,325.73 
1985 	  156,433.64 	  145,246.10 
1986 	  190,826.23 	  178,350.48 
1987 	  206,888.68 	  193,292.88 
1988 	  256,184.27 	  230,343.39 
1989 	  343,789.87 	  297,490.89 
1990 	  334,932.68 	  310,750.33 
1991 	  461,290.03 	  407,971.77 
1992 	  518,779.89 	  458,366.96 
1993 	  590,301.39 	  525,034.21 
1994 	  604,796.48 	  530,666.98 
1995 	  843,251.12 	  709,013.04 
1996 	1,040,408.56 	  822,721.51 
1997 	1,385,819.91 	1,026,643.73 
1998 	1,730,625.76 	1,235,034.83 
1999 	2,166,087.84 	1,415,441.64 
2000 	1,954,638.28 	1,424,541.02 
2001 	1,758,243.04 	1,393,356.46 
2002 	1,406,254.42 	1,316,413.18 
2003 	1,875,486.77 	1,602,404.59 
2004 	2,135,361.55 	1,768,788.67 
2005 	2,287,378.58 	1,872,546.08 
2006 	2,669,440.23 	2,096,406.75 
2007 	2,841,626.57 	2,275,306.27 
2008 	1,804,812.35 	1,911,763.76 
2009 	2,355,805.05 	2,257,862.00 
2010 	2,789,236.07 	2,585,699.68 
2011 	2,843,271.94 	2,730,009.90 
How much is mistakes versus things like tax drag AND the difference between linearity of raises and savings and reality? Probably hard to say.

And you should look at how retirement has gone so far. Assume say 100k/year of withdrawals
stocks: 4.7 million
balanced: 3.7 million

Is having 1 year when you have more money worth giving up having more money in the rest of those years? You need like a 30%+ drop for your balanced portfolio to catch up. Obviously it is a lot easier to have this attitude when you know that risk didn't show up during the time period.

Personally I am a 75/25 type guy and will only adjust downwards if I don't end up with enough money when I retire (I work more because I want to, not because I need the cash these days. I like the extra spending money but would be happy without it.)
BogleBoogie
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Re: Is 60/40 too conservative for 31 year old?

Post by BogleBoogie »

ruralavalon wrote:
NewbieBogle007 wrote:I'm no expert by any means, but I'm surprised to see all this support for a 60/40 split for a 30 year old. Even the Target Retirement funds are set to glide at 90/10 until age 40. Now I'm second-guessing my own plans...
They have little need to take risk, wife doesn't want to, and 60/40 can be suitable for just about anyone. So 60/40 is really a no brainer.
+1
KyleAAA
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Re: Is 60/40 too conservative for 31 year old?

Post by KyleAAA »

I think 60/40 is a perfectly fine asset allocation to stay at essentially forever. I intend to stay at 70/30 essentially forever, myself.
lowndes
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Re: Is 60/40 too conservative for 31 year old?

Post by lowndes »

I'm about your age (33) and save pretty much the same amount per year and am at 80/20. My thought being that my biggest asset right now is my earning potential and just actually saving money and developing those habits (and preventing lifestyle creep). I think you could be more aggressive but nothing wrong at all with 60/40. According to my investment plan that's the AA I plan to use beginning at age 45.
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whodidntante
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Re: Is 60/40 too conservative for 31 year old?

Post by whodidntante »

You'll probably end up with more money with a higher stock allocation, but only if you can and do see it through.
goblue100
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Re: Is 60/40 too conservative for 31 year old?

Post by goblue100 »

A lot of support for 60/40. Of course, ultimately your decision. I vote for too conservative. I'll quote some Bernstein at you:
"Bernstein: Well, I divide the age bands into three of them. One is the early one, the people or the person who is 20 or 30 or 40 years old. And then, there is a middle, where the person has significant assets but is still saving. And then finally, there is the distribution phase. And I start, logically enough, with the first phase. And from a strictly mathematical point of view, that person should be investing 100% their money in risky assets because their human capital is so much larger than their investment capital. If you're a typical 20- or 30-year-old person, you may have a couple of million dollars of human capital of future earnings over the course of your life. And if your $50,000 portfolio decreases by half or three quarters, it logically shouldn't affect you that much."

http://www.morningstar.com/cover/videoc ... ?id=670230

Obviously you have more than a $50,000 portfolio, but you also have a lot of human capital. You *may leave a lot of money on the table over 40 or 50 years.

* - No one knows the ideal future asset allocation.
"Confusion has its cost" - Crosby, Stills and Nash
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flamesabers
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Re: Is 60/40 too conservative for 31 year old?

Post by flamesabers »

OP,

I'm the same age as you and while I have a much more aggressive asset allocation, I think your ideal asset allocation really depends on what your priorities are. If your main concern is the volatility of equities, then I think a 60/40 allocation is a good target for you. If on the other hand, your primary concern is the loss of purchasing power due to inflation, then I think a more aggressive allocation would be better suited for you.

Regardless of your desired asset allocation, having more money helps to ride out the drawbacks of either approaches. If you have a $1 million portfolio, you probably won't be hurting so much from a 50% stock market crash then if you have a $100k portfolio. The same goes with the loss of purchasing power due to inflation.
goblue100
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Re: Is 60/40 too conservative for 31 year old?

Post by goblue100 »

Vanguard Fan 1367 wrote:
RetiredinKaty wrote:Just for fun I generated the table below for my work years (1975-2011), my salary progression (15K to 150K, assume linear), and a constant 18% investment rate (employee and company match). I used Portfolio Visualizer Asset Class Backtest for All Stock (Total US) and for 60/40 Total US Stock / Intermediate Treasury.

My actual was about $2.1 MM, with many mistakes along the way.

Code: Select all

Year	  All Stock	    60 / 40
2011 	2,843,271.94 	2,730,009.90 
Thanks for posting that. Interesting how well either approach worked.
My comment on this is this period included the most bullish bond market in history, with prime rates of 21.5%! in 1980 falling to a low of 3.25% in 2008. In retrospect we all should have loaded up on 30 year bonds in December of 1980 but I certainly wasn't that smart. Of course, I was only 20 and had no money. I'm using this table as a source, hopefully it is correct, but even if it is off we all know we are not starting at a point of high historical interest rates.

http://www.fedprimerate.com/wall_street ... tm#current
"Confusion has its cost" - Crosby, Stills and Nash
Bogle-007
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Re: Is 60/40 too conservative for 31 year old?

Post by Bogle-007 »

BogleBoogie wrote:
ruralavalon wrote:
NewbieBogle007 wrote:I'm no expert by any means, but I'm surprised to see all this support for a 60/40 split for a 30 year old. Even the Target Retirement funds are set to glide at 90/10 until age 40. Now I'm second-guessing my own plans...
They have little need to take risk, wife doesn't want to, and 60/40 can be suitable for just about anyone. So 60/40 is really a no brainer.
+1
This is another thing I don't understand -- the idea that "There is little need to take risk." Shouldn't a high income individual be able to take more risk? If your investments take a downturn, you won't sweat it as much since you're making big earnings anyway...
Thesaints
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Re: Is 60/40 too conservative for 31 year old?

Post by Thesaints »

ugaDAWGS09 wrote:My wife and I have been looking at our retirement accounts and we are thinking of switching from age in bonds to 60/40 for the long haul. We currently max our 401k's and Roth's and also invest an additional amount usually around 20k in a CD or Total Stock Market fund based on our allocation needs. This comes to about 70k each year we invest in retirement accounts. My wife's reasoning is since we invest such a large amount we shouldn't have to be aggressive to meet our long term needs. I completely understand where she is coming from but wanted to get the opinion of the board before making a change.
Your wife's is a valid approach. If one has reached a capital high enough to satisfy all needs, best allocation would be all cash. No need to take extra risk (I'm reasoning ex-inflation).

However, to evaluate properly which allocation is best for you (i.e. with the necessary expected return and the minimum volatility) you would have to set a target; in the case of retirement, estimate your expenses. From there you can calculate the necessary average return and once that is know, you can select the allocation more likely to grant you that return with the lowest volatility.

Who knows, 60/40 may turn out to be too risky!
TheEternalVortex
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Re: Is 60/40 too conservative for 31 year old?

Post by TheEternalVortex »

I'm 31 and want to switch to 60/40 too because I'm ahead of my saving goals (currently 70/30). So it seems reasonable :)
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ruralavalon
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Re: Is 60/40 too conservative for 31 year old?

Post by ruralavalon »

NewbieBogle007 wrote:
BogleBoogie wrote:
ruralavalon wrote:
NewbieBogle007 wrote:I'm no expert by any means, but I'm surprised to see all this support for a 60/40 split for a 30 year old. Even the Target Retirement funds are set to glide at 90/10 until age 40. Now I'm second-guessing my own plans...
They have little need to take risk, wife doesn't want to, and 60/40 can be suitable for just about anyone. So 60/40 is really a no brainer.
+1
This is another thing I don't understand -- the idea that "There is little need to take risk." Shouldn't a high income individual be able to take more risk? If your investments take a downturn, you won't sweat it as much since you're making big earnings anyway...
The three criteria are:
ability to take risk;
willingness to take risk; and
need to take risk.

Nobody is required to take as much risk as they are able to.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy
dbr
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Re: Is 60/40 too conservative for 31 year old?

Post by dbr »

NewbieBogle007 wrote:
BogleBoogie wrote:
ruralavalon wrote:
NewbieBogle007 wrote:I'm no expert by any means, but I'm surprised to see all this support for a 60/40 split for a 30 year old. Even the Target Retirement funds are set to glide at 90/10 until age 40. Now I'm second-guessing my own plans...
They have little need to take risk, wife doesn't want to, and 60/40 can be suitable for just about anyone. So 60/40 is really a no brainer.
+1
This is another thing I don't understand -- the idea that "There is little need to take risk." Shouldn't a high income individual be able to take more risk? If your investments take a downturn, you won't sweat it as much since you're making big earnings anyway...
In the end these things are a matter of judgement and preference. In short, what do you want to do given an understanding of the consequences. Need/ability/willingness is a good way to organize what you want and what the consequences are.

Larry Swedroe does discuss the issue of low need x high ability and makes the two comments that need trumps ability because the marginal value of wealth is diminishing and because people underestimate risk. Note that if you really want the wealth, then you do have need. The not sweat it part is ability to take risk.
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retiredjg
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Re: Is 60/40 too conservative for 31 year old?

Post by retiredjg »

NewbieBogle007 wrote:This is another thing I don't understand -- the idea that "There is little need to take risk." Shouldn't a high income individual be able to take more risk?
Need and ability are frequently not in sync in the decision to take risk. Nevertheless, it is one of the 3 things that should be considered.

As mentioned, there is no need to take as much risk as you have the ability to take. In fact, it can frequently be pretty dumb to do that. Why put what you have at risk if having more is not going to affect your life in some positive way?
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