I thought I knew my desired AA

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Alto Astral
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I thought I knew my desired AA

Postby Alto Astral » Mon Mar 20, 2017 2:09 pm

Him: Age=37, Income=130K
Her: Age=32, Income=100K
Desired AA: Either 70/30 or 80/20
Emergency Funds - 12 months (@ $5K/ month living expense)
$50K (1,2,3,4,5 year CD Ladder of $10K each at CapitalOne ranging 1.3%-2.3%)
$10K CapitalOne360 Savings @ 0.75%
Investments
9% Cash: $40K (Checking Accounts @ 0.01% - available to reallocate)
2% Taxable: $10K (+ $2k/month, Vanguard Total Stock Index)
5% His+Her RothIRA: $22K (+$11k/year, Vanguard Total Stock Index)
56% His 401k: $240K (+$18K/year, Blackrock Total Stock Index)
28% Her 401k: $120K ($18K/year, Vanguard Total Bond Index)

100% Total $420K

Mortgage: $235K at 3.625% interest 30Y fixed (currently paying $800 extra per month towards principal to pay it off in 15 years)
Tax: Married-Filing-Jointly, 28% Bracket
State: IL
Kids: 3 years + newborn

Hi,
I've stuck to 70/30 for close to a decade based on age-in-bonds I heard Mr Bogle say a long time back. I though I was conservative and picked that. Never gave much thought to it since. Since then I got married and got two kids. The latest newborn got me thinking about my AA so I hope/believe this is not market timing.

In an hypothetical 50% market drop, my portfolio will drop from $420K to $273 with a 70/30 AA and to $252 with a 80/20 AA. That $21K difference translates to 4 months living expenses.

Questions
1. How do I know what AA I am comfortable with? How do I know what my tolerance of risk is? If my original basis of my 70/30 AA was my deep respect for Mr Bogle, how do I know what my actual tolerance is? I ran the numbers and am I crazy that 21k shortage does not seem to cause me discomfort?
2. While I appreciate staying the course, am I veering if I pick 80/20 vs 70/30? Now that I am 37, I know most folks in my situation may go the other way to 60/40.

While I know that I need to answer the AA allocation myself, I wanted to make sure I am not doing something stupid here by picking 80/20 over 70/30.

Thanks for your time
Alto

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nedsaid
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Re: I thought I knew my desired AA

Postby nedsaid » Mon Mar 20, 2017 2:14 pm

A 60% stocks/40% bonds balanced portfolio is a good asset allocation for almost anyone in my opinion. If you research the returns of balanced funds, you will be amazed at how good the returns are and how steady the funds are. Almost every mutual fund company has one, and as long as the fees are reasonable, these are good investments. You might just pick Vanguard LifeStrategy Moderate Growth and use that as your "one choice" and "set it and forget it" investment. You get a World portfolio with US and International Stocks and Bonds. This is something you can buy and hold for a lifetime.
A fool and his money are good for business.

aristotelian
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Re: I thought I knew my desired AA

Postby aristotelian » Mon Mar 20, 2017 2:19 pm

If you don't know your risk tolerance, a bunch of anonymous people on the internet are not going to be able to decide for you. It is a personal decision and honestly there is not that much difference between 80/20 and 70/30. You could split the difference and go 75/25. That is my allocation at Age 42.

RadAudit
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Re: I thought I knew my desired AA

Postby RadAudit » Mon Mar 20, 2017 2:23 pm

Alto Astral wrote:How do I know what AA I am comfortable with?


Excellent question. Unfortunately, there really isn't any sure way to know until your are in the middle of a crash. And then it is a little too late. Worse still, as you get older, your risk tolerance changes. So what worked the last time may not work 10 years later.

But, Nedsaid +1. Ought to work very well for you for another 20 years or so.
"Everything will be all right in the end. If everything is not all right, then it is not the end." - The Best Exotic Marigold Hotel

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flamesabers
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Re: I thought I knew my desired AA

Postby flamesabers » Mon Mar 20, 2017 2:57 pm

I agree nobody can tell you what your ideal AA is, but you can ask yourself some questions to gain a better understanding of how your portfolio should be allocated. For instance:

1. What are you investing for? (i.e. retirement, new home, kids' college tuition, emergency fund, earn additional income, etc.)
2. In regards to your finances, what is your greatest concern for the future? (i.e. high inflation, being unemployed/disabled for the long-term, stock market crash, becoming insolvent, not having enough money to retire in your senior years, etc.)

While you may not know what ultimately you spend your investments on or what your worst-case scenario is, establishing your priorities I think is essential to being able to stay the course and not second guess yourself all the time. If you focus on the short-term, your AA will be very different then if you invest with the intent to hold for the next 20-30 years.

Alto Astral
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Re: I thought I knew my desired AA

Postby Alto Astral » Mon Mar 20, 2017 3:05 pm

flamesabers wrote:I agree nobody can tell you what your ideal AA is, but you can ask yourself some questions to gain a better understanding of how your portfolio should be allocated. For instance:

1. What are you investing for? (i.e. retirement, new home, kids' college tuition, emergency fund, earn additional income, etc.)
2. In regards to your finances, what is your greatest concern for the future? (i.e. high inflation, being unemployed/disabled for the long-term, stock market crash, becoming insolvent, not having enough money to retire in your senior years, etc.)

While you may not know what ultimately you spend your investments on or what your worst-case scenario is, establishing your priorities I think is essential to being able to stay the course and not second guess yourself all the time. If you focus on the short-term, your AA will be very different then if you invest with the intent to hold for the next 20-30 years.

1 & 2 above sound like "all-of-the-above". But its generally for the longer term. Majority for retirement. Some for kids college in 13 years. Hope to retire in current home and have 12 months living expenses in EF.

KlangFool
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Re: I thought I knew my desired AA

Postby KlangFool » Mon Mar 20, 2017 3:13 pm

OP,

The short answer to your question is you are doing market timing. You are changing your AA from 70/30 to 80/20 because we are in a bull market. There is nothing in your life circumstances that justify changing your AA to a higher risk. In a normal aka none market timing move, the AA should glide towards less risk when it gets bigger.

KlangFool

LeeMKE
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Re: I thought I knew my desired AA

Postby LeeMKE » Mon Mar 20, 2017 3:14 pm

If you stood pat in 2008-09, your asset allocation is good where it is.

You have a mixed bag of dates for withdrawal, but all more than 10 years out. I'd urge you to avoid throttling down to more conservative AA unless you are getting worried.

I noticed that I would get worried as the balance in my accounts increased. The biggest mistakes I've made were caused by my fear that the balance was higher than I could manage on my own.

The downside of being too conservative is that inflation can/will erode the value of your savings, so stocks weather that much better than bonds. The longer your horizon, the greater this threat.
The mightiest Oak is just a nut who stayed the course.

rkhusky
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Re: I thought I knew my desired AA

Postby rkhusky » Mon Mar 20, 2017 3:15 pm

Don't forget that a 50% market drop does not happen in isolation. You have no assurance that the market will stop at a 50% drop. In 2008, there were fears that the entire banking and insurance system was going to collapse. The stock market can go to zero.

On the other hand, you are a ways from retirement, so can work for a few more years if the market has a big drop in a few years. But the closer you get to retirement, the less able you will be to recover. If you do go to 80/20, when will you start dialing back on the stocks? According to a poll a few years ago, many people use age-10 or even age-20 instead of age in bonds.

I prefer a gradual glide slope, because I would hate it if the year before I decided to go from 80/20 to 60/40 the market dropped by 30%.

onourway
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Re: I thought I knew my desired AA

Postby onourway » Mon Mar 20, 2017 3:22 pm

I too am trying to come to grips with my comfort point without really knowing how I'd feel now that I'm paying closer attention (2008 passed me by without me blinking - I was busy with other things and didn't notice in the slightest.)

What has been convincing me to move towards 70/30 from the 100/0 I was at not too long ago is two-fold. One, we now are at the point where we have assets that are considerable enough to want to preserve them. Two, having run endless simulations, it feels like I am more comfortable missing out on some of the gains at the peaks compared to how things look (in simulation) after a crash. What stands out to me is not the relatively small difference in total loss between an 80/20 or 70/30 portfolio, but rather how long it takes to recover afterwards - an 80/20 portfolio often requires 4-5 years to catch back up to a 70/30 during the recovery, and then another couple more to surpass it in any way I feel is meaningful. We are a few years older than you, but optional retirement could be as little as 10-15 years out depending on how things play out. So 4-5 extra years of recovery is beginning to have some concrete meaning.

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nedsaid
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Re: I thought I knew my desired AA

Postby nedsaid » Mon Mar 20, 2017 3:29 pm

You never know your desired asset allocation until you go through a bear market. I have been through two 50% down bear markets since 2000 and found that 70% stocks and 30% barely worked for me. Now I am age 57, and I have 67% stocks and 33% bonds and cash. The emotional pain of loss, even if it is temporary, is real and should not be dismissed. Back in October 1987, the stock market crashed and I lost hundreds of dollars. It may as well have been billions. It seems silly today but the pain was real.
A fool and his money are good for business.

retiredjg
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Re: I thought I knew my desired AA

Postby retiredjg » Mon Mar 20, 2017 3:34 pm

Alto Astral wrote:Since then I got married and got two kids. The latest newborn got me thinking about my AA so I hope/believe this is not market timing.

It is not market timing when you realize your responsibilities are different from what they were in the past. Having a good honest look at your risk tolerance is a good thing. However, this usually is discussed when a person reduces risk rather than raises risk.


1. How do I know what AA I am comfortable with? How do I know what my tolerance of risk is? If my original basis of my 70/30 AA was my deep respect for Mr Bogle, how do I know what my actual tolerance is? I ran the numbers and am I crazy that 21k shortage does not seem to cause me discomfort?

The best way to know is to honestly remember and explore how you felt in the last market crash. However, it appears you may not have been invested then. The next way is to imagine how you would feel to see ___ of your money disappear. This is not entirely reliable, but it is the best you've got.

You are "estimatedly" looking at the loss of $147k as compared to $168k. If the 21k difference doesn't seem scary to you, it probably doesn't matter much if you feel like you could stay the course and not sell out with either loss.


2. While I appreciate staying the course, am I veering if I pick 80/20 vs 70/30? Now that I am 37, I know most folks in my situation may go the other way to 60/40.

I think "staying the course" has to give a person some time to learn things. If you are now a more mature investor, increasing the aggressiveness of your portfolio is reasonable. But....and it is a big one....it would be much wiser to increase your risk AFTER you know the gut wrench of a market crash.

Apparently your investing has all or mostly occurred during a market hey day. I would be very cautious of increasing risk at this time because it might just be the result of an exuberant market rather than your own investing maturation.

If you really feel you are less conservative now because you know more, consider a smaller change. In a few years, 80/20 will be pretty aggressive for your age.

While I know that I need to answer the AA allocation myself, I wanted to make sure I am not doing something stupid here by picking 80/20 over 70/30.

It is a good question to ask, but I don't know of any way for you to know if you are doing this because of the raging market or because you know more now. 80/20 is not crazy stupid for a 37 year old, but it is as aggressive as I like to recommend for a 40 year old who wants to be aggressive. Have you really changed that much and in that direction in the last decade?

Alto Astral
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Re: I thought I knew my desired AA

Postby Alto Astral » Mon Mar 20, 2017 3:54 pm

nedsaid wrote:A 60% stocks/40% bonds balanced portfolio is a good asset allocation for almost anyone in my opinion. If you research the returns of balanced funds, you will be amazed at how good the returns are and how steady the funds are. Almost every mutual fund company has one, and as long as the fees are reasonable, these are good investments. You might just pick Vanguard LifeStrategy Moderate Growth and use that as your "one choice" and "set it and forget it" investment. You get a World portfolio with US and International Stocks and Bonds. This is something you can buy and hold for a lifetime.

Would you recommend 60/40 that to someone in their 30s with a smaller portfolio? I guess I am wondering if I would have enough

Alto Astral
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Re: I thought I knew my desired AA

Postby Alto Astral » Mon Mar 20, 2017 3:57 pm

aristotelian wrote:If you don't know your risk tolerance, a bunch of anonymous people on the internet are not going to be able to decide for you. It is a personal decision and honestly there is not that much difference between 80/20 and 70/30. You could split the difference and go 75/25. That is my allocation at Age 42.

If you don't mind me asking, how did you decide 75/25 was comfortable for you. Its not age-in-bonds or even age-10. Close to age-17. Did you base that on your current portfolio size or to reach 20-30x income in the next couple of decades?

pkcrafter
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Re: I thought I knew my desired AA

Postby pkcrafter » Mon Mar 20, 2017 3:57 pm

The problem with choosing an asset allocation is you will choose it while in a comfortable non-stressed state, but when it's put to the test, you will be under stressful conditions. Extremely stressful situations can induce strong hormonal releases that trigger physical changes as well as the flight-or-fight response in many investors. Those whose make-up doesn't trigger the response simply cannot comprehend the fear and they think we are nuts. Unfortunately, risk questionnaires only test us when we are in a nice calm state, so the results are very often not accurate. When we are in a highly stressed state, we don't need no stinkin' questionnaire.

http://www.smithsonianmag.com/science-n ... 180949768/

http://www.huffingtonpost.com/2013/04/1 ... 12800.html

The point here is many investors can and will experience these chemical changes. The changes can quickly convert an otherwise reasonable person into a panicked one that's wants nothing but to get away from what's triggering the reaction. For this reason, some experts suggest new investors, even young investors, start out with an asset allocation that is moderate, and once the test is passed, they can increase if desired.

Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.

KlangFool
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Re: I thought I knew my desired AA

Postby KlangFool » Mon Mar 20, 2017 4:02 pm

OP,

You are saving 50K to 60K per year. Let's assume that you are comfortable with 80/20 at 420K, what are you going to do with your AA when it is 720K aka 5 years from now? Switch back to 70/30 again?

You need to pick an AA that you can stick with for a few years. So, just because you are comfortable with 80/20 at 420K is not good enough. You need to be comfortable with 80/20 at 720K too. Aka, 5 years from now.

KlangFool

Alto Astral
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Re: I thought I knew my desired AA

Postby Alto Astral » Mon Mar 20, 2017 4:07 pm

KlangFool wrote:OP,

The short answer to your question is you are doing market timing. You are changing your AA from 70/30 to 80/20 because we are in a bull market. There is nothing in your life circumstances that justify changing your AA to a higher risk. In a normal aka none market timing move, the AA should glide towards less risk when it gets bigger.

KlangFool

I guess I know more on how much I will need to retire. I did not crunch any numbers when I picked 70/30 nor have a family. Now I've both. I am trying to see if I can have a safe withdrawal rate or even be able to reach 20-30x expenses (hopefully this number covers inflation). While I've crunched all the FV-calculations in a spreadsheet, I still have no clue if I will actually have enough. So I guess, I am am questioning my fundamental assumption.

I guess I can't tell you if I would entertain this thought in a bear market. But would you still call it market timing?

Would it be still market timing had I picked 80/20 to start with and decided to stick with it?

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Pranav
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Re: I thought I knew my desired AA

Postby Pranav » Mon Mar 20, 2017 4:14 pm

"The Investor Questionnaire makes asset allocation suggestions based on information you enter about your investment objectives and experience, time horizon, risk tolerance, and financial situation."

https://personal.vanguard.com/us/FundsInvQuestionnaire
Pranav

Ethelred
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Re: I thought I knew my desired AA

Postby Ethelred » Mon Mar 20, 2017 4:25 pm

When I went through this process last year, it turned out the biggest question was actually, "What asset allocation is within my wife's comfort level?" As a result, our AA is 70/30 with an emergency / large purchases fund that is probably double what I would have chosen.

KlangFool
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Re: I thought I knew my desired AA

Postby KlangFool » Mon Mar 20, 2017 4:26 pm

Alto Astral wrote:
KlangFool wrote:OP,

The short answer to your question is you are doing market timing. You are changing your AA from 70/30 to 80/20 because we are in a bull market. There is nothing in your life circumstances that justify changing your AA to a higher risk. In a normal aka none market timing move, the AA should glide towards less risk when it gets bigger.

KlangFool

I guess I know more on how much I will need to retire. I did not crunch any numbers when I picked 70/30 nor have a family. Now I've both. I am trying to see if I can have a safe withdrawal rate or even be able to reach 20-30x expenses (hopefully this number covers inflation). While I've crunched all the FV-calculations in a spreadsheet, I still have no clue if I will actually have enough. So I guess, I am am questioning my fundamental assumption.

I guess I can't tell you if I would entertain this thought in a bear market. But would you still call it market timing?

Would it be still market timing had I picked 80/20 to start with and decided to stick with it?


Alto Astral,

You should know by now it would not make a difference whether you will reach your number with either 70/30 or 80/20. If you are employed over the next 10 to 15 years, you will reach your number. If not, you will not.

KlangFool

KlangFool
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Re: I thought I knew my desired AA

Postby KlangFool » Mon Mar 20, 2017 4:30 pm

OP,

The good news / bad news is the only thing that will make a difference on whether you will reach your number is your saving rate.

A) It increases the amount that you can invest.

B) It reduces the annual expense that you need to support.

Over the next 10 to 15 years, the time and compounding of your annual savings is the difference maker.

KlangFool

Dottie57
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Re: I thought I knew my desired AA

Postby Dottie57 » Mon Mar 20, 2017 4:41 pm

Before 2008, I had no problems since I did not have much and retirement seemed far away. Hitting 50 and going through 2008 opened my eyes. Including EF, I am at 50/50. Without it I am at 60/40. Retirement is 3 to 5 years away.
Last edited by Dottie57 on Mon Mar 20, 2017 4:41 pm, edited 1 time in total.

Alto Astral
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Re: I thought I knew my desired AA

Postby Alto Astral » Mon Mar 20, 2017 4:41 pm

Ethelred wrote:When I went through this process last year, it turned out the biggest question was actually, "What asset allocation is within my wife's comfort level?" As a result, our AA is 70/30 with an emergency / large purchases fund that is probably double what I would have chosen.

My wife is generally on the more conservative side. While my wife is good with numbers and such - she is not as much obsessed by these things. She sounded fine with both 70/30 and 80/30. I showed my spreadsheet, the $21K difference etc. How did you communicate any tangible risks of 80/20? I guess I am trying to fully grasp it too.

Dottie57
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Re: I thought I knew my desired AA

Postby Dottie57 » Mon Mar 20, 2017 4:50 pm

KlangFool wrote:OP,

The good news / bad news is the only thing that will make a difference on whether you will reach your number is your saving rate.

A) It increases the amount that you can invest.

B) It reduces the annual expense that you need to support.

Over the next 10 to 15 years, the time and compounding of your annual savings is the difference maker.

KlangFool



This is so true. I've always had a good savings rate. And 401k has helped save more. I have more than I ever expected especially with the amount of mistakes ( high load funds, not paying attention to roll ever IRA, not opening a Roth early on, moving some stock funds to bonds in 2008 and the list goes on ). It is the rate of savings which will save you.

cherijoh
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Re: I thought I knew my desired AA

Postby cherijoh » Mon Mar 20, 2017 4:55 pm

Alto Astral wrote:Him: Age=37, Income=130K
Her: Age=32, Income=100K
Desired AA: Either 70/30 or 80/20
Emergency Funds - 12 months (@ $5K/ month living expense)
$50K (1,2,3,4,5 year CD Ladder of $10K each at CapitalOne ranging 1.3%-2.3%)
$10K CapitalOne360 Savings @ 0.75%
Investments
9% Cash: $40K (Checking Accounts @ 0.01% - available to reallocate)
2% Taxable: $10K (+ $2k/month, Vanguard Total Stock Index)
5% His+Her RothIRA: $22K (+$11k/year, Vanguard Total Stock Index)
56% His 401k: $240K (+$18K/year, Blackrock Total Stock Index)
28% Her 401k: $120K ($18K/year, Vanguard Total Bond Index)

100% Total $420K

Mortgage: $235K at 3.625% interest 30Y fixed (currently paying $800 extra per month towards principal to pay it off in 15 years)
Tax: Married-Filing-Jointly, 28% Bracket
State: IL
Kids: 3 years + newborn

Hi,
I've stuck to 70/30 for close to a decade based on age-in-bonds I heard Mr Bogle say a long time back. I though I was conservative and picked that. Never gave much thought to it since. Since then I got married and got two kids. The latest newborn got me thinking about my AA so I hope/believe this is not market timing.

In an hypothetical 50% market drop, my portfolio will drop from $420K to $273 with a 70/30 AA and to $252 with a 80/20 AA. That $21K difference translates to 4 months living expenses.

Questions
1. How do I know what AA I am comfortable with? How do I know what my tolerance of risk is? If my original basis of my 70/30 AA was my deep respect for Mr Bogle, how do I know what my actual tolerance is? I ran the numbers and am I crazy that 21k shortage does not seem to cause me discomfort?
2. While I appreciate staying the course, am I veering if I pick 80/20 vs 70/30? Now that I am 37, I know most folks in my situation may go the other way to 60/40.

While I know that I need to answer the AA allocation myself, I wanted to make sure I am not doing something stupid here by picking 80/20 over 70/30.

Thanks for your time
Alto


I think you could argue that 70/30 was fairly conservative for a 30 year old, but as you get older and have more financial responsibilities you should NOT be moving to a LESS conservative allocation. Reading the start of your post when you mentioned your newborn, I thought you were going to ask if it was time to move to 60/40!

If I were in your shoes, I certainly wouldn't be allocating 10% more of my portfolio towards stocks with these stock market valuations.

Alto Astral
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Re: I thought I knew my desired AA

Postby Alto Astral » Mon Mar 20, 2017 4:56 pm

LeeMKE wrote:If you stood pat in 2008-09, your asset allocation is good where it is.

I was barely starting in 2008. Just 3 years into the markets I believe. I did'nt do anything with my investments but my colleagues were making jokes about their 401k becoming a 201k :)

LeeMKE wrote:You have a mixed bag of dates for withdrawal, but all more than 10 years out. I'd urge you to avoid throttling down to more conservative AA unless you are getting worried.

I noticed that I would get worried as the balance in my accounts increased. The biggest mistakes I've made were caused by my fear that the balance was higher than I could manage on my own.

The downside of being too conservative is that inflation can/will erode the value of your savings, so stocks weather that much better than bonds. The longer your horizon, the greater this threat.

Yeah, my post was about going the other way. Make it 10% riskier with 80/20 instead of 70/30. I guess I have the inflation fear.

Alto Astral
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Re: I thought I knew my desired AA

Postby Alto Astral » Mon Mar 20, 2017 5:00 pm

rkhusky wrote:Don't forget that a 50% market drop does not happen in isolation. You have no assurance that the market will stop at a 50% drop. In 2008, there were fears that the entire banking and insurance system was going to collapse. The stock market can go to zero.

On the other hand, you are a ways from retirement, so can work for a few more years if the market has a big drop in a few years. But the closer you get to retirement, the less able you will be to recover. If you do go to 80/20, when will you start dialing back on the stocks? According to a poll a few years ago, many people use age-10 or even age-20 instead of age in bonds.

I prefer a gradual glide slope, because I would hate it if the year before I decided to go from 80/20 to 60/40 the market dropped by 30%.

Yeah, I looked for some recent polls. I don't believe we have that feature anymore based on a comment I read on a "text" poll vs a graph poll. How do gradually dial back? 1% per year?

Alto Astral
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Re: I thought I knew my desired AA

Postby Alto Astral » Mon Mar 20, 2017 5:02 pm

onourway wrote:What stands out to me is not the relatively small difference in total loss between an 80/20 or 70/30 portfolio, but rather how long it takes to recover afterwards - an 80/20 portfolio often requires 4-5 years to catch back up to a 70/30 during the recovery, and then another couple more to surpass it in any way I feel is meaningful. We are a few years older than you, but optional retirement could be as little as 10-15 years out depending on how things play out. So 4-5 extra years of recovery is beginning to have some concrete meaning.

I guess I did not think of it like that.

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nedsaid
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Re: I thought I knew my desired AA

Postby nedsaid » Mon Mar 20, 2017 5:04 pm

Alto Astral wrote:
nedsaid wrote:A 60% stocks/40% bonds balanced portfolio is a good asset allocation for almost anyone in my opinion. If you research the returns of balanced funds, you will be amazed at how good the returns are and how steady the funds are. Almost every mutual fund company has one, and as long as the fees are reasonable, these are good investments. You might just pick Vanguard LifeStrategy Moderate Growth and use that as your "one choice" and "set it and forget it" investment. You get a World portfolio with US and International Stocks and Bonds. This is something you can buy and hold for a lifetime.

Would you recommend 60/40 that to someone in their 30s with a smaller portfolio? I guess I am wondering if I would have enough


Someone in their thirties could go more aggressive than that. Probably an 80% stock/20% bond or 75/25. The reason that I say that 60/40 is good for most everyone is that there are enough bonds in there to calm even the most nervous of investors. I know I was pretty conservative in my 20's.
A fool and his money are good for business.

Alto Astral
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Re: I thought I knew my desired AA

Postby Alto Astral » Mon Mar 20, 2017 5:08 pm

nedsaid wrote:You never know your desired asset allocation until you go through a bear market. I have been through two 50% down bear markets since 2000 and found that 70% stocks and 30% barely worked for me. Now I am age 57, and I have 67% stocks and 33% bonds and cash. The emotional pain of loss, even if it is temporary, is real and should not be dismissed. Back in October 1987, the stock market crashed and I lost hundreds of dollars. It may as well have been billions. It seems silly today but the pain was real.

That's true. I graduated during the dot com bust. Then went back to grad school in a couple of years. When I graduated we were still recovering. I was 3 years into savings when the great recession hit. I did not have much so I did not lose much. If you don't mind me stating the obvious, 33% is age-24 in bonds. At that rate, I should be 90/10 :) But then your bond portion may be significant to ride your a crash, not to mention any pensions.

By barely worked, you men it was insufficient growth?

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Re: I thought I knew my desired AA

Postby aristotelian » Mon Mar 20, 2017 5:12 pm

Alto Astral wrote:
aristotelian wrote:If you don't know your risk tolerance, a bunch of anonymous people on the internet are not going to be able to decide for you. It is a personal decision and honestly there is not that much difference between 80/20 and 70/30. You could split the difference and go 75/25. That is my allocation at Age 42.

If you don't mind me asking, how did you decide 75/25 was comfortable for you. Its not age-in-bonds or even age-10. Close to age-17. Did you base that on your current portfolio size or to reach 20-30x income in the next couple of decades?


Just gut feeling. I was at 90/10 in my 30's and decided to rebalance while the market was high and getting closer to retirement. Thought about what a 50% crash would do and ran some numbers. No magic formula, but I have heard Age-minus-bonds and Age+20-minus bonds. 75/25 is close to Age+20 but a little more conservative. I wanted a little more cushion to be able to rebalance in the event of a bull market. I agree with Klang Fool, +/- 10% probably makes no tangible difference in terms of your standard of living in retirement. We are maybe talking about the difference between +/- 2% of your net assets, and it could go either way depending on if/when the crash hits. This is a debate that can go on forever, because there is no answer, just your personal judgment call.

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Re: I thought I knew my desired AA

Postby nedsaid » Mon Mar 20, 2017 5:17 pm

Alto Astral wrote:
nedsaid wrote:You never know your desired asset allocation until you go through a bear market. I have been through two 50% down bear markets since 2000 and found that 70% stocks and 30% barely worked for me. Now I am age 57, and I have 67% stocks and 33% bonds and cash. The emotional pain of loss, even if it is temporary, is real and should not be dismissed. Back in October 1987, the stock market crashed and I lost hundreds of dollars. It may as well have been billions. It seems silly today but the pain was real.

That's true. I graduated during the dot com bust. Then went back to grad school in a couple of years. When I graduated we were still recovering. I was 3 years into savings when the great recession hit. I did not have much so I did not lose much. If you don't mind me stating the obvious, 33% is age-24 in bonds. At that rate, I should be 90/10 :) But then your bond portion may be significant to ride your a crash, not to mention any pensions.

By barely worked, you men it was insufficient growth?


My asset allocation worked fine. During the 2000-2002 bear market my peak to trough losses were about 32%, during the 2008-2009 bear market my losses were about 35%. What I mean by "barely worked" is that my losses were barely tolerable, 35% losses were about the most I could stand. The reason I didn't sell at the bottom was that I knew that if I sold that I would never be able to meet my retirement goals. My losses were about two years of take home pay.

A good rule of thumb is to have 2 times your maximum tolerable loss in stocks. At 35% maximum tolerable loss, my stock allocation of 70% was just right.
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Re: I thought I knew my desired AA

Postby Alto Astral » Mon Mar 20, 2017 5:24 pm

retiredjg wrote:
Alto Astral wrote:Since then I got married and got two kids. The latest newborn got me thinking about my AA so I hope/believe this is not market timing.

It is not market timing when you realize your responsibilities are different from what they were in the past. Having a good honest look at your risk tolerance is a good thing. However, this usually is discussed when a person reduces risk rather than raises risk.

That irony is not lost on me. I have my personal "lost decade" I only started saving when I was touching the 30s. I am generally frugal with expenses and such, so naturally thought of myself as conservative. However, with a lot of unknowns such as unemployment/bear market etc I am not sure if I am doing the opposite of "excessive risk" in the context of raising a family. Am I being "excessively conservative"?

retiredjg wrote:
1. How do I know what AA I am comfortable with? How do I know what my tolerance of risk is? If my original basis of my 70/30 AA was my deep respect for Mr Bogle, how do I know what my actual tolerance is? I ran the numbers and am I crazy that 21k shortage does not seem to cause me discomfort?

The best way to know is to honestly remember and explore how you felt in the last market crash. However, it appears you may not have been invested then. The next way is to imagine how you would feel to see ___ of your money disappear. This is not entirely reliable, but it is the best you've got.

You are "estimatedly" looking at the loss of $147k as compared to $168k. If the 21k difference doesn't seem scary to you, it probably doesn't matter much if you feel like you could stay the course and not sell out with either loss.

While I did not lose money around 2000 and 2008 jobs were more difficult to come by. This time around that same thing would be coupled with a drop in retirement savings.

retiredjg wrote:
2. While I appreciate staying the course, am I veering if I pick 80/20 vs 70/30? Now that I am 37, I know most folks in my situation may go the other way to 60/40.

I think "staying the course" has to give a person some time to learn things. If you are now a more mature investor, increasing the aggressiveness of your portfolio is reasonable. But....and it is a big one....it would be much wiser to increase your risk AFTER you know the gut wrench of a market crash.

Apparently your investing has all or mostly occurred during a market hey day. I would be very cautious of increasing risk at this time because it might just be the result of an exuberant market rather than your own investing maturation.

If you really feel you are less conservative now because you know more, consider a smaller change. In a few years, 80/20 will be pretty aggressive for your age.

Yep, all in the hey day. Yes, it will be pretty aggressive in a few years. I need to read some posts on if folks gradually decrease or re-balance it one fine day to pick a lower risk.

retiredjg wrote:
While I know that I need to answer the AA allocation myself, I wanted to make sure I am not doing something stupid here by picking 80/20 over 70/30.

It is a good question to ask, but I don't know of any way for you to know if you are doing this because of the raging market or because you know more now. 80/20 is not crazy stupid for a 37 year old, but it is as aggressive as I like to recommend for a 40 year old who wants to be aggressive. Have you really changed that much and in that direction in the last decade?

Nope, I haven't changed much other than a receding hairline and an increasing waistline. Which begs the question: why am I asking this question now? Am I more sensitive to unemployment or just thinking that being a parent of 2 needs me to do something more?

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Re: I thought I knew my desired AA

Postby Alto Astral » Mon Mar 20, 2017 5:28 pm

pkcrafter wrote:The point here is many investors can and will experience these chemical changes. The changes can quickly convert an otherwise reasonable person into a panicked one that's wants nothing but to get away from what's triggering the reaction. For this reason, some experts suggest new investors, even young investors, start out with an asset allocation that is moderate, and once the test is passed, they can increase if desired.

I am yet to face that test. I would definitely call myself a young investor. Only around a decade of investing. I've stayed put most of this time, just maxing out 401k, Roth and maintaining EF. I never gave a thought to how much I actually need in retirement and just thinking about that the past couple of months

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Re: I thought I knew my desired AA

Postby Alto Astral » Mon Mar 20, 2017 5:44 pm

KlangFool wrote:OP,

You are saving 50K to 60K per year. Let's assume that you are comfortable with 80/20 at 420K, what are you going to do with your AA when it is 720K aka 5 years from now? Switch back to 70/30 again?

You need to pick an AA that you can stick with for a few years. So, just because you are comfortable with 80/20 at 420K is not good enough. You need to be comfortable with 80/20 at 720K too. Aka, 5 years from now.

KlangFool

How long do folks recommend one stick with their AA.

As always, you make a great point about 5 years from now. With $720K I would have $536/$144K in an 80/20 and $504/$216 in a 70/30 AA in stocks/bonds. In a 50% stock market drop the $720 will drop to $407 in 80/20 vs $468. The difference will be $61K or one year living expense. This difference is is equivalent to me being 100/0 vs 70/30 today. Yes, I will dial back in 5 years. So, are you saying why bother?

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Re: I thought I knew my desired AA

Postby KlangFool » Mon Mar 20, 2017 5:47 pm

Alto Astral wrote:
KlangFool wrote:OP,

You are saving 50K to 60K per year. Let's assume that you are comfortable with 80/20 at 420K, what are you going to do with your AA when it is 720K aka 5 years from now? Switch back to 70/30 again?

You need to pick an AA that you can stick with for a few years. So, just because you are comfortable with 80/20 at 420K is not good enough. You need to be comfortable with 80/20 at 720K too. Aka, 5 years from now.

KlangFool

How long do folks recommend one stick with their AA.

As always, you make a great point about 5 years from now. With $720K I would have $536/$144K in an 80/20 and $504/$216 in a 70/30 AA in stocks/bonds. In a 50% stock market drop the $720 will drop to $407 in 80/20 vs $468. The difference will be $61K or one year living expense. This difference is is equivalent to me being 100/0 vs 70/30 today. Yes, I will dial back in 5 years. So, are you saying why bother?


Alto Astral,

Yes. AA should only be changed once every few years. If you change your AA regularly, you probably are doing "market timing".

KlangFool

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Re: I thought I knew my desired AA

Postby WarpSpeed » Mon Mar 20, 2017 5:55 pm

This is an interesting conversation, and I've also been doing some thinking about my desired AA recently. I know for a fact that at age 41 my allocation (somewhere near 90/10) is too aggressive right now when compared with conventional thinking. I've been taking steps to slowing shift my AA toward 80/20 (primarily by putting more new money into bonds vs. equities), but it's a very slow shift, primarily because equities have been doing well over the last few years.

When thinking about desired AA during accumulation phase, I'm wondering if the ratio of new contributions (per year) vs. the total portfolio value should be considered? In my current thinking, if new contributions per year represent a large enough portion of the total portfolio, I would think that a much more aggressive AA makes sense. I say this because during a 50% bear market (that lasts perhaps 2-3 years), the additional equities purchased will be at such a discount that the portfolio will recover its value very quickly after the market turns around.

Now that I've been investing for long enough (and my portfolio value has risen enough) that new contributions to the portfolio per year are far less than 10% of the total portfolio value, I'm thinking that the AA should become more conservative. This is really just another way of saying that now that there is more to lose in a downturn, the focus turns more towards capital preservation than it does toward growth.

What I haven't quite figured out yet is at what point should the ratio of new contributions vs. the portfolio size start to impact the AA. Clearly if the ratio is above 50% I would have no qualms about going with an AA of somewhere between 100/0 and 90/10, since the portfolio value would recover from a 50% downturn in a single year (based on new contributions alone). If the ratio was 33%, I'd still be very comfortable with a very aggressive AA--the portfolio should recover its value in less than 2 years. When the ratio drops below 10% it gets interesting... You are potentially looking at 5 years to recover (depending significantly on when and how fast the market turns). Depending on how close you are to retirement, 5 years can start to have real meaning.

When I get some time I might try to get a bit more formal with this. Or if anyone can point me to someone who has already done this work, please do so!

To the OP: It seems like your new contributions to the portfolio are in the range of $60k vs. a portfolio value of $420k (for a ratio of about 14%). I think you can still be pretty aggressive at your age given how long you'll be contributing before retirement, but as others have said, this is a very personal decision and one you will have to make on your own.

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Re: I thought I knew my desired AA

Postby Alto Astral » Mon Mar 20, 2017 6:00 pm

KlangFool wrote:
Alto Astral wrote:
KlangFool wrote:OP,

The short answer to your question is you are doing market timing. You are changing your AA from 70/30 to 80/20 because we are in a bull market. There is nothing in your life circumstances that justify changing your AA to a higher risk. In a normal aka none market timing move, the AA should glide towards less risk when it gets bigger.

KlangFool

I guess I know more on how much I will need to retire. I did not crunch any numbers when I picked 70/30 nor have a family. Now I've both. I am trying to see if I can have a safe withdrawal rate or even be able to reach 20-30x expenses (hopefully this number covers inflation). While I've crunched all the FV-calculations in a spreadsheet, I still have no clue if I will actually have enough. So I guess, I am am questioning my fundamental assumption.

I guess I can't tell you if I would entertain this thought in a bear market. But would you still call it market timing?

Would it be still market timing had I picked 80/20 to start with and decided to stick with it?


Alto Astral,

You should know by now it would not make a difference whether you will reach your number with either 70/30 or 80/20. If you are employed over the next 10 to 15 years, you will reach your number. If not, you will not.

KlangFool

What if its something in-between? Partial employment? Will an appropriate AA help smooth out less than ideal savings? Also should I re-evaluate my 12-month-expense EF?

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Re: I thought I knew my desired AA

Postby Alto Astral » Mon Mar 20, 2017 6:05 pm

cherijoh wrote:I think you could argue that 70/30 was fairly conservative for a 30 year old, but as you get older and have more financial responsibilities you should NOT be moving to a LESS conservative allocation. Reading the start of your post when you mentioned your newborn, I thought you were going to ask if it was time to move to 60/40!

LOL. Is it?

cherijoh wrote:If I were in your shoes, I certainly wouldn't be allocating 10% more of my portfolio towards stocks with these stock market valuations.

True. I would be buying high.

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Re: I thought I knew my desired AA

Postby Alto Astral » Mon Mar 20, 2017 6:09 pm

Dottie57 wrote:Before 2008, I had no problems since I did not have much and retirement seemed far away. Hitting 50 and going through 2008 opened my eyes. Including EF, I am at 50/50. Without it I am at 60/40. Retirement is 3 to 5 years away.

What was your AA when you were 40 and 50? What would you have changed given the advantage of having 2008 in hindsight?

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Re: I thought I knew my desired AA

Postby KlangFool » Mon Mar 20, 2017 6:09 pm

Alto Astral wrote:What if its something in-between? Partial employment? Will an appropriate AA help smooth out less than ideal savings? Also should I re-evaluate my 12-month-expense EF?


Alto Astral,

It won't matter either. As a homework assignment, please tell us the average return rate of 70/30 versus 80/20.

KlangFool

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Re: I thought I knew my desired AA

Postby Alto Astral » Mon Mar 20, 2017 6:13 pm

aristotelian wrote:This is a debate that can go on forever, because there is no answer, just your personal judgment call.

Arrghhh :)

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Re: I thought I knew my desired AA

Postby Fallible » Mon Mar 20, 2017 6:18 pm

Alto Astral wrote:Questions
1. How do I know what AA I am comfortable with? How do I know what my tolerance of risk is? If my original basis of my 70/30 AA was my deep respect for Mr Bogle, how do I know what my actual tolerance is? I ran the numbers and am I crazy that 21k shortage does not seem to cause me discomfort?
2. While I appreciate staying the course, am I veering if I pick 80/20 vs 70/30? Now that I am 37, I know most folks in my situation may go the other way to 60/40 ...


You're not market timing, just asking some of the smartest questions an investor can ask, including how much risk you and your wife can and want to handle emotionally, and how much you can afford to lose before you need the money. And you're asking them at a good time. As author and WSJ columnist Jason Zweig has written, "Nothing is more important for investors than learning how much they can stand to lose. But nothing is harder to learn - before it’s too late."

You already have some good advice here on an AA and risk tolerance, but other than "age-in-bonds," what have you read on those subjects? Some recommended reading includes Boglehead pro Rick Ferri's All About Asset Allocation, 2nd ed., the wiki's "Asset Allocation" and "Risk Tolerance" pages, in particular Larry Swedroe's three blogs on need, ability, and willingness to take risk, and more on risk and understanding risk tolerance in a Zweig's book, Your Money & Your Brain.

https://www.bogleheads.org/wiki/Asset_allocation
ttps://www.bogleheads.org/wiki/Risk_tolerance
https://www.bogleheads.org/wiki/Asset_a ... C_and_need
Bogleheads® wiki | Investing Advice Inspired by Jack Bogle

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Re: I thought I knew my desired AA

Postby Alto Astral » Mon Mar 20, 2017 6:19 pm

nedsaid wrote:
Alto Astral wrote:
nedsaid wrote:You never know your desired asset allocation until you go through a bear market. I have been through two 50% down bear markets since 2000 and found that 70% stocks and 30% barely worked for me. Now I am age 57, and I have 67% stocks and 33% bonds and cash. The emotional pain of loss, even if it is temporary, is real and should not be dismissed. Back in October 1987, the stock market crashed and I lost hundreds of dollars. It may as well have been billions. It seems silly today but the pain was real.

That's true. I graduated during the dot com bust. Then went back to grad school in a couple of years. When I graduated we were still recovering. I was 3 years into savings when the great recession hit. I did not have much so I did not lose much. If you don't mind me stating the obvious, 33% is age-24 in bonds. At that rate, I should be 90/10 :) But then your bond portion may be significant to ride your a crash, not to mention any pensions.

By barely worked, you men it was insufficient growth?


My asset allocation worked fine. During the 2000-2002 bear market my peak to trough losses were about 32%, during the 2008-2009 bear market my losses were about 35%. What I mean by "barely worked" is that my losses were barely tolerable, 35% losses were about the most I could stand. The reason I didn't sell at the bottom was that I knew that if I sold that I would never be able to meet my retirement goals. My losses were about two years of take home pay.

A good rule of thumb is to have 2 times your maximum tolerable loss in stocks. At 35% maximum tolerable loss, my stock allocation of 70% was just right.

I guess one needs to go through one of those to find "maximum tolerable loss". But I like you putting it in the context of years of take home pay. That helps coming up with a percentage.

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Re: I thought I knew my desired AA

Postby Alto Astral » Mon Mar 20, 2017 6:25 pm

WarpSpeed wrote:When thinking about desired AA during accumulation phase, I'm wondering if the ratio of new contributions (per year) vs. the total portfolio value should be considered? In my current thinking, if new contributions per year represent a large enough portion of the total portfolio, I would think that a much more aggressive AA makes sense. I say this because during a 50% bear market (that lasts perhaps 2-3 years), the additional equities purchased will be at such a discount that the portfolio will recover its value very quickly after the market turns around.

Even before accumulating amounts that exceed annual contributions, keep in mind that a bear market may be accompanied with some short-term unemployment. While you will recover soon, you may not be able to re-balance based on contributions alone.

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Re: I thought I knew my desired AA

Postby Boglehawk » Mon Mar 20, 2017 7:44 pm

I'm the same age as OP (37) and my asset allocation has been 80/20 for the last decade or so. I had the same AA in 2008 and did not flinch, although I had a lot less invested then.

I have been toying with the idea of changing it to 75/25--not necessarily to reduce volatility but, instead, for simplicity (50% domestic equities/25% international equities/25% bonds). Because my savings rate has increased significantly in the last few years and I'm at least two decades from retirement, my AA currently feels right for my situation.

I would be interested in how and when others changed their allocations. Was it a gradual process (i.e., 1% a year) or more abrupt (i.e., one AA for 30s then a 5-10% difference for 40s, etc.)?

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Re: I thought I knew my desired AA

Postby aristotelian » Mon Mar 20, 2017 7:50 pm

A couple of points.

1. You could change your allocation every six months. As long as it is headed in the same direction and proceeding according to a plan, it would not be market timing. You could change your allocation every five years, but if you were doing it in response to market conditions it would be market timing and you could be vulnerable to making bad decisions. I would suspect that going from 70/30 to 80/20 would be market timing because you are going in the opposite direction that you should be. However, you are young, so if you could lock yourself in to 80/20 it might be justifiable.

2. Take a look at Wellesley Income. It might be a special case, but it is 35/65 and still produces like a 60/40 stock portfolio. Bonds are not a lock to stay positive and stocks could be flat for a decade at a time. The important thing is to invest, stick with a plan, and do not engage in emotional behaviors that could lead to you buying high and selling low.

3. Part of your risk tolerance calculation is your need for risk. If you are on track for retirement and you do not need to place an aggressive bet on the stock market, then you should start to minimize your downside risk. Why take the risk of 80/20 if you are already on track for retirement at 70/30? Run some Monte Carlo simulations at 70/30 with your current savings and contribution. If you are on track for retirement, do not change a thing. I recently moved from 90/10 to 75/25 because I don't feel the need for big gains.

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Re: I thought I knew my desired AA

Postby KlangFool » Mon Mar 20, 2017 7:59 pm

Alto Astral wrote:I guess one needs to go through one of those to find "maximum tolerable loss". But I like you putting it in the context of years of take home pay. That helps coming up with a percentage.


Alto Astral,

There is a more straightforward way to look at this: number of years of annual savings. In your case, let's assume that you will work for another 15 years and your annual savings is 60K.

At 420K and 80/20, the maximum loss is 168K = 2.8 years of savings. You have 15 years to recover. So, you may make it.

5 years from now, at 720K and 80/20, the maximum loss = 288K = 4.8 years of savings with 10 more years to go. It is obvious that you cannot afford to take the risk. You do not have the ability to take the risk. You are out of time.

Ability to take the risk is independent of the emotional capability to take the risk. It is purely by the number.

KlangFool

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Re: I thought I knew my desired AA

Postby emoore » Mon Mar 20, 2017 8:17 pm

rkhusky wrote:Don't forget that a 50% market drop does not happen in isolation. You have no assurance that the market will stop at a 50% drop. In 2008, there were fears that the entire banking and insurance system was going to collapse. The stock market can go to zero.

On the other hand, you are a ways from retirement, so can work for a few more years if the market has a big drop in a few years. But the closer you get to retirement, the less able you will be to recover. If you do go to 80/20, when will you start dialing back on the stocks? According to a poll a few years ago, many people use age-10 or even age-20 instead of age in bonds.

I prefer a gradual glide slope, because I would hate it if the year before I decided to go from 80/20 to 60/40 the market dropped by 30%.


I don't think that will ever happen. Yes theoretically it can go to zero but it never has so why would you plan for something that has almost zero chance of happening. I see quite a few comments here about the stock market going to zero. You cannot plan for that unless you have a bomb shelter and supplies to last the rest of your life.

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Re: I thought I knew my desired AA

Postby aj76er » Mon Mar 20, 2017 8:37 pm

WarpSpeed wrote:When thinking about desired AA during accumulation phase, I'm wondering if the ratio of new contributions (per year) vs. the total portfolio value should be considered?


I think you are on to something here. I bet this is what a lot of investors intrinsically "feel" as they get older with larger portfolios and want to de-risk.
"Buy-and-hold, long-term, all-market-index strategies, implemented at rock-bottom cost, are the surest of all routes to the accumulation of wealth" - John C. Bogle


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