Solid justification for including all stocks & NO bonds?

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frankmorris
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Solid justification for including all stocks & NO bonds?

Post by frankmorris »

Hi all,

I'm working toward being able to post my total portfolio proposition in your expected format, but am slowly asking a few questions as I guide my preparation.

My next, with a brief background: Mid-30s, nonprofit/education with little disposable income, but likely an inheritance of around $1-2M. I'm considering how to invest that. I'd be in for the long-term - 30-50 years, though likely keeping dividends along the way (at least at first) to bolster near-term finance.

Question: Is there any solid reason NOT to invest 100% in stocks, perhaps a balance of large cap, TSM, and TISM? I'm through around 5 books, including the half of the Bogleheads book, Elements of Investing (Malkiel), etc., and my take-home with bonds is that they smooth short-term to moderate-term annual return risks, but in the long-term they'll never really beat stocks. So, if I can stomach large fluctuations in the market, is it more wise to stick with 100% stocks?

Side questions/points:

-I could add a 10% bond portfolio, but really - why? If I"m that little diversifying in stocks vs bonds, is there a point - other than potential liquidity if I need a LOT of cash in a long-term bear market?

-Risk: To me, it seems there are 2 types of risk: Short-term risk in which your portfolio may not be worth beyond a certain range in a given year (perhaps measured by SD or Beta), vs. the risk that you would simply LOSE your investment. The latter seems quite unlikely over the long-term, given investment in broad market funds, of course not including some major financial catastrophe, in which problems would be greater than simple diversification.

So, if I'm willing to shoulder the risk that my portfolio won't be worth a certain amount in a given year (or even band of multiple years), is there any solid argument for more than an incidental amount of bonds (for greater liquidity in case of a market downturn)?
aristotelian
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Re: Solid justification for including all stocks & NO bonds?

Post by aristotelian »

How will you feel if your newfound inheritance drops by 50% over a couple of bad weeks?

How would you then feel being in a low income job with no ability to buy back into the market when it bottoms out?

What if the next bear market does not come back in a year but takes 8 to 10 years or longer, like Japan or the US Great Depression?
ff4930
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Re: Solid justification for including all stocks & NO bonds?

Post by ff4930 »

So, if I can stomach large fluctuations in the market, is it more wise to stick with 100% stocks?
If you can stomach it and sleep at night, then yes. Go with 100% stocks. No one is saying you can't nor stopping you.
-I could add a 10% bond portfolio, but really - why? If I"m that little diversifying in stocks vs bonds, is there a point - other than potential liquidity if I need a LOT of cash in a long-term bear market?
This going to risk level again. If you feel you can stomach losing majority or even all of it then yes, do 100%. However there are people who have 20, 30, or even 60% bonds because that is their risk level.
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jhfenton
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Re: Solid justification for including all stocks & NO bonds?

Post by jhfenton »

I was 100% stocks for more than 20 years, but in your case I would not be 100% stocks.

My wife and I started out in our mid-20's with $0 in our portfolio and expectations of two professional salaries (attorney and CPA) for 35+ years. At that point our lifetime asset allocation was 0% equities/100% human capital. Even 20 years in, with substantial savings invested 100% in equities, we were probably still less than 50% stocks and more than 50% human capital. But a couple of years ago, at age 45, we realized that we might retire in as soon as 12 years--when our younger child should be graduating from college--and almost certainly within 17 years. At that point, we decided to slowly add fixed income. And with a bit of acceleration this year, we're currently at 86/14.

In your case, it sounds like you're already in a situation, due to your substantial inheritance and modest non-profit salary, that your current assets are already a huge chunk of your lifetime savings. You're not where we were in our mid-30's, with just a low six-figure portfolio and increasing incomes and savings.

That doesn't mean I would go 60/40. If you're not planning to draw on the portfolio for 20+ years, I would probably go 80/20 just to hedge against the Japan scenario. If you plan on leaving the non-profit world and increasing your income down the road, I might consider 90/10.
KlangFool
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Re: Solid justification for including all stocks & NO bonds?

Post by KlangFool »

frankmorris wrote:
My next, with a brief background: Mid-30s, nonprofit/education with little disposable income, but likely an inheritance of around $1-2M. I'm considering how to invest that. I'd be in for the long-term - 30-50 years, though likely keeping dividends along the way (at least at first) to bolster near-term finance.
frankmorris,

1) Consider your background, why would you invest this money for 30 to 50 years? It is more likely that you will retire early with this money.

2) You had won the game. Why would you keep playing? Keep an AA of 60/40 and enjoy your life.

3) Life is too short. You do not live forever. So, why would you work 40 hours per week and earn far less than your investment income? Furthermore, most of those incomes will be lost to tax anyhow.

4) It looks like you had received this windfall recently. You had not thought through how it will affect and change your life.

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JFP_SF
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Re: Solid justification for including all stocks & NO bonds?

Post by JFP_SF »

KlangFool wrote:
frankmorris wrote:
My next, with a brief background: Mid-30s, nonprofit/education with little disposable income, but likely an inheritance of around $1-2M. I'm considering how to invest that. I'd be in for the long-term - 30-50 years, though likely keeping dividends along the way (at least at first) to bolster near-term finance.
frankmorris,

1) Consider your background, why would you invest this money for 30 to 50 years? It is more likely that you will retire early with this money.

2) You had won the game. Why would you keep playing? Keep an AA of 60/40 and enjoy your life.

3) Life is too short. You do not live forever. So, why would you work 40 hours per week and earn far less than your investment income? Furthermore, most of those incomes will be lost to tax anyhow.

4) It looks like you had received this windfall recently. You had not thought through how it will affect and change your life.

KlangFool
To me, this advice is absolutely spot-on. You don't need to be that aggressive, so why would you be? The more money you have, the less aggressive you need to be.
CppCoder
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Re: Solid justification for including all stocks & NO bonds?

Post by CppCoder »

Just another point to consider, in your case, it sounds like you are looking for your investment to produce a (reliable?) cash flow. Cash flow from bonds is a little more reliable than cash flow from stocks in so much as the bond coupon is fixed in a contract and stock dividends are determined periodically by a company's board of directors. Of course, it's not quite this straightforward in the real world. During a crisis, stock yields may go up rather than boards cutting dividends. Concurrently, interest rates affecting bonds can change.

I think, more importantly, for your situation, I would want to use bonds to dampen volatility. It's easier to think you'll stay the course watching 50% of your portfolio vanish than it is to actually behave this way.
NiceUnparticularMan
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Re: Solid justification for including all stocks & NO bonds?

Post by NiceUnparticularMan »

So a comprehensive look at portfolios would include variable contributions/withdrawals, and adverse correlations between contributions/withdrawals and stock market events could be pretty damaging. Therefore, it could make sense to have non-stocks to provide against such possibilities.

An emergency fund is an example of such a strategy, but I think there are also possibilities that could, say, interfere with contributions even if you don't need to draw on an emergency fund for spending.

I actually do think you could end up with pretty small but nonetheless potentially effective allocations to non-stocks in light of such considerations.
retire57
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Re: Solid justification for including all stocks & NO bonds?

Post by retire57 »

My question is: how do you know you can stomach large fluctuations until you've live through it? You really don't know your risk tolerance until you are at risk.

So why increase your risk at this point? With all that time on your side?

We went through 1987, 2000, and 2008 - trust me, it takes a lot of grim determination to stay the course during those dark times. The only light was our bond allocation. Even at 20-30%, those bonds prevented panic.

As others have said, it's all about risk versus reward.
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Re: Solid justification for including all stocks & NO bonds?

Post by KlangFool »

retire57 wrote:My question is: how do you know you can stomach large fluctuations until you've live through it? You really don't know your risk tolerance until you are at risk.

So why increase your risk at this point? With all that time on your side?

We went through 1987, 2000, and 2008 - trust me, it takes a lot of grim determination to stay the course during those dark times. The only light was our bond allocation. Even at 20-30%, those bonds prevented panic.

As others have said, it's all about risk versus reward.
retire57,

In the OP's case, there is little to no reward due to the marginal utility of money.

There is a big reward for the first million. The second million is less and the third million is even less. At 2 million, even if the money double to 4 million, there is minimal benefit to OP. But, if the 2 million drop to 1 million, it will be a significant loss to OP.

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The 19th hole
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Re: Solid justification for including all stocks & NO bonds?

Post by The 19th hole »

Depends entirely on your risk tolerance.

I'm 60 and just recently retired. I was 100% stocks for my entire work life except for my emergency fund (and day to day cash). That included my Roth IRA, my taxable investment account and my kids 529 accounts. I firmly believed that my long term interests were best served by being in stocks. I am now at the stage where I am adjusting to a 70/30 split.

I have no regrets.

If you can live with the sometimes extreme fluctuations in stock prices - yes all stock prices - and you can see the total value of your investment accounts shrink significantly without getting itchy and selling, then you can be aggressive with stocks. Remember though, your situation may change and you may want to spend some of that inheritance (house, family, emergency) when it's not a good time to sell, so make sure to take that into account.
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Re: Solid justification for including all stocks & NO bonds?

Post by sport »

retire57 wrote:My question is: how do you know you can stomach large fluctuations until you've live through it? You really don't know your risk tolerance until you are at risk.
The importance of this question cannot be overstated. It is easy to say, now, that you can continue to hold stocks when they drop and drop and then drop some more with no end in sight. It is not so easy when it is your money that is evaporating.
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knpstr
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Re: Solid justification for including all stocks & NO bonds?

Post by knpstr »

The correct allocation would be 100% stocks given all what you stated. Drops are not meaningful for the long term investor except as an opportunity to buy more per dollar than they otherwise could have.

Given your (potentially) long investment time horizon I'd say it is prudent to be 100% stocks or 90% stocks if you decide must hold bonds for some reason.

As Warren Buffett said, bonds are far riskier than stocks when it comes to long term (multi-decade) investing.
Very little is needed to make a happy life; it is all within yourself, in your way of thinking. -Marcus Aurelius
retiredjg
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Re: Solid justification for including all stocks & NO bonds?

Post by retiredjg »

Although many people do it, I do not believe there is any solid justification for having 100% stocks and no bonds. By definition, that is not a diversified portfolio.

Edit: Ok, I know I'll get slammed for that comment. My comment revolves around the words "solid justification" which implies that one thing is better than another. There can be no reasonable argument that 100% stocks is "better" than something less than 100% stocks.

This doesn't mean that a person is "wrong" for choosing 100% stocks. I just see no "solid justification" for using 100% stocks.
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knpstr
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Re: Solid justification for including all stocks & NO bonds?

Post by knpstr »

retiredjg wrote:Although many people do it, I do not believe there is any solid justification for having 100% stocks and no bonds. By definition, that is not a diversified portfolio.

Edit: Ok, I know I'll get slammed for that comment. My comment revolves around the words "solid justification" which implies that one thing is better than another. There can be no reasonable argument that 100% stocks is "better" than something less than 100% stocks.

This doesn't mean that a person is "wrong" for choosing 100% stocks. I just see no "solid justification" for using 100% stocks.
Certainly someone is diversified if they own 1 fund that holds 3,000 stocks, by definition.
I think I read that mathematical models showed that most of the benefits of diversification is reached at holding about 20-30 different stocks. So really 3,000+ is over kill. Same with a S&P 500 fund.

The "solid justification" comes in that bonds have been shown to be risky for the long term investor.
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jhfenton
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Re: Solid justification for including all stocks & NO bonds?

Post by jhfenton »

retiredjg wrote:Although many people do it, I do not believe there is any solid justification for having 100% stocks and no bonds. By definition, that is not a diversified portfolio.

Edit: Ok, I know I'll get slammed for that comment. My comment revolves around the words "solid justification" which implies that one thing is better than another. There can be no reasonable argument that 100% stocks is "better" than something less than 100% stocks.

This doesn't mean that a person is "wrong" for choosing 100% stocks. I just see no "solid justification" for using 100% stocks.
I won't slam you. :sharebeer At the margins, this is as much about temperament as logic.

I gave my justification, though, above. I don't see anything wrong with young accumulators starting from scratch being 100% equities in their portfolio. At that point, what is there to be worried about losing? (I still remember making my very first $400 Roth IRA contribution.) When you're young, you're not really 100% equities, your largest asset is future earnings (human capital).
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Re: Solid justification for including all stocks & NO bonds?

Post by retiredjg »

knpstr wrote:Certainly someone is diversified if they own 1 fund that holds 3,000 stocks, by definition.
I would call that diversification within the asset class of stocks. That is not the same as a diversified portfolio.

The first tier of diversification is between stocks and bonds (or other fixed income assets). Then there is further diversification within each asset class and within in sub-classes (for lack of a better term). You are only considering the second and later tiers.

I realize people use these terms differently. I'm using the more basic definition which I learned several years ago from the Vanguard site. Asset allocation, at its most basic level, means having both stocks and bonds. This is not how the term is used in the colloquial manner - which equates "asset allocation" to "how do you split up your stuff?" and is usually focused on secondary, tertiary, etc. levels of diversification.

All that said, let's not get into a lengthy terminology argument since that is not very helpful to the original poster. I stand by the statement that a portfolio without bonds/fixed is, by definition, an undiversified portfolio. I assume you don't agree. And that should be fine for both of us. :happy
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Re: Solid justification for including all stocks & NO bonds?

Post by KlangFool »

jhfenton wrote:
retiredjg wrote:Although many people do it, I do not believe there is any solid justification for having 100% stocks and no bonds. By definition, that is not a diversified portfolio.

Edit: Ok, I know I'll get slammed for that comment. My comment revolves around the words "solid justification" which implies that one thing is better than another. There can be no reasonable argument that 100% stocks is "better" than something less than 100% stocks.

This doesn't mean that a person is "wrong" for choosing 100% stocks. I just see no "solid justification" for using 100% stocks.
I won't slam you. :sharebeer At the margins, this is as much about temperament as logic.

I gave my justification, though, above. I don't see anything wrong with young accumulators starting from scratch being 100% equities in their portfolio. At that point, what is there to be worried about losing? (I still remember making my very first $400 Roth IRA contribution.) When you're young, you're not really 100% equities, your largest asset is future earnings (human capital).
jhfenton,

Except this does not apply to OP. He would never earn or save this amount of money for his whole life. So, he could not afford to lose the money.

KlangFool
NiceUnparticularMan
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Re: Solid justification for including all stocks & NO bonds?

Post by NiceUnparticularMan »

The tricky thing is diversification is a "free lunch" when you are talking about assets with approximately similar expected returns. When you are diversifying with assets with much lower expected returns, it can add long term risk, not subtract it.

So I mostly see bonds as risk-management tools, not diversification tools, in a long-term portfolio. You might make exceptions for long nominal bonds and MAYBE international bonds, but for the most part I would not claim bonds are useful for pure diversification purposes.
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Re: Solid justification for including all stocks & NO bonds?

Post by KlangFool »

OP,

It is very simple. You do not have the ability to take the risk of 100/0. You cannot afford to lose the money. So, it does not matter whether you are willing to take the risk. You cannot afford to. You could neither earn or save this amount for your whole life. In order to save 1 million, you need to earn at least 2 million. In order to save 2 million, you need to earn at least 4 million.

How many years of earning and saving does this amount of money represent? If you lose 50% of this, could you ever earn and save this back? I believe the answer is no for you. So, you do not have the ability to take the risk.

KlangFool
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jhfenton
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Re: Solid justification for including all stocks & NO bonds?

Post by jhfenton »

KlangFool wrote:
jhfenton wrote:
retiredjg wrote:Although many people do it, I do not believe there is any solid justification for having 100% stocks and no bonds. By definition, that is not a diversified portfolio.

Edit: Ok, I know I'll get slammed for that comment. My comment revolves around the words "solid justification" which implies that one thing is better than another. There can be no reasonable argument that 100% stocks is "better" than something less than 100% stocks.

This doesn't mean that a person is "wrong" for choosing 100% stocks. I just see no "solid justification" for using 100% stocks.
I won't slam you. :sharebeer At the margins, this is as much about temperament as logic.

I gave my justification, though, above. I don't see anything wrong with young accumulators starting from scratch being 100% equities in their portfolio. At that point, what is there to be worried about losing? (I still remember making my very first $400 Roth IRA contribution.) When you're young, you're not really 100% equities, your largest asset is future earnings (human capital).
jhfenton,

Except this does not apply to OP. He would never earn or save this amount of money for his whole life. So, he could not afford to lose the money.

KlangFool
Which is why I said in my first post that he should not be 100% equities.
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Re: Solid justification for including all stocks & NO bonds?

Post by autopeep »

KlangFool wrote:OP,

It is very simple. You do not have the ability to take the risk of 100/0. You cannot afford to lose the money. So, it does not matter whether you are willing to take the risk. You cannot afford to. You could neither earn or save this amount for your whole life. In order to save 1 million, you need to earn at least 2 million. In order to save 2 million, you need to earn at least 4 million.

How many years of earning and saving does this amount of money represent? If you lose 50% of this, could you ever earn and save this back? I believe the answer is no for you. So, you do not have the ability to take the risk.

KlangFool
+1. Not only does he not have the ability to take this risk, but also he has not articulated a need to take it.
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Re: Solid justification for including all stocks & NO bonds?

Post by Mr.BB »

Many people feel they can handle losing 30-40% when the market goes down; until it actually happens.
That is why so many people lost money these last ten years, when the markets were at all time lows, they sold instead of adding to their accounts.
Theory is one thing, practical application is another.
Basically bonds minimize the impact of a downturn in the market, and they can add to your income stream.
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Re: Solid justification for including all stocks & NO bonds?

Post by knpstr »

retiredjg wrote:
knpstr wrote:Certainly someone is diversified if they own 1 fund that holds 3,000 stocks, by definition.
I would call that diversification within the asset class of stocks. That is not the same as a diversified portfolio.

The first tier of diversification is between stocks and bonds (or other fixed income assets). Then there is further diversification within each asset class and within in sub-classes (for lack of a better term). You are only considering the second and later tiers.

I realize people use these terms differently. I'm using the more basic definition which I learned several years ago from the Vanguard site. Asset allocation, at its most basic level, means having both stocks and bonds. This is not how the term is used in the colloquial manner - which equates "asset allocation" to "how do you split up your stuff?" and is usually focused on secondary, tertiary, etc. levels of diversification.

All that said, let's not get into a lengthy terminology argument since that is not very helpful to the original poster. I stand by the statement that a portfolio without bonds/fixed is, by definition, an undiversified portfolio. I assume you don't agree. And that should be fine for both of us. :happy
Yes, we can agree to disagree. I don't think a diversified portfolio is mandatory exposure to all asset classes of every kind.
Since by that definition I'm not sure if your portfolio is truly diversified without holding pork bellies, gold and fine art, among other asset classes. Unless one's definition is just stocks and bonds (fixed income) are, for some reason, the only assets that matter in a diversified portfolio. :beer
Very little is needed to make a happy life; it is all within yourself, in your way of thinking. -Marcus Aurelius
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Re: Solid justification for including all stocks & NO bonds?

Post by JFP_SF »

autopeep wrote:
KlangFool wrote:OP,

It is very simple. You do not have the ability to take the risk of 100/0. You cannot afford to lose the money. So, it does not matter whether you are willing to take the risk. You cannot afford to. You could neither earn or save this amount for your whole life. In order to save 1 million, you need to earn at least 2 million. In order to save 2 million, you need to earn at least 4 million.

How many years of earning and saving does this amount of money represent? If you lose 50% of this, could you ever earn and save this back? I believe the answer is no for you. So, you do not have the ability to take the risk.

KlangFool
+1. Not only does he not have the ability to take this risk, but also he has not articulated a need to take it.
+2. What's the need to go 100% stocks? He's inheriting more than he could ever save. His first goal should be to preserve that wealth.
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Re: Solid justification for including all stocks & NO bonds?

Post by knpstr »

Mr.BB wrote:Many people feel they can handle losing 30-40% when the market goes down; until it actually happens.
That is why so many people lost money these last ten years, when the markets were at all time lows, they sold instead of adding to their accounts.
Theory is one thing, practical application is another.
Basically bonds minimize the impact of a downturn in the market, and they can add to your income stream.
Well to be fair, in a 60/40 portfolio one would still suffer a 30% drop in a 50% down market.
So hopefully they can handle it.
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Re: Solid justification for including all stocks & NO bonds?

Post by Bogle_Feet »

frankmorris wrote:but in the long-term they'll never really beat stocks. So, if I can stomach large fluctuations in the market, is it more wise to stick with 100% stocks?
You don't own bonds because you think they'll beat stocks or maybe beat stocks. History says that they probably won't. You own bonds as a stock shock absorber. When stocks fall, money runs to the safety of bonds.
Stocks have historically been the best performing asset class, but over short time periods they can be volatile. If you have a short investing time horizon before retirement then taking a lot of risk may be ill-advised. In the end it's YOUR decision. Study historical returns and decide how much risk you have a stomach for.
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Re: Solid justification for including all stocks & NO bonds?

Post by 123 »

Many folks with expected long working lives ahead of them might favor an all stock portfolio. The problem that arises with that position is that you never know when disability or misfortune may strike reducing or eliminating your future earnings potential. If you are in a situation of unfortunate circumstances and coincidentally at the time there is a bear market situation that may last for 5 years or more you may not have access to substantial capital that would otherwise have existed in your portfolio if you had a more incorporated a more significant bond position.

While, you may say "That can never happen to me", I would respond "What makes you so special?". Life happens.
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Re: Solid justification for including all stocks & NO bonds?

Post by rhornback »

One thing I want to add is that bonds can get clobbered during times of high inflation.

If the bond pays 3% and inflation goes to 5% the value of the bond goes down. I do not consider bonds risk free investments.

At risk of sounding smug, I feel it has been so long since we have had hyper inflation in this country that maybe some have forgotten this.

BTW I do not own any bonds, I am in stocks and cash. Warren Buffet once suggested that 90% stocks and 10% short term securities. That is what I am doing. Though obviously I am against the grain of a long of people.

On a side note, I consider my job (both my wife and I work) as a hedge against both inflation and market drops. Hopefully we will get wage increases during times of inflation. And if the market takes a tumble I am assuming we can live off one salary until it recovers. I am assuming a 10 year worst case scenario.

Unfortunately I own a McMansion. Otherwise I am debt free. BTW I do not like the McMansion but happy wife is happy life. So again not everyone is like me.

BTW I am a big fan of Vanguard Total Stock Market Index (Domestic). There is some sort of late night commercial where the tag line is "Set it and forget it". While I am not doing this myself I think for most the Vanguard Total Stock Market Index is a great idea.
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Re: Solid justification for including all stocks & NO bonds?

Post by autopeep »

rhornback wrote:One thing I want to add is that bonds can get clobbered during times of high inflation.

If the bond pays 3% and inflation goes to 5% the value of the bond goes down. I do not consider bonds risk free investments.

At risk of sounding smug, I feel it has been so long since we have had hyper inflation in this country that maybe some have forgotten this.

BTW I do not own any bonds, I am in stocks and cash. Warren Buffet once suggested that 90% stocks and 10% short term securities. That is what I am doing. Though obviously I am against the grain of a long of people.

On a side note, I consider my job (both my wife and I work) as a hedge against both inflation and market drops. Hopefully we will get wage increases during times of inflation. And if the market takes a tumble I am assuming we can live off one salary until it recovers. I am assuming a 10 year worst case scenario.

Unfortunately I own a McMansion. Otherwise I am debt free. BTW I do not like the McMansion but happy wife is happy life. So again not everyone is like me.

BTW I am a big fan of Vanguard Total Stock Market Index (Domestic). There is some sort of late night commercial where the tag line is "Set it and forget it". While I am not doing this myself I think for most the Vanguard Total Stock Market Index is a great idea.
Please show me an example of inflation/interest rates "clobbering" bond funds. I also don't understand how you can be concerned about inflation risk but keep your fixed income in cash (now there's an asset that can be clobbered by inflation)
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Re: Solid justification for including all stocks & NO bonds?

Post by radiowave »

My next, with a brief background: Mid-30s, nonprofit/education with little disposable income, but likely an inheritance of around $1-2M. I'm considering how to invest that. I'd be in for the long-term - 30-50 years, though likely keeping dividends along the way (at least at first) to bolster near-term finance.
So the OP presumes he is receiving a $1-2M inheritance. If he want to let it ride for a few decades, that favors a high equity percent, like VTSAX as autopeep notes. If we have a depression of 50 or more % of equity for a couple decades, there's a lot more to worry about than just stocks. OTOH if the primary goal is to preserve capital, higher bond portions are prudent. We don't know if this inheritance is in a tax deferred or taxable account. If in taxable, use of low or no LTCG could be a good strategy up to the top of the 15% bracket. Take what he needs let the rest be reinvested. Using a rule of thumb that equities double every 10 years, he could easily have $4-5M and retire in his 60's with a nice nest egg.
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Re: Solid justification for including all stocks & NO bonds?

Post by dbr »

My answer to your question is that you are looking for a solid justification for something that is a matter of judgement and preference. There is no such answer. More than that said judgement and preference is specific to the situation of an individual. There is no general answer for all individuals. I am sure many answers on this thread address issues that impact what your judgement and preference might come to be.

I remember a lawyer telling me once that the single question that must be answered before proceeding with any discussion was "What do you want?"

Frankly, a lot of the debate about choices in asset allocation seems to revolve around the "principle of indifferent choice." POIC means that given a multiplicity of choices one simply distributes one's selection evenly across all the alternatives, being indifferent to any one of them in particular. That is not as arbitrary as it seems at first as it does adhere to some kind of intuitive notion that diversification must somehow be good. When stated as "Don't put all your eggs in one basket." the concept seems most evident.
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Re: Solid justification for including all stocks & NO bonds?

Post by aristotelian »

Before this thread, my IPS read:
Do not be greedy. Do not try to beat the market. Be satisfied with owning the market. Invest rather than speculate.

Based on this thread, I have one addition:
Do not be greedy. Do not take unnecessary risk. Do not try to beat the market. Be satisfied with owning the market. Invest rather than speculate.

OP, what does your IPS say? What is your risk/reward calculus?

Listen to Klangfool. He is a wise man. He has been through the ups and downs of the market. He knows how much you can lose, and how scary that is.

You have been given an instant head start that puts you on track to financial independence with just a little bit of prudence. Why would you risk screwing that up?

Yes, historically stocks have outperformed bonds over the very long term. However, they have also gone through periods that have taken decades to recover. You don't know that the next recovery will be like the last one. If you hold 20-30% bonds, you will still capture most of the gains of the market while giving you the piece of mind that you will have most of your nest egg left even in the worst case scenario.
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Re: Solid justification for including all stocks & NO bonds?

Post by frankmorris »

Wow, thanks everyone - logging back on after a few hours away and seeing a wealth of wisdom. Here's what I've gathered:

-Staying the course over decades, with potentially (and probably) multiple downturns, of potentially (and probably) multiple years of losses, is extremely difficult. Bonds help ease the pain.

-If I'm lucky enough to have a decent starting amount, higher allocations to bonds are insurance to minimize the likelihood that I fall below a certain amount. If I've "already won," why play the game at all?

-Some bond allocation can provide quicker access to capital in the event of a prolonged downturn, and immediate need/desire for some of that fund.

-There is nothing inherently wrong about sticking with all or mostly stocks - it's a matter of my intestinal fortitude, which I've never actually tested given that I've never invested that amount during a significant downturn.

This has given me a lot to think about, everyone. To answer a few questions or respond to a few comments:

-Why: Why would I want to risk a good starting point? I think partially because I feel like I should. In part, coming from a nonprofit background, I've come to really, really appreciate the value of a dollar. I've worked in small nonprofits or schools for around 15 years, and wow - what a huge amount of difference $1,000,000 could make. If had the good fortune of taking a wise, prudent risk over 40-50 years, and we do the math - I could literally invest/leave millions to organizations and do a world of good. If this were simply speculation - throwing everything I had on an off chance of making more, I'd be inclined to be more cautious. But if you all on this forum, and millions of others, are conservatively investing hard-earned money in the market, would it not be wise of me to do the same, with the strong possibility of being able to do so much more than if I simply keep it all to myself?

Yes, I realize that seems very lofty and idealistic, and that may not have a place at the table when it comes to prudent investing. It probably also seems naive and easy for me to say, given that I didn't put forth an hour's worth of effort for what I may get. At the same time, I've seen my grandparents work hard and save that money over decades, starting with almost nothing, working tedious jobs, but yet being frugal. Is the best I can do with that simply live comfortably? Is that morally responsible?

Again, I apologize - I'm probably getting beyond the boundaries of this forum, but if we're talking core mission/value statements behind an investor policy statement - I feel like this matters. Perhaps this means i need to write this down, print it out, and keep it next to my bed on the first night after the next inevitable crash.

Coming back into more practical reality, honestly if I'm 80/20 and we have a crash, I'll be down huge amount of money short-term. Realistically, if I started with $2M and I'm down to $800,000 instead of $1,000,000 - is this of practical significance? Part of that is a statement (I don't think it is), but part of it is a sincere question - does having a small amount of bonds realistically make you sleep better? Other than accessing capital short-term, it seems that if you've got 80% skin the game, that's enough to make you do what you're going to do, good or bad.

Again, thanks everyone - keep the comments coming if you have them, and I sincerely appreciate the wisdom...
Last edited by frankmorris on Sun May 07, 2017 9:01 pm, edited 2 times in total.
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Re: Solid justification for including all stocks & NO bonds?

Post by grabiner »

Mr.BB wrote:Many people feel they can handle losing 30-40% when the market goes down; until it actually happens.
That is why so many people lost money these last ten years, when the markets were at all time lows, they sold instead of adding to their accounts.
Theory is one thing, practical application is another.
And that is the reason for my recommendation here, which is my usual recommendation: don't hold more than 80% stocks until you have been through a bear market with a stock-heavy portfolio. If you were 80% stock in 2007, and were still 80% stock in 2009, then you know how you react to a bear market, and 100% stock could be right for you if you have the ability to take that much risk.

I have one of the most aggressive portfolios on the Bogleheads, but I also believe in this advice. I was 80% stock in 2000, and kept that allocation in the 2000-2002 bear market. By 2004, I was 90% stock with the risk of 100% stock (overweighting riskier stocks), because I knew how I would react in a bear market. I lost 60% of my portfolio from the 2007 peak to the 2009 bottom, but I stuck with the allocation, rebalancing into stock near the 2008 market low.
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Re: Solid justification for including all stocks & NO bonds?

Post by frankmorris »

And a follow-up to my initial question, about the two kinds of risk - are there any horror stories of folks out there who have invested in wise investments, e.g., VT or VTI and literally lost everything long-term? Not just being down a few years, but never came back? It seems to me that if the market has literally always, without fail, come back - and come back stronger, would this not be encouragement to stick through rough times?

And if we should somehow enter a financial apocalypse and find our first market crash that we never come out of, that would truly be catastrophic beyond portfolio damage. I also get the sense that giving up 20% of a portfolio's earning power to bond's, if I don't really need access to capital, is like keeping a stockpile of gold in the safe in case the government collapses - that may well be wise on some level, but perhaps a little extreme? Then again, with North Korea the way it is, maybe those will end up being the wise ones after all...
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Re: Solid justification for including all stocks & NO bonds?

Post by KlangFool »

frankmorris wrote: -Why: Why would I want to risk a good starting point? I think partially because I feel like I should. In part, coming from a nonprofit background, I've come to really, really appreciate the value of a dollar. I've worked in small nonprofits or schools for around 15 years, and wow - what a huge amount of difference $1,000,000 could make. If had the good fortune of taking a wise, prudent risk over 40-50 years, and we do the math - I could literally invest/leave millions to organizations and do a world of good. If this were simply speculation - throwing everything I had on an off chance of making more, I'd be inclined to be more cautious. But if you all on this forum, and millions of others, are conservatively investing hard-earned money in the market, would it not be wise of me to do the same, with the strong possibility of being able to do so much more than if I simply keep it all to myself?

Yes, I realize that seems very lofty and idealistic, and that may not have a place at the table when it comes to prudent investing. It probably also seems naive and easy for me to say, given that I didn't put forth an hour's worth of effort for what I may get. At the same time, I've seen my grandparents work hard and save that money over decades, starting with almost nothing, working tedious jobs, but yet being frugal. Is the best I can do with that simply live comfortably? Is that morally responsible?

Again, I apologize - I'm probably getting beyond the boundaries of this forum, but if we're talking core mission/value statements behind an investor policy statement - I feel like this matters. Perhaps this means i need to write this down, print it out, and keep it next to my bed on the first night after the next inevitable crash.

Coming back into more practical reality, honestly if I'm 80/20 and we have a crash, I'll be down huge amount of money short-term. Realistically, if I started with $2M and I'm down to $800,000 instead of $1,000,000 - is this of practical significance? Part of that is a statement (I don't think it is), but part of it is a sincere question - does having a small amount of bonds realistically make you sleep better? Other than accessing capital short-term, it seems that if you've got 80% skin the game, that's enough to make you do what you're going to do, good or bad.
frankmorris,

<<what a huge amount of difference $1,000,000 could make.>>

<< Realistically, if I started with $2M and I'm down to $800,000 instead of $1,000,000 - >>

If gaining 1 million matters to you, why do you think that losing 1.2 million does not matter to you? How does this make any sense?

Let's be honest, you have not experienced what is it like to have 2 million. So, please do not rush into any decision.

KlangFool
Last edited by KlangFool on Sun May 07, 2017 9:18 pm, edited 1 time in total.
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Re: Solid justification for including all stocks & NO bonds?

Post by KlangFool »

frankmorris wrote:And a follow-up to my initial question, about the two kinds of risk - are there any horror stories of folks out there who have invested in wise investments, e.g., VT or VTI and literally lost everything long-term? Not just being down a few years, but never came back? It seems to me that if the market has literally always, without fail, come back - and come back stronger, would this not be encouragement to stick through rough times?

And if we should somehow enter a financial apocalypse and find our first market crash that we never come out of, that would truly be catastrophic beyond portfolio damage. I also get the sense that giving up 20% of a portfolio's earning power to bond's, if I don't really need access to capital, is like keeping a stockpile of gold in the safe in case the government collapses - that may well be wise on some level, but perhaps a little extreme? Then again, with North Korea the way it is, maybe those will end up being the wise ones after all...
frankmorris,

Until you have the 1 to 2 million for a while, what makes you think that you will not retire earlier? It is illogical for you to work the next 30 to 50 years. Or, you may start your own nonprofit and work for free. So, how could you assume at this moment that you do not need the money for the next 30 to 50 years?

It is more logical to assume that you will not live and work as you were with the money. You have options.

KlangFool
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Re: Solid justification for including all stocks & NO bonds?

Post by retiredjg »

Yes. There is an example of a market going down and not coming back. Check out Japan.

As for the rest of your argument, there are times, even decades, when bonds outperform stocks. During such times, the people with bonds are mighty happy to have something that is actually making money.
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Re: Solid justification for including all stocks & NO bonds?

Post by frankmorris »

KlangFool wrote:
frankmorris wrote: -Why: Why would I want to risk a good starting point? I think partially because I feel like I should. In part, coming from a nonprofit background, I've come to really, really appreciate the value of a dollar. I've worked in small nonprofits or schools for around 15 years, and wow - what a huge amount of difference $1,000,000 could make. If had the good fortune of taking a wise, prudent risk over 40-50 years, and we do the math - I could literally invest/leave millions to organizations and do a world of good. If this were simply speculation - throwing everything I had on an off chance of making more, I'd be inclined to be more cautious. But if you all on this forum, and millions of others, are conservatively investing hard-earned money in the market, would it not be wise of me to do the same, with the strong possibility of being able to do so much more than if I simply keep it all to myself?

Yes, I realize that seems very lofty and idealistic, and that may not have a place at the table when it comes to prudent investing. It probably also seems naive and easy for me to say, given that I didn't put forth an hour's worth of effort for what I may get. At the same time, I've seen my grandparents work hard and save that money over decades, starting with almost nothing, working tedious jobs, but yet being frugal. Is the best I can do with that simply live comfortably? Is that morally responsible?

Again, I apologize - I'm probably getting beyond the boundaries of this forum, but if we're talking core mission/value statements behind an investor policy statement - I feel like this matters. Perhaps this means i need to write this down, print it out, and keep it next to my bed on the first night after the next inevitable crash.

Coming back into more practical reality, honestly if I'm 80/20 and we have a crash, I'll be down huge amount of money short-term. Realistically, if I started with $2M and I'm down to $800,000 instead of $1,000,000 - is this of practical significance? Part of that is a statement (I don't think it is), but part of it is a sincere question - does having a small amount of bonds realistically make you sleep better? Other than accessing capital short-term, it seems that if you've got 80% skin the game, that's enough to make you do what you're going to do, good or bad.
frankmorris,

<<what a huge amount of difference $1,000,000 could make.>>

<< Realistically, if I started with $2M and I'm down to $800,000 instead of $1,000,000 - >>

If gaining 1 million matters to you, why do you think that losing 1 million does not matter to you? How does this make any sense?

Let's be honest, you have not experienced what is it like to have 2 million. So, please do not rush into any decision.

KlangFool
Not to be argumentative, but because - in the long-term - in the US economy - that $1M really isn't lost. It's just down, whereas the $1M extra gained is actually gained.
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Re: Solid justification for including all stocks & NO bonds?

Post by autopeep »

frankmorris wrote:
Coming back into more practical reality, honestly if I'm 80/20 and we have a crash, I'll be down huge amount of money short-term. Realistically, if I started with $2M and I'm down to $800,000 instead of $1,000,000 - is this of practical significance? Part of that is a statement (I don't think it is), but part of it is a sincere question - does having a small amount of bonds realistically make you sleep better? Other than accessing capital short-term, it seems that if you've got 80% skin the game, that's enough to make you do what you're going to do, good or bad.

Again, thanks everyone - keep the comments coming if you have them, and I sincerely appreciate the wisdom...
Accumulating assets to give to charity is a reasonable (and very noble) goal. That said, in your situation, I would want to do so without risking my financial independence. 80/20 is still pretty aggressive and on paper I agree $200k doesn't seem like much (however, that's years of living expenses, or a substantial donation). I personally would use a 60/40 portfolio in your shoes. YMMV
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Re: Solid justification for including all stocks & NO bonds?

Post by frankmorris »

KlangFool wrote:
frankmorris wrote:And a follow-up to my initial question, about the two kinds of risk - are there any horror stories of folks out there who have invested in wise investments, e.g., VT or VTI and literally lost everything long-term? Not just being down a few years, but never came back? It seems to me that if the market has literally always, without fail, come back - and come back stronger, would this not be encouragement to stick through rough times?

And if we should somehow enter a financial apocalypse and find our first market crash that we never come out of, that would truly be catastrophic beyond portfolio damage. I also get the sense that giving up 20% of a portfolio's earning power to bond's, if I don't really need access to capital, is like keeping a stockpile of gold in the safe in case the government collapses - that may well be wise on some level, but perhaps a little extreme? Then again, with North Korea the way it is, maybe those will end up being the wise ones after all...
frankmorris,

Until you have the 1 to 2 million for a while, what makes you think that you will not retire earlier? It is illogical for you to work the next 30 to 50 years. Or, you may start your own nonprofit and work for free. So, how could you assume at this moment that you do not need the money for the next 30 to 50 years?

It is more logical to assume that you will not live and work as you were with the money. You have options.

KlangFool
Very valid points, the most important of which is simply that I don't know. Maybe it does change my outlook and perspective. How would you articulate that keeping a 80/20 split would change my options - simply preserving access to capital? That's not an argument - a sincere question.

In terms of continuing to work, if dividend yields are 2% in TSM, I'd start off with $30,000 year. Over time, that would grow, likely giving me the option to "more fully" retire after a while, hopefully without drawing down the principle.
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Re: Solid justification for including all stocks & NO bonds?

Post by frankmorris »

retiredjg wrote:Yes. There is an example of a market going down and not coming back. Check out Japan.

As for the rest of your argument, there are times, even decades, when bonds outperform stocks. During such times, the people with bonds are mighty happy to have something that is actually making money.
Yeah, the Japan example is a mighty scary one, particularly as I'm considering investing in total world funds.

Another argument against bonds - in this ultra low-rate environment, investing in bonds with the yields as low as they are is essentially guaranteeing that - with inflation - I will lose that money over time unless I sell the bonds off in the next decade or two. I can't see how a 2.3% yield can be possible win in terms of investing. Maybe in terms of capital preservation.
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Re: Solid justification for including all stocks & NO bonds?

Post by frankmorris »

autopeep wrote:
frankmorris wrote:
Coming back into more practical reality, honestly if I'm 80/20 and we have a crash, I'll be down huge amount of money short-term. Realistically, if I started with $2M and I'm down to $800,000 instead of $1,000,000 - is this of practical significance? Part of that is a statement (I don't think it is), but part of it is a sincere question - does having a small amount of bonds realistically make you sleep better? Other than accessing capital short-term, it seems that if you've got 80% skin the game, that's enough to make you do what you're going to do, good or bad.

Again, thanks everyone - keep the comments coming if you have them, and I sincerely appreciate the wisdom...
Accumulating assets to give to charity is a reasonable (and very noble) goal. That said, in your situation, I would want to do so without risking my financial independence. 80/20 is still pretty aggressive and on paper I agree $200k doesn't seem like much (however, that's years of living expenses, or a substantial donation). I personally would use a 60/40 portfolio in your shoes. YMMV
Thanks autopeep - you know, it's almost surreal. I make so little money, and have so little money, and have never had much. It's strange to think about such big numbers, and your comments have brought me back to the reality that even those "small chunks of change" that I may consider insignificant could end up being really all I need in the end. Yes - if I lost 100% of stocks but managed to keep $300,000 in a bond fund, then invested that at the bottom of a crash - I'd still be set in 30 years.
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Re: Solid justification for including all stocks & NO bonds?

Post by KlangFool »

frankmorris wrote:
Not to be argumentative, but because - in the long-term - in the US economy - that $1M really isn't lost. It's just down, whereas the $1M extra gained is actually gained.
frankmorris,

How do you know that you do not need the money for the next 5, 10, 15, 20 years? If not, what does long-term mean to you?

KlangFool
JFP_SF
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Re: Solid justification for including all stocks & NO bonds?

Post by JFP_SF »

frankmorris wrote:
KlangFool wrote:
frankmorris wrote:And a follow-up to my initial question, about the two kinds of risk - are there any horror stories of folks out there who have invested in wise investments, e.g., VT or VTI and literally lost everything long-term? Not just being down a few years, but never came back? It seems to me that if the market has literally always, without fail, come back - and come back stronger, would this not be encouragement to stick through rough times?

And if we should somehow enter a financial apocalypse and find our first market crash that we never come out of, that would truly be catastrophic beyond portfolio damage. I also get the sense that giving up 20% of a portfolio's earning power to bond's, if I don't really need access to capital, is like keeping a stockpile of gold in the safe in case the government collapses - that may well be wise on some level, but perhaps a little extreme? Then again, with North Korea the way it is, maybe those will end up being the wise ones after all...
frankmorris,

Until you have the 1 to 2 million for a while, what makes you think that you will not retire earlier? It is illogical for you to work the next 30 to 50 years. Or, you may start your own nonprofit and work for free. So, how could you assume at this moment that you do not need the money for the next 30 to 50 years?

It is more logical to assume that you will not live and work as you were with the money. You have options.

KlangFool
Very valid points, the most important of which is simply that I don't know. Maybe it does change my outlook and perspective. How would you articulate that keeping a 80/20 split would change my options - simply preserving access to capital? That's not an argument - a sincere question.

In terms of continuing to work, if dividend yields are 2% in TSM, I'd start off with $30,000 year. Over time, that would grow, likely giving me the option to "more fully" retire after a while, hopefully without drawing down the principle.
Traditionally, a big part of the gain from stocks has been reinvested dividends, so if you are pulling the dividends out for income, you might as well own some investments designed to provide income.

More importantly, you have already told us that you work for a non-profit, have little income, and (presumably) no portfolio of investments. In your circumstances, I would go with a conservative portfolio (probably 60/40 or even 40/60). That will give you plenty of growth over the coming years, and will still leave you with a lot of safety to provide for unforeseen needs. It's easy to be cavalier about huge losses in the stock market when it's all theoretical, but all the research shows that you are far more likely to react badly to an actual loss.
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Re: Solid justification for including all stocks & NO bonds?

Post by frankmorris »

Oh, and the question about taxable account - I could add a little to an IRA each year, but the bulk would be in a taxable account, so tax effiency is huge. I want to have lowest dividends possible (without losing exposure to the market), and obviously dividends - at 15% - would be better than bond income treated as ordinary, if I understand it correctly.
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Re: Solid justification for including all stocks & NO bonds?

Post by frankmorris »

KlangFool wrote:
frankmorris wrote:
Not to be argumentative, but because - in the long-term - in the US economy - that $1M really isn't lost. It's just down, whereas the $1M extra gained is actually gained.
frankmorris,

How do you know that you do not need the money for the next 5, 10, 15, 20 years? If not, what does long-term mean to you?

KlangFool
I don't, of course, know I wouldn't need it - fair point. I do think that - given that I'm young, and hard-working - I stand as much a chance as most at being able to make things work. If I've getting a decent sum from dividends, especially as the principle grows and that (presumably) gets larger.

So, I think my response to you - given an "all in stock" scenario - would be that I'd do what I've been doing for the past 15 years: Working hard, saving what I can, doing what I need to do. If the market drops tomorrow and stay low for 10 years, then I count myself as lucky to have dividend payouts until things improve and I have even more dividend payouts. If something in that interim happens catastrophically, like an accident or having triplets, then I eat the loss and sell a bit at a less-desirable point in time. The upside being, of course, that if nothing happens catastrophically, then I continue on my way until things improve.

I've actually had a difficult time or two in my life so far, so your words aren't lost on me in terms of bad things happening and saving some for a rainy day. It just seems to me that, if it's all a calculated risk vs. return scenario, then the risk of having a lot more is worth the potential downside scenarios.

And note - I'm not completely ignoring what you're saying and fully disagreeing. Just trying to fully immerse myself in the argument to understand it. What may actually keep me up at night more is the loss of capital appreciation over time, knowing full well I could have invested more. Maybe it's because I'm not used to having money, and my world hasn't revolved around it. Not sure...
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Re: Solid justification for including all stocks & NO bonds?

Post by KlangFool »

frankmorris wrote:Oh, and the question about taxable account - I could add a little to an IRA each year, but the bulk would be in a taxable account, so tax effiency is huge. I want to have lowest dividends possible (without losing exposure to the market), and obviously dividends - at 15% - would be better than bond income treated as ordinary, if I understand it correctly.
frankmorris,

Why? Your income is so low that it won't matter. Please do not be "Penny Wise Pound Foolish".

So, you would rather lose a few hundred thousand up to 1 million in stock because the bond is not tax-efficient and you may pay a few thousand extra tax every year?

KlangFool
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Re: Solid justification for including all stocks & NO bonds?

Post by frankmorris »

JFP_SF wrote:
frankmorris wrote:
KlangFool wrote:
frankmorris wrote:And a follow-up to my initial question, about the two kinds of risk - are there any horror stories of folks out there who have invested in wise investments, e.g., VT or VTI and literally lost everything long-term? Not just being down a few years, but never came back? It seems to me that if the market has literally always, without fail, come back - and come back stronger, would this not be encouragement to stick through rough times?

And if we should somehow enter a financial apocalypse and find our first market crash that we never come out of, that would truly be catastrophic beyond portfolio damage. I also get the sense that giving up 20% of a portfolio's earning power to bond's, if I don't really need access to capital, is like keeping a stockpile of gold in the safe in case the government collapses - that may well be wise on some level, but perhaps a little extreme? Then again, with North Korea the way it is, maybe those will end up being the wise ones after all...
frankmorris,

Until you have the 1 to 2 million for a while, what makes you think that you will not retire earlier? It is illogical for you to work the next 30 to 50 years. Or, you may start your own nonprofit and work for free. So, how could you assume at this moment that you do not need the money for the next 30 to 50 years?

It is more logical to assume that you will not live and work as you were with the money. You have options.

KlangFool
Very valid points, the most important of which is simply that I don't know. Maybe it does change my outlook and perspective. How would you articulate that keeping a 80/20 split would change my options - simply preserving access to capital? That's not an argument - a sincere question.

In terms of continuing to work, if dividend yields are 2% in TSM, I'd start off with $30,000 year. Over time, that would grow, likely giving me the option to "more fully" retire after a while, hopefully without drawing down the principle.
Traditionally, a big part of the gain from stocks has been reinvested dividends, so if you are pulling the dividends out for income, you might as well own some investments designed to provide income.

More importantly, you have already told us that you work for a non-profit, have little income, and (presumably) no portfolio of investments. In your circumstances, I would go with a conservative portfolio (probably 60/40 or even 40/60). That will give you plenty of growth over the coming years, and will still leave you with a lot of safety to provide for unforeseen needs. It's easy to be cavalier about huge losses in the stock market when it's all theoretical, but all the research shows that you are far more likely to react badly to an actual loss.
My thinking has been based on long-term average market returns (pre-inflation adjusted) at 8-10.5% in the market. If VT is currently yielding 1.8%, I've been factoring capital appreciation at 6-8% annualized over the long-term. I am aware of Jack Bogle's comments (and others) about lower-than-average returns in the future. I don't quite understand those predictions given that we can't predict the future, but I'm taking my own estimates with a grain of salt.
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