Solid justification for including all stocks & NO bonds?

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

Post by frankmorris »

KlangFool wrote:
knpstr wrote:
KlangFool wrote:
frankmorris wrote:
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...
The average return of 100/0 is 10.2%
The average return of 60/40 is 8.8%

Why would the difference of 1.4% average annual return matters to you?
Well to be clear when starting with $2M over the course of 30 years that 1.4% difference is about $11.7 million dollars.

But I do understand what you're saying and the reasons why you are risk adverse.
knpstr,

And, why does it matters?

With 60/40, you get 25 million. With 100/0, you get 37 million. How does that 12 million makes a difference? It does not. What can you do with 37 million that you cannot get with 25 million?

The marginal utility of money.

http://www.economicshelp.org/blog/12309 ... nd-wealth/

Do not pursue risk and return in order to get more money that does not matter to you. It is a loser's game. Even if you win, you lose. Aka, you gain nothing of significance.

You only need one word to be happy: enough.

KlangFool
I'm about to make another post largely moving toward your side of things after having reflected, but wanted to jump and say that - to ME $12M on top of $25M may not make a difference, but to various nonprofits I'm involved with? That $12M could do some pretty incredible things.
Topic Author
frankmorris
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Re: Solid justification for including all stocks & NO bonds?

Post by frankmorris »

So, I've been reflecting on this conversation, and I'm more liking at least some bond allocation for 2 reasons:

1) Preservation of access to capital in a downturn, and
2) The ability to have some money "on the side" to throw in the market if/when it goes south

I'm actually thinking I may figure a bond allocation based on a dollar amount I'd estimate needing for, let's say, 5 years of a bear market. If I need $40,000 annually (on top of my job), then perhaps keeping $200,000 in bonds is a safe bet. Over time, I might consider keeping this $200,000 allocation (inflation-adjusted and life-adjusted) - in other words, if there is appreciation, selling it. If I have to spend some in a downturn, refunding that "bond emergency fund" when (hopefully) things then improve.

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

Post by KlangFool »

frankmorris wrote:
I'm about to make another post largely moving toward your side of things after having reflected, but wanted to jump and say that - to ME $12M on top of $25M may not make a difference, but to various nonprofits I'm involved with? That $12M could do some pretty incredible things.
frankmorris,

It is not risk-free. Or else, no discussion is needed.

You take on the risk of losing 50% (100/0) anytime over that 30 years in order to get 37 million. You only need to be unlucky once and you will lose 50% aka 15+ million. Meanwhile, you have a smoother ride with 60/40 and get 25 million.

Why would you take the risk?

By the way, most non-profit organization, endowment fund, insurance companies and so on has an AA of 60/40.

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

Post by KlangFool »

frankmorris wrote:So, I've been reflecting on this conversation, and I'm more liking at least some bond allocation for 2 reasons:

1) Preservation of access to capital in a downturn, and
2) The ability to have some money "on the side" to throw in the market if/when it goes south

I'm actually thinking I may figure a bond allocation based on a dollar amount I'd estimate needing for, let's say, 5 years of a bear market. If I need $40,000 annually (on top of my job), then perhaps keeping $200,000 in bonds is a safe bet. Over time, I might consider keeping this $200,000 allocation (inflation-adjusted and life-adjusted) - in other words, if there is appreciation, selling it. If I have to spend some in a downturn, refunding that "bond emergency fund" when (hopefully) things then improve.

Thoughts?
frankmorris,

<< If I need $40,000 annually (on top of my job), then perhaps keeping $200,000 in bonds is a safe bet. >>

The correct number should be how much you need if there is a bear market and you are unemployed. Why do you think that you would not be affected by any recession over the next 30 years?

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

Post by rhornback »

hulburt1 wrote:I sold all my bonds last week. I'm 95 stock and 5 cash. I could lost half and still live well. Remember I own the S&P, total stock, health fund, primecap and face book. 40+ years of investing I've seen it all. The only this is I'm putting my dividends into cash. I'm 64
I am in a similar situation. I also own S&P, total stock market, healthcare, and primecap. I am 48 with 10% in cash. Though I do not own facebook. Hope you got in at a good price. BTW I also have vanguard strategic equity.
aristotelian
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Re: Solid justification for including all stocks & NO bonds?

Post by aristotelian »

frankmorris wrote:So, I've been reflecting on this conversation, and I'm more liking at least some bond allocation for 2 reasons:

1) Preservation of access to capital in a downturn, and
2) The ability to have some money "on the side" to throw in the market if/when it goes south

I'm actually thinking I may figure a bond allocation based on a dollar amount I'd estimate needing for, let's say, 5 years of a bear market. If I need $40,000 annually (on top of my job), then perhaps keeping $200,000 in bonds is a safe bet. Over time, I might consider keeping this $200,000 allocation (inflation-adjusted and life-adjusted) - in other words, if there is appreciation, selling it. If I have to spend some in a downturn, refunding that "bond emergency fund" when (hopefully) things then improve.

Thoughts?
I think you are on the right track, but I would still ask you to say what your goals are, then come up with a strategy to accomplish your goals with the least risk. Your reasoning the opposite -- you are asking what is the least amount of cushion you need in order to take the most risk (for no apparent purpose).

You might have larger goals than personal self-sufficiency which may in fact justify risk. OK. But you should have a clear idea of what those goals are and how much you are willing to risk to accomplish them. Whether you pick one number, the other, or split the difference, I think it would be a good exercise for you to go through. You have too much money to not have a clear strategy. Then write that strategy down (we call it an "Investment Policy Statement") and stick to it. Do you have an IPS?
NiceUnparticularMan
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Re: Solid justification for including all stocks & NO bonds?

Post by NiceUnparticularMan »

frankmorris wrote:So, I've been reflecting on this conversation, and I'm more liking at least some bond allocation for 2 reasons:

1) Preservation of access to capital in a downturn, and
2) The ability to have some money "on the side" to throw in the market if/when it goes south

I'm actually thinking I may figure a bond allocation based on a dollar amount I'd estimate needing for, let's say, 5 years of a bear market. If I need $40,000 annually (on top of my job), then perhaps keeping $200,000 in bonds is a safe bet. Over time, I might consider keeping this $200,000 allocation (inflation-adjusted and life-adjusted) - in other words, if there is appreciation, selling it. If I have to spend some in a downturn, refunding that "bond emergency fund" when (hopefully) things then improve.

Thoughts?
I think your way of approaching the issues is a pretty sound one. Whether that is "enough" is a different question, but I think that is a fairly individualized issue.
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knpstr
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Re: Solid justification for including all stocks & NO bonds?

Post by knpstr »

KlangFool wrote:
frankmorris wrote:
I'm about to make another post largely moving toward your side of things after having reflected, but wanted to jump and say that - to ME $12M on top of $25M may not make a difference, but to various nonprofits I'm involved with? That $12M could do some pretty incredible things.
frankmorris,

It is not risk-free. Or else, no discussion is needed.

You take on the risk of losing 50% (100/0) anytime over that 30 years in order to get 37 million. You only need to be unlucky once and you will lose 50% aka 15+ million. Meanwhile, you have a smoother ride with 60/40 and get 25 million.

Why would you take the risk?

By the way, most non-profit organization, endowment fund, insurance companies and so on has an AA of 60/40.

KlangFool
So if the market is down and his $30M goes to $15M is he in hardship? I'm not sure he is.

And just to be clear on your "lose $15M remark" we should actually provide the alternative than just try to impress upon a $15M drop:

At a 50% drop, it's a difference of being left with:
$18.5M (37M-18.5M) in the 100/0
or
$17.5M (25M-7.5M) in the 60/40 portfolio

So after a "catastrophic, risky" 50% drop at the start of retirement after 30 years the 100/0 portfolio still has $1M more dollars than the 60/40 portfolio. I'm not sure about your concern about a drop of $15M being risky if it means you end up with more money than you'd have in the 60/40 "not as risky" portfolio.

In response to his post, if that amount does not matter he should go 60/40 or 40/60 or whatever else he is comfortable with. But there is not much real risk in a 100/0 portfolio at such high levels.

In the long run bonds are the riskier investment. Volatility is not synonymous with risk. Warren Buffett is not wrong about those statements.
Very little is needed to make a happy life; it is all within yourself, in your way of thinking. -Marcus Aurelius
JFP_SF
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Re: Solid justification for including all stocks & NO bonds?

Post by JFP_SF »

This is a pretty fascinating thread. It's almost a test of how close we are to irrational exuberance.
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Re: Solid justification for including all stocks & NO bonds?

Post by KlangFool »

knpstr wrote:
KlangFool wrote:
frankmorris wrote:
I'm about to make another post largely moving toward your side of things after having reflected, but wanted to jump and say that - to ME $12M on top of $25M may not make a difference, but to various nonprofits I'm involved with? That $12M could do some pretty incredible things.
frankmorris,

It is not risk-free. Or else, no discussion is needed.

You take on the risk of losing 50% (100/0) anytime over that 30 years in order to get 37 million. You only need to be unlucky once and you will lose 50% aka 15+ million. Meanwhile, you have a smoother ride with 60/40 and get 25 million.

Why would you take the risk?

By the way, most non-profit organization, endowment fund, insurance companies and so on has an AA of 60/40.

KlangFool
So if the market is down and his $30M goes to $15M is he in hardship? I'm not sure he is.

And just to be clear on your "lose $15M remark" we should actually provide the alternative than just try to impress upon a $15M drop:

At a 50% drop, it's a difference of being left with:
$18.5M (37M-18.5M) in the 100/0
or
$17.5M (25M-7.5M) in the 60/40 portfolio

So after a "catastrophic, risky" 50% drop at the start of retirement after 30 years
knpstr,

<<So after a "catastrophic, risky" 50% drop at the start of retirement after 30 years>>

If a person can count on that the stock market will not have any severe drop over the next 30 years, why do we need to discuss? The severe drop could happen anytime and several times over the next 30 years. And, it may not recover. That is the risk.

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

Post by aristotelian »

knpstr wrote:
In the long run bonds are the riskier investment. Volatility is not synonymous with risk. Warren Buffett is not wrong about those statements.
I would agree with the statement that bonds and stocks are both subject to risk, and the risks associated with bonds should not be underestimated. Since they are associated with different risks, what makes the most sense is to diversify.
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Re: Solid justification for including all stocks & NO bonds?

Post by knpstr »

KlangFool wrote: knpstr,

<<So after a "catastrophic, risky" 50% drop at the start of retirement after 30 years>>

If a person can count on that the stock market will not have any severe drop over the next 30 years, why do we need to discuss? The severe drop could happen anytime and several times over the next 30 years. And, it may not recover. That is the risk.

KlangFool
I was just filling out the other side of your example. I find your last post incomplete:
It is not risk-free. Or else, no discussion is needed.

You take on the risk of losing 50% (100/0) anytime over that 30 years in order to get 37 million. You only need to be unlucky once and you will lose 50% aka 15+ million. Meanwhile, you have a smoother ride with 60/40 and get 25 million.

Why would you take the risk?
First, bonds are not risk-free (not even treasuries). Or else, no discussion is needed.

But in short, I was merely "finishing your example". Of course, why would anyone take a "risk" if the options are framed as what you said: either "lose $15+M" or the alternative "a smoother ride and you get 25M"? Well you stated that in a very unclear way, you didn't state what happened to the other portfolio, you just mentioned the outcome.

Because if we're in the good times and the 60/40 balance is at $25M well then 100/0 balance is at $37M.
If we're in the bad time you suggested and lose $15M in a 50% drop, that means we are in year 28 when 100/0 was at 30M so you're left with $15M balance.
That also means a 60/40 portfolio balance is at $21M in year 28 and after the 50% drop the new balance is at $14.7M

To be clear, in a practical survival manner, either one of these positions is obviously fine to be in. I don't think you are arguing that. But your fixated on the "drops" your looking at the wrong thing.
Your wording suggests to me that you think $15M drop must always be worse than a $6.3M drop, even if that really means having $15M(100/0) vs $14.7M(60/40)

The way you stated your quote above "why would you take the risk?" you're saying that 60/40 is the less risky, choice. I don't think it really is.
Last edited by knpstr on Mon May 08, 2017 4:02 pm, edited 1 time in total.
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Re: Solid justification for including all stocks & NO bonds?

Post by JFP_SF »

knpstr wrote:
KlangFool wrote: knpstr,

<<So after a "catastrophic, risky" 50% drop at the start of retirement after 30 years>>

If a person can count on that the stock market will not have any severe drop over the next 30 years, why do we need to discuss? The severe drop could happen anytime and several times over the next 30 years. And, it may not recover. That is the risk.

KlangFool
I was just filling out the other side of your example. I find your last post woefully incomplete:
It is not risk-free. Or else, no discussion is needed.

You take on the risk of losing 50% (100/0) anytime over that 30 years in order to get 37 million. You only need to be unlucky once and you will lose 50% aka 15+ million. Meanwhile, you have a smoother ride with 60/40 and get 25 million.

Why would you take the risk?
First, bonds are not risk-free (not even treasuries). Or else, no discussion is needed.

But in short, I was merely "finishing your example". Of course, why would anyone take a "risk" if the options are framed as what you said: either "lose $15+M" or the alternative "a smoother ride and you get 25M"? Well you stated that in a very unclear way, you didn't state what happened to the other portfolio, you just mentioned the outcome.

Because if we're in the good times and the 60/40 balance is at $25M well then 100/0 balance is at $37M.
If we're in the bad time you suggested and lose $15M in a 50% drop, that means we are in year 28 when 100/0 was at 30M so you're left with $15M balance.
That also means a 60/40 portfolio balance is at $21M in year 28 and after the 50% drop the new balance is at $14.7M

To be clear, in a practical survival manner, either one of these positions is obviously fine to be in. I don't think you are arguing that. But your fixated on the "drops" your looking at the wrong thing.
Your wording suggests to me that you think $15M drop must always be worse than a $6.3M drop, even if that really means having $15M vs $14.7M

The way you stated your quote above "why would you take the risk?" you're saying that 60/40 is the less risky, choice. I don't think it really is.
Except the 60/40 portfolio would not drop the same amount as a 100% stock portfolio. Possibly, the bonds could rise in value at the same time the stocks were dropping.
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Re: Solid justification for including all stocks & NO bonds?

Post by knpstr »

JFP_SF wrote:Except the 60/40 portfolio would not drop the same amount as a 100% stock portfolio. Possibly, the bonds could rise in value at the same time the stocks were dropping.
They didn't drop the same amount. One lost $15M (50% of 100% of it's balance)and one lost $6.3M (50% of 60% of it's balance)

and perhaps the bonds lost value at the same time stocks were dropping.
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Re: Solid justification for including all stocks & NO bonds?

Post by JFP_SF »

knpstr wrote:
JFP_SF wrote:Except the 60/40 portfolio would not drop the same amount as a 100% stock portfolio. Possibly, the bonds could rise in value at the same time the stocks were dropping.
They didn't drop the same amount. One lost $15M (50% of 100% of it's balance)and one lost $6.3M (50% of 60% of it's balance)

and perhaps the bonds lost value at the same time stocks were dropping.
Right the chances of the stock portion dropping and the bond portion neither gaining or losing is very low. In the case of a drop in the stock market, the usual reaction is to cut interest rates which is positive for bonds, so the expected behavior would be a gain.
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Re: Solid justification for including all stocks & NO bonds?

Post by dbr »

JFP_SF wrote:
knpstr wrote:
JFP_SF wrote:Except the 60/40 portfolio would not drop the same amount as a 100% stock portfolio. Possibly, the bonds could rise in value at the same time the stocks were dropping.
They didn't drop the same amount. One lost $15M (50% of 100% of it's balance)and one lost $6.3M (50% of 60% of it's balance)

and perhaps the bonds lost value at the same time stocks were dropping.
Right the chances of the stock portion dropping and the bond portion neither gaining or losing is very low. In the case of a drop in the stock market, the usual reaction is to cut interest rates which is positive for bonds, so the expected behavior would be a gain.
More to the point the volatility of bonds is much less than that of stocks. Whether bonds move opposite to stocks or not, bond movements are not going to offset stock movements. The point of the allocation to bonds in the first order is to dilute the volatility of stocks, which is accomplished roughly in proportion to the amount in bonds.
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Re: Solid justification for including all stocks & NO bonds?

Post by Mr.BB »

knpstr wrote:
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.
Agreed, but it would still be less than if they are in an all stock portfolio.
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Re: Solid justification for including all stocks & NO bonds?

Post by KlangFool »

Folks,

It is entirely possible that the stock market drops 50% in the first few years of the 30 years. Then, the impact to the end result will be magnified.

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

Post by knpstr »

dbr wrote:More to the point the volatility of bonds is much less than that of stocks. Whether bonds move opposite to stocks or not, bond movements are not going to offset stock movements. The point of the allocation to bonds in the first order is to dilute the volatility of stocks, which is accomplished roughly in proportion to the amount in bonds.
So, is volatility something we (with 30+ year horizons) really need to lower our returns to guard against?
Or is it pedagogy?
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 dbr »

knpstr wrote:
dbr wrote:More to the point the volatility of bonds is much less than that of stocks. Whether bonds move opposite to stocks or not, bond movements are not going to offset stock movements. The point of the allocation to bonds in the first order is to dilute the volatility of stocks, which is accomplished roughly in proportion to the amount in bonds.
So, is volatility something we (with 30+ year horizons) really need to lower our returns to guard against?
Or is it pedagogy?
I didn't say that. It is not pedagogy. It is a choice of deciding where to target expected return keeping in mind that increased return involves more uncertainty in outcome. People really just need to go look at a statistical distribution of outcomes. I will go and generate an example from the data in Firecalc for how things turned out for investors holding for thirty years over the periods in question. A 100% stock portfolio could have ended up after thirty years at $40,966 real to $395,919. The first was for an investor starting in 1903 and the last for someone starting in 1970. If a person had invested in 50/50 then the numbers are $42,240 for an 1888 investor and $213,583 for a 1970 investor. Note it actually happens that the worst outcome for 100/0 is slightly worse than the worst outcome for 50/50. For 100/0 the results are $19,219 for the 1929 investor and $98,540 for the 1968 investor. You can contemplate these things and decide for yourself the best choice. Just from listing these numbers it should be evident that the biggest effect on outcome is when you invested. The next biggest effect is not investing only in bonds.
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Re: Solid justification for including all stocks & NO bonds?

Post by knpstr »

dbr wrote:
knpstr wrote:
dbr wrote:More to the point the volatility of bonds is much less than that of stocks. Whether bonds move opposite to stocks or not, bond movements are not going to offset stock movements. The point of the allocation to bonds in the first order is to dilute the volatility of stocks, which is accomplished roughly in proportion to the amount in bonds.
So, is volatility something we (with 30+ year horizons) really need to lower our returns to guard against?
Or is it pedagogy?
I didn't say that. It is not pedagogy. It is a choice of deciding where to target expected return keeping in mind that increased return involves more uncertainty in outcome. People really just need to go look at a statistical distribution of outcomes. I will go and generate an example from the data in Firecalc for how things turned out for investors holding for thirty years over the periods in question. A 100% stock portfolio could have ended up after thirty years at $40,966 real to $395,919. The first was for an investor starting in 1903 and the last for someone starting in 1970. If a person had invested in 50/50 then the numbers are $42,240 for an 1888 investor and $213,583 for a 1970 investor. Note it actually happens that the worst outcome for 100/0 is slightly worse than the worst outcome for 50/50. For 100/0 the results are $19,219 for the 1929 investor and $98,540 for the 1968 investor. You can contemplate these things and decide for yourself the best choice. Just from listing these numbers it should be evident that the biggest effect on outcome is when you invested. The next biggest effect is not investing only in bonds.
I'm confused. You didn't say: "The point of the allocation to bonds in the first order is to dilute the volatility of stocks?"?

I think in regard to this thread we're talking about people that aren't planning on withdrawing (or not having to withdraw, but may) from the portfolio?
So why would someone in the accumulation phase need to dilute volatility?

This is more of what I was asking. Sorry if it wasn't clear.
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 KlangFool »

knpstr wrote:
dbr wrote:More to the point the volatility of bonds is much less than that of stocks. Whether bonds move opposite to stocks or not, bond movements are not going to offset stock movements. The point of the allocation to bonds in the first order is to dilute the volatility of stocks, which is accomplished roughly in proportion to the amount in bonds.
So, is volatility something we (with 30+ year horizons) really need to lower our returns to guard against?
Or is it pedagogy?
knpstr,

Please note that specific to OP, he is not saving and/or contributing any significant amount of money to this pool of money. This is significantly different to the usual 30+ years old. For them, if the market drops 50%, the person can count on their annual savings to add to the investment. This does not apply to OP.

OP should think more along the line of folks that are retired and no longer contributing to their retirement fund. Essentially, this is the situation that he is in.

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

Post by KlangFool »

knpstr wrote:
I'm confused. You didn't say: "The point of the allocation to bonds in the first order is to dilute the volatility of stocks?"?

I think in regard to this thread we're talking about people that aren't planning on withdrawing (or not having to withdraw, but may) from the portfolio?
So why would someone in the accumulation phase need to dilute volatility?

This is more of what I was asking. Sorry if it wasn't clear.
knpstr,

OP is not adding to this investment from his annual saving. So, you cannot say that he is in the accumulation phase.

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

Post by zuma »

KlangFool wrote: knpstr,

OP is not adding to this investment from his annual saving. So, you cannot say that he is in the accumulation phase.

KlangFool
One can reinvest dividends and still be accumulating -- especially when looking at a long investment period.
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Re: Solid justification for including all stocks & NO bonds?

Post by KlangFool »

Folks,

If OP is earning 40K per year but his 2 million investment at 6% is earning and growing at 120K per year, is he in the accumulation phase? The answer could be no. In fact, financially, he is "retired". He's income is no longer dependent on his salary and/or saving. His investment income is several times larger than his salary income.

I am living paycheck to paycheck now. My portfolio is big enough that I can reach my goal without adding any additional saving. So, am I in the accumulation phase? Not exactly will be the answer.

KlangFool
Last edited by KlangFool on Mon May 08, 2017 6:04 pm, edited 1 time in total.
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Re: Solid justification for including all stocks & NO bonds?

Post by KlangFool »

zuma wrote:
KlangFool wrote: knpstr,

OP is not adding to this investment from his annual saving. So, you cannot say that he is in the accumulation phase.

KlangFool
One can reinvest dividends and still be accumulating -- especially when looking at a long investment period.
zuma,

Yes, but that does not change the fact that

A) A 50% drop will not be offset by any annual savings.

B) A 50% drop in the early part of the 30 years will be damaging. Aka, the sequence of return risk.

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

Post by zuma »

KlangFool wrote:
zuma wrote:
KlangFool wrote: knpstr,

OP is not adding to this investment from his annual saving. So, you cannot say that he is in the accumulation phase.

KlangFool
One can reinvest dividends and still be accumulating -- especially when looking at a long investment period.
zuma,

Yes, but that does not change the fact that

A) A 50% drop will not be offset by any annual savings.

B) A 50% drop in the early part of the 30 years will be damaging. Aka, the sequence of return risk.

KlangFool
My point was simply that an investor can be accumulating even without new contributions to the portfolio. The more important factor is whether or not the investor is withdrawing.
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Re: Solid justification for including all stocks & NO bonds?

Post by knpstr »

KlangFool wrote: knpstr,

OP is not adding to this investment from his annual saving. So, you cannot say that he is in the accumulation phase.

B) A 50% drop in the early part of the 30 years will be damaging. Aka, the sequence of return risk.

KlangFool
He is also not withdrawing, or only withdrawing as he sees fit. He said he may keep dividends at first. So he is essentially in an accumulation phase. Perhaps it could be called a grow phase if you prefer. Whatever you'd like to call it, it is the same point.

To your next point, there isn't a sequence of returns risk when he isn't withdrawing or doesn't need to withdrawal. More specifically than withdrawal, I mean sell shares. If he has $2,000,000 has 1.8% dividend he can still raise $36,000/yr in cash without selling any shares.

If I put $1,000,000 in an account to let it grow for 50 years and even if I never add another dime. There isn't sequence of returns risk. There isn't volatility "risk".
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 backpacker »

Suppose the OP has $2 million, invests it all in a global stock portfolio, and decides to live off the dividends. The dividend yield is currently 2.25%, so that would be $45k a year.

Everyone is focusing on the fact that the price of the portfolio could fall by half, but who cares? If you're living off the dividends, what you care about are the dividend checks coming in the mail. As already pointed out, dividends are far less volatile than price and fall far less than price in a crash. As Robert Shiller points out in the linked paper, even through the great depression, real dividends were substantially below trend (i.e. between -10% and -25%) for only four years (1933, 1934 1935 and 1938).

Putting the matter in more concrete terms, if we go through another great depression, the OP could see his dividends drop from $45k to $33k. He then needs to get $7k a year from somewhere to maintain his proposed spending of $40k a year (which is IMO too high, but let's go with it).

One way to do it would be to supplement dividends from cash or bonds. $100k would be more than enough, given that the OP would only need $7k a year. He could make it through three great depression. That should be enough.

Another way to do it would be to have flexible spending. If the OP is currently living without any of the $40k a year, he could presumably get by on $33k more than he currently has in a pinch.

Also, while the utility of wealth is generally decreasing, there is a point for many investors at which it flattens out. Taking an extreme example, if I had $100 million, I couldn't imagine that the market either doubling or falling by half would change my life much, suggesting that the utility of wealth at that point is basically linear. More controversially, some of us have utility functions that flatten out much earlier than that.
Last edited by backpacker on Mon May 08, 2017 6:38 pm, edited 1 time in total.
aristotelian
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Re: Solid justification for including all stocks & NO bonds?

Post by aristotelian »

backpacker wrote:Suppose the OP has $2 million, invests it all in a global stock portfolio, and decides to live off the dividends. The dividend yield is currently 2.25%, so that would be $45k a year.

Everyone is focusing on the fact that the price of the portfolio could fall by half, but who cares? If you're living off the dividends, what you care about are the dividend checks coming the mail. As already pointed out, dividends are far less volatile than price and fall far less than price in a crash. As Robert Shiller points out in the linked paper, even through the great depression, real dividends were substantially below trend (i.e. between -10% and -25%) for only four years (1933, 1934 1935 and 1938).

Putting the matter in more concrete terms, if we go through another great depression, the OP could see his dividends drop from $45k to $33k. He then needs to get $7k a year from somewhere to maintain his proposed spending of $40k a year (which is IMO too high, but let's go with it).

One way to do it would be to supplement dividends from cash or bonds. $100k would be more than enough, given that the OP would only need $7k a year. He could make it through three great depression in a row.

Another way to do it would be to have flexible spending. If the OP is currently living without any of the $40k a year, he could presumably get by on $33k more than he currently has in a pinch.

Also, while the utility of wealth is generally decreasing, there is a point for many investors at which it flattens out. Taking an extreme example, if I had $100 million, I couldn't imagine that the market either doubling or falling by half would change my life much, suggesting that the utility of wealth at that point is basically linear. More controversially, some of us have utility functions that flatten out much earlier than that.
What if, on top of the reduced dividend income in a stock crash, he also loses his job? Then he has an $80K annual shortfall to make up. If he has only $1M left in the crash, he could burn through a lot of that real quick. This amount of money puts OP on track for independence if he is prudent and has a plan, but it does not guarantee independence.
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Re: Solid justification for including all stocks & NO bonds?

Post by backpacker »

aristotelian wrote:
backpacker wrote:Suppose the OP has $2 million, invests it all in a global stock portfolio, and decides to live off the dividends. The dividend yield is currently 2.25%, so that would be $45k a year.

Everyone is focusing on the fact that the price of the portfolio could fall by half, but who cares? If you're living off the dividends, what you care about are the dividend checks coming the mail. As already pointed out, dividends are far less volatile than price and fall far less than price in a crash. As Robert Shiller points out in the linked paper, even through the great depression, real dividends were substantially below trend (i.e. between -10% and -25%) for only four years (1933, 1934 1935 and 1938).

Putting the matter in more concrete terms, if we go through another great depression, the OP could see his dividends drop from $45k to $33k. He then needs to get $7k a year from somewhere to maintain his proposed spending of $40k a year (which is IMO too high, but let's go with it).

One way to do it would be to supplement dividends from cash or bonds. $100k would be more than enough, given that the OP would only need $7k a year. He could make it through three great depression in a row.

Another way to do it would be to have flexible spending. If the OP is currently living without any of the $40k a year, he could presumably get by on $33k more than he currently has in a pinch.

Also, while the utility of wealth is generally decreasing, there is a point for many investors at which it flattens out. Taking an extreme example, if I had $100 million, I couldn't imagine that the market either doubling or falling by half would change my life much, suggesting that the utility of wealth at that point is basically linear. More controversially, some of us have utility functions that flatten out much earlier than that.
What if, on top of the reduced dividend income in a stock crash, he also loses his job? Then he has an $80K annual shortfall to make up. If he has only $1M left in the crash, he could burn through a lot of that real quick. This amount of money puts OP on track for independence if he is prudent and has a plan, but it does not guarantee independence.
Alright. His $100k might get him through only one great depression instead of three in a row. :D

More seriously, this is a good point. The OP needs to figure out how much income he needs and how much income he wants. Those don't have to be the same value. He can probably plan on $33k a year through even the worst of times, then want some cash to fill the gap between $33k can what he needs for maybe four or five years.

The more inflexible your spending, the more cash or bonds you need. The more flexible your spending, the more stocks you can get by with. Generally speaking at least.
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Re: Solid justification for including all stocks & NO bonds?

Post by KlangFool »

zuma wrote:
KlangFool wrote:
zuma wrote:
KlangFool wrote: knpstr,

OP is not adding to this investment from his annual saving. So, you cannot say that he is in the accumulation phase.

KlangFool
One can reinvest dividends and still be accumulating -- especially when looking at a long investment period.
zuma,

Yes, but that does not change the fact that

A) A 50% drop will not be offset by any annual savings.

B) A 50% drop in the early part of the 30 years will be damaging. Aka, the sequence of return risk.

KlangFool
My point was simply that an investor can be accumulating even without new contributions to the portfolio. The more important factor is whether or not the investor is withdrawing.
zuma,

Most folks cannot guarantee that they will be fully employed continuously over 30 years. So, the prudent answer would the investor would be withdrawing at some point over that 30 years.

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

Post by knpstr »

KlangFool wrote:
zuma wrote: My point was simply that an investor can be accumulating even without new contributions to the portfolio. The more important factor is whether or not the investor is withdrawing.
zuma,

Most folks cannot guarantee that they will be fully employed continuously over 30 years. So, the prudent answer would the investor would be withdrawing at some point over that 30 years.

KlangFool
As previously stated, depending on the fund he chooses even at 100/0 he could get $36,000/yr or more in income (dividends) without selling/withdrawing shares. This even if the market drops and he is unemployed the day after buying his position.
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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frankmorris
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Re: Solid justification for including all stocks & NO bonds?

Post by frankmorris »

Seems like I've missed a lot of discussion while gone - thanks everyone. Reading through comments, and first want to acknowledge those who continue to urge me to draft an IPS, be more strategic & goal-oriented, consider risk-aversion not just loss of maximized returns, etc. These are not lost on me, and appreciate the comments. I've got a running list of things to get to, and these are all on there.

To comment on my personal situation, first - I do have a job, so the $35,000/year dividends are really on top of that. I do currently pay my bills, etc. I'm not saving much, but neither am I losing any either. So, I do have some "equity" in ongoing earnings potential, though it's quite acknowledged that said earnings are, by no means, guaranteed. The additional dividends could be used for reinvestment, house upgrade, etc. In a downturn, I could do without, as I've been for the past 35+ years.

Second, the strongest argument for me in terms of keeping a small amount in bonds has been the idea of readily available funds in case i want to do something bigger (e.g., move to a different city, buy a bigger house, etc.). While I may be tempted to say, "Oh, I'll just wait 10 years - or indefinitely - for the market to improve" - that level of patience is probably an area of personal weakness. So, having $150,000-$200,000 in bonds ensures that, given a stock downturn, I'd still be able to pull the trigger on some larger expenses (or fund expenses in the event of income loss).

I certainly hear everyone when they say it's hard to watch a portfolio drop, and I can sympathize - since I've been brought into the family finances, I'm aware of which stocks & funds we own, and track them. We've had some decent swings over the past few years - positive & negative - and the downturns are....frustrating. Still, I have a sense that - unless apocalyptic catastrophe strikes - things will eventually go up, and even more so if I'm more in stocks than bonds, so I believe - for long-term sake - I could stomach the volatility. It's more the SHORT-TERM needs that I'd like to "ensure" against via a small amount of bonds.

In short, I think there a few different arguments being made here, perhaps being complicated by the specifics of my situation which may be atypical. In my case, investing in a "small amount of bonds" is actually - in all reality - a much larger amount of bonds than the average person my age would have. If I invest in $200,000 worth of bonds, that would actually constitute a 60/40 split if my total portfolio were $500,000, which is probably larger than most folks my age.
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Re: Solid justification for including all stocks & NO bonds?

Post by KlangFool »

frankmorris wrote:
I could stomach the volatility.
frankmorris,

Let's be honest, you do not know should be the right answer. You are kidding yourself if you say anything else.

10+ years ago, I was 100% stock with individual Telecom stock. The market crash and my employer start having quarterly laid off. I lost 50% of my whole life savings. Yes, I thought I could handle the 50% loss too. And, I thought I would continuously be employed for next 20+ years too.

You do not know until you actually went through one of those market crashes. And, just because you can handle the market crash when you have 100K, it does not mean you will react the same way when you have 2 million.

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

Post by aristotelian »

Frankmorris,
Last thing I will say. Most people regard 4% withdrawal rate as unsustainable over the long term. I would suggest writing into your IPS that you will not withdraw more than 3%. Then you can put your portfolio in whatever you want. If the market falls, your 3% withdrawal rate may amount to half of what it was the year before.
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Re: Solid justification for including all stocks & NO bonds?

Post by lostdog »

Frank,

Here is the Vanguard asset allocation questionnaire. Do the questionnaire every year and set your allocation accordingly.

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

My wife is 39 and I am 41. We're 100% stocks based on the questionnaire. High risk, high reward. If you really think you can handle it then go for it.

I don't think my wife and I will ever fully retire. We'll stay semi-retired with jobs we enjoy until we can't do it anymore. At that point we'll have bonds.

Here are some other good links to read.


http://jlcollinsnh.com/2017/04/14/sell-sell-sell-sell/

http://jlcollinsnh.com/stock-series/
Brokerage: VTI+VXUS || Retirement: VTWAX || Short-Term: Cash+BSV || 33x Expenses
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frankmorris
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Re: Solid justification for including all stocks & NO bonds?

Post by frankmorris »

KlangFool wrote:
frankmorris wrote:
I could stomach the volatility.
frankmorris,

Let's be honest, you do not know should be the right answer. You are kidding yourself if you say anything else.

10+ years ago, I was 100% stock with individual Telecom stock. The market crash and my employer start having quarterly laid off. I lost 50% of my whole life savings. Yes, I thought I could handle the 50% loss too. And, I thought I would continuously be employed for next 20+ years too.

You do not know until you actually went through one of those market crashes. And, just because you can handle the market crash when you have 100K, it does not mean you will react the same way when you have 2 million.

KlangFool
Fully conceded, KlangFool. In my relatively short life I'm been through enough unexpected ups and downs - beyond the financial sector - that I've learned new things about myself in each one.

Thanks again for your wisdom, and looking forward to continued interactions here...
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Re: Solid justification for including all stocks & NO bonds?

Post by frankmorris »

aristotelian wrote:Frankmorris,
Last thing I will say. Most people regard 4% withdrawal rate as unsustainable over the long term. I would suggest writing into your IPS that you will not withdraw more than 3%. Then you can put your portfolio in whatever you want. If the market falls, your 3% withdrawal rate may amount to half of what it was the year before.
Thanks Aristotelian - realistically, I probably need to look at some sample plans and consider quite a few things. Good point about the withdrawal rate. Ideally, my plan would be to not withdraw any principle ever, save for bigger situations such as upgrading to a larger house down the road. But, if you consider 2% dividend yield part of that, that may change things.

Thanks again, and looking forward to more discussion in the future.
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frankmorris
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Re: Solid justification for including all stocks & NO bonds?

Post by frankmorris »

lostdog wrote:Frank,

Here is the Vanguard asset allocation questionnaire. Do the questionnaire every year and set your allocation accordingly.

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

My wife is 39 and I am 41. We're 100% stocks based on the questionnaire. High risk, high reward. If you really think you can handle it then go for it.

I don't think my wife and I will ever fully retire. We'll stay semi-retired with jobs we enjoy until we can't do it anymore. At that point we'll have bonds.

Here are some other good links to read.


http://jlcollinsnh.com/2017/04/14/sell-sell-sell-sell/

http://jlcollinsnh.com/stock-series/
Thanks lostdog - making my way through your first link now. Funny how it mentions how either the P could fall, or the E (in P/E) could catch up - we've been in a pretty decent earnings season so far, so hopefully it's the latter.
lostdog
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Re: Solid justification for including all stocks & NO bonds?

Post by lostdog »

frankmorris wrote:
lostdog wrote:Frank,

Here is the Vanguard asset allocation questionnaire. Do the questionnaire every year and set your allocation accordingly.

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

My wife is 39 and I am 41. We're 100% stocks based on the questionnaire. High risk, high reward. If you really think you can handle it then go for it.

I don't think my wife and I will ever fully retire. We'll stay semi-retired with jobs we enjoy until we can't do it anymore. At that point we'll have bonds.

Here are some other good links to read.


http://jlcollinsnh.com/2017/04/14/sell-sell-sell-sell/

http://jlcollinsnh.com/stock-series/
Thanks lostdog - making my way through your first link now. Funny how it mentions how either the P could fall, or the E (in P/E) could catch up - we've been in a pretty decent earnings season so far, so hopefully it's the latter.
Frank,

The stock series is a really good one and will be on par to how you're thinking.

I went through the 2007 and 2009 drop and watched my balance get cut in half. Granted I was young at the time and was concentrating on my career. The good thing was I did not panic and sell. Just stayed the course. The main point is FEAR. How much of a drop can you handle? Will you see this as an opportunity to buy cheaper stocks? Humans always go back and forth with greed and fear. So far over the long term greed is ahead.
Brokerage: VTI+VXUS || Retirement: VTWAX || Short-Term: Cash+BSV || 33x Expenses
lostdog
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Re: Solid justification for including all stocks & NO bonds?

Post by lostdog »

Brokerage: VTI+VXUS || Retirement: VTWAX || Short-Term: Cash+BSV || 33x Expenses
KlangFool
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Re: Solid justification for including all stocks & NO bonds?

Post by KlangFool »

lostdog wrote:
frankmorris wrote:
lostdog wrote:Frank,

Here is the Vanguard asset allocation questionnaire. Do the questionnaire every year and set your allocation accordingly.

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

My wife is 39 and I am 41. We're 100% stocks based on the questionnaire. High risk, high reward. If you really think you can handle it then go for it.

I don't think my wife and I will ever fully retire. We'll stay semi-retired with jobs we enjoy until we can't do it anymore. At that point we'll have bonds.

Here are some other good links to read.


http://jlcollinsnh.com/2017/04/14/sell-sell-sell-sell/

http://jlcollinsnh.com/stock-series/
Thanks lostdog - making my way through your first link now. Funny how it mentions how either the P could fall, or the E (in P/E) could catch up - we've been in a pretty decent earnings season so far, so hopefully it's the latter.
Frank,

The stock series is a really good one and will be on par to how you're thinking.

I went through the 2007 and 2009 drop and watched my balance get cut in half. Granted I was young at the time and was concentrating on my career. The good thing was I did not panic and sell. Just stayed the course. The main point is FEAR. How much of a drop can you handle? Will you see this as an opportunity to buy cheaper stocks? Humans always go back and forth with greed and fear. So far over the long term greed is ahead.
lostdog,

I disagreed.

1) In my opinion, it is a case of survivor bias. Those that lose did not survive. Many of my peers did not survive financially in the Telecom Bust. And, most of them like me were 100% stock. 80% of my co-workers were laid off at my employer over a period of 5 years. Many of them ended up permanently unemployed and under-employed. I was lucky enough to survive that 5 years stretch. Or else, I was financially ruined too.

One particular engineer had been working at the retail store and selling the used car since 10 years ago.

2) Long-term is meaningless for many people since they cannot guarantee their employment over the long-term. So, using long-term return to justify investment is meaningless since they cannot do it.

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

Post by dergon »

This thread was a helpful clarification. As of today I have started a slow move towards a less equities heavy asset allocation. It is likely that I will stay more aggressive than most, but I have at least started the process. I am now 91/9 and will move slowly more into bonds over the next few years of my early 50s.
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