Solid justification for including all stocks & NO bonds?

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
User avatar
TD2626
Posts: 637
Joined: Thu Mar 16, 2017 3:40 pm

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

Post by TD2626 »

Relatively high equity allocations seem reasonable in your situation. However, 100% may not be best. I would suggest somewhat closer to 80% equities, 15% longer-term bonds, and 5% short term bonds/cash.

First, within equities, strongly consider very broad diversification. Substantial allocations to international stock funds can help mitigate the potential for a Japan-like scenario. I would suggest 30% plus of equities in international - though getting at or closer to the global market cap in the mid 40% range may be better. (If you go with the latter option, consider the Vanguard Total World Stock fund)

Second, having some safer assets is definitely a good idea. Have a strong emergency fund and some shorter-term bonds. These can very much protect you in emergencies and downturns. One could consider a cash allocation of, say, 5% - or some sort of short-term bond allocation target.

Also, investing in bonds doesn't have to detract from returns that much. Long-term bonds provide very substantial returns, and really help in adding diversification. With only 10-20% of the portfolio in bonds, the reduction in returns is not that enormous given the benefits of holding bonds.

Past performance is no guarantee. History may or may not repeat itself. Stocks have outperformed bonds over very long periods - but they could underperform for decades. 50 years is a long time - but even still, having at least some in safer assets will mitigate risks.
User avatar
grabiner
Advisory Board
Posts: 29177
Joined: Tue Feb 20, 2007 11:58 pm
Location: Columbia, MD

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

Post by grabiner »

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.
Taxes are important, but getting your risk level right is more important. If bonds cost you an extra 0.5% per year in taxes (which is probably too high given current yields, and considering that the long-term gains on stock will be taxed eventually), holding 20% of your taxable account in bonds costs you 0.1% per year. However, it also reduces the loss in a 50% market crash from 50% to 40%, and that may be much more important to you.
Wiki David Grabiner
JFP_SF
Posts: 76
Joined: Sat Oct 01, 2016 12:01 pm

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

Post by JFP_SF »

frankmorris wrote:
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.
You seem determined to invest it all in stocks, so I won't argue with you any longer. I'll just leave you with a quotation from one of my favorite books Your Money and Your Brain: "Imagining that you can shrug off setbacks before you've ever suffered any is a disastrous delusion."
User avatar
HomerJ
Posts: 16031
Joined: Fri Jun 06, 2008 12:50 pm

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

Post by HomerJ »

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?
In 2008, we had $750,000, about 66/33 stocks/bonds.

Absolutely having $250,000 in bonds let us stay the course, and sleep at night. $250,000 meant, no matter what, my family was going to stay warm and fed, even if we both lost our jobs. Watching the $500,000 in stocks drop 50% was painful. Neighbors lost their jobs, 150 year old financial firms went belly up. It was a scary time.

You don't realize how 2008 could have been different. The stock market is not guaranteed to bounce back in a year. You could easily lose your job, and 50% or more of your money. You could lose $1 million or more, and have to start pulling from what you have left just to eat. It is certainly possible that a stock market crash could take 5-10 years to recover. Look at that graph above... 100% stocks, from 2000 to today, if you didn't have a job, and had to pull from it to pay your bills, dropped to $400,000 with little chance to recover.

The Great Depression happened. By definition, it's possible. 10-15 years to break even with 25% unemployment. Japan happened. Still hasn't broken even.

Hey, you didn't earn this money... If you want to risk it, go ahead. But you've won the game... There's no need to gamble it all. But if you want to, it's your choice. The odds are very very good that, in the long-run, you'll have a ton more money investing this way.

But nothing is guaranteed. It's possible you could lose this bet, and end up broke thinking about how you once had a million dollars.
KlangFool
Posts: 19696
Joined: Sat Oct 11, 2008 12:35 pm

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

Post by KlangFool »

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...
frankmorris,

https://personal.vanguard.com/us/insigh ... about-risk

Please look at the chart at the above link.

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?

The worst loss of 100/0 is -43.1%
The worst loss of 60/40 is -26.6%

So, you are taking the risk of losing 17% more in any year in order to gain 1.4% more per year in return? You have to be lucky of not hitting one of those worst years in 12 (17/1.4) years in order to break even

You are taking unnecessary risk. You can reach your goal safely with 60/40. So, why are you doing 100/0?

KlangFool
rhornback
Posts: 166
Joined: Tue Mar 07, 2017 9:59 am

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

Post by rhornback »

autopeep wrote:
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)
When I am saying cash I am really saying short term securities. But cash is OK to. You are correct that cash can also get clobbered by inflation. The goal of cash is just to keep up with inflation not act as an investment. The 10% cash is a cushion in case of a major market downturn. The goal is between work and 10% cash to ride out the storm.
Topic Author
frankmorris
Posts: 346
Joined: Tue Apr 25, 2017 4:34 pm

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

Post by frankmorris »

KlangFool wrote:
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
If I'm in the game for 30 years, I don't perceive a downturn as a loss, just part of the ebb and flow. The only true loss scenario, outside of financial catastrophe in which we all lose everything and the market never comes back, would be if I need a HUGE sum of money when the market is down. I do think that, as I get closer to retirement, I'd shift my allocations gradually with residual dividends and other investments (e.g., IRA contributions) much more conservatively. But I suppose I'd consider my insurance policy against principle loss to be the high sum I'd be starting with.

In other words, if I start with a large amount of bonds (e.g., 40%), that money has NO chance to work for me. On the other hand, if I put it to work in the market, and an unlikely need for an exceptionally large amount of cash happens at a bad time, I have to pull from principle - the money is STILL there (even if I have to pull at a horrendous time when the market is 70% down) - I'd still have, for example, over $400,000 if I started off with $1.5M - hardly a great time to cash in, but an insurance policy nonetheless, financed hopefully by many more positive years in the market than bad ones. In the scenario with 100% stocks, I MIGHT lose the game of chance. In the bond scenario, I definitely lose - the money won't hold up to 3% inflation.

To a potential response of "well, what happens if you need a LOT of money at the WORST part of the market" - I suppose even with a lot of bonds, that still may not be enough. Life happens, and I may lose it all tomorrow, or die of cancer in 5 years. From what I've read, investing means taking calculated risks.
aristotelian
Posts: 8936
Joined: Wed Jan 11, 2017 8:05 pm

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

Post by aristotelian »

frankmorris wrote:
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.
If you would be "set" with $300K, why in the world would you risk all $2M just to make more money that you don't need?

100% stock makes sense if your goal is to accumulate as much wealth as possible, which is to say, greed. If your goal is financial independence, you do not need to take that much risk. Figure out how much risk you NEED to take.

Again, you need an IPS that states your goals, then develop a strategy to accomplish your goals with the least risk. I agree again with Klangfool - don't do anything until you have thought this through.

Regarding interest rates, that is a market timing argument. Why are you prepared to take the long view with stocks, but you are not prepared to take the long view with bonds?
rhornback
Posts: 166
Joined: Tue Mar 07, 2017 9:59 am

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

Post by rhornback »

One thing that I do not see being discussed here, or that much on Bogleheads.org when it comes to asset allocation is the possibility of dividend paying stocks which IMO provide a middle ground between stocks and bonds.

Specifically the vanguard high dividend yield mutual fund. The last time I checked it was paying 3%. Now that is not going to get you rich but it will pay a steady return in a down market (assuming dividends are not cut to much). So you are effectively getting paid to wait in a down market. And you still have the upside of a stock market rally.

Hopefully on a high inflation period companies which are able to achieve pricing power will be able to maintain their dividends.

My experience with times of high inflation, specifically the late 70s is almost ever investment class gets clobbered. The exception is real estate. If we had 5% inflation with my 30 year 3.25% mortgage I would be very happy!!!

I suppose you could also argue gold but I don't really understand it so it is not my cup of tea. I mean it is pretty for jewelry but I do not see the intrinsic value. Like I said, not my cup of tea.
Topic Author
frankmorris
Posts: 346
Joined: Tue Apr 25, 2017 4:34 pm

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

Post by frankmorris »

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...
frankmorris,

https://personal.vanguard.com/us/insigh ... about-risk

Please look at the chart at the above link.

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?

The worst loss of 100/0 is -43.1%
The worst loss of 60/40 is -26.6%

So, you are taking the risk of losing 17% more in any year in order to gain 1.4% more per year in return? You have to be lucky of not hitting one of those worst years in 12 (17/1.4) years in order to break even

You are taking unnecessary risk. You can reach your goal safely with 60/40. So, why are you doing 100/0?

KlangFool
Thanks for this link KlangFool - this will actually be really helpful. As much as I've been going back and forth on this thread, I actually haven't gotten to the point yet of really researching rates of return and such on specific allocations. I'm still on the theory phase. This chart will no doubt be helpful.

To you and others who aren't going back and forth with me: First, thank you for indulging and teaching. I do my best learning by trying to really deconstruct arguments. Please know I'm not making any statements about your experience or knowledge - quite the contrary. I just want to make sure I understand. Second, you all are certainly convincing me that having some sort of accessible fund is critical. My plan was already to have at least a year's worth of living expenses as accessible as feasible, perhaps two. That may mean bonds, and that may tip my allocation a few more percentages toward that, rather than trying to keep them in a cash/money market account (beyond a few months' worth). That way, theoretically I should have at least some safe access to capital in the event of job loss, disability, etc.

So, apologies - I don't want to seem overly determined to have my own allocation against the wisdom of the ages. I just like to learn by getting into the thick of it with a good old intense conversation. Thanks for indulging.
Topic Author
frankmorris
Posts: 346
Joined: Tue Apr 25, 2017 4:34 pm

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

Post by frankmorris »

aristotelian wrote:
frankmorris wrote:
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.
If you would be "set" with $300K, why in the world would you risk all $2M just to make more money that you don't need?

100% stock makes sense if your goal is to accumulate as much wealth as possible, which is to say, greed. If your goal is financial independence, you do not need to take that much risk. Figure out how much risk you NEED to take.

Again, you need an IPS that states your goals, then develop a strategy to accomplish your goals with the least risk. I agree again with Klangfool - don't do anything until you have thought this through.

Regarding interest rates, that is a market timing argument. Why are you prepared to take the long view with stocks, but you are not prepared to take the long view with bonds?
Thanks artistotelian - I definitely will continue giving it a lot of thought. I'm not at the point of making a decision yet, just trying to inch closer to one.

In terms of interest rates, maybe I don't understand bonds as well as I thought I had - my understanding is that my interest amount is locked in once I buy a bond or a bond fund. In other words, if I get $2.30/year through a bond purchase, then I will get that same $2.30 each year until I sell the fund. Whereas stock returns fluctuate, bond returns do not. The yield may change, but only because of the value of the bond itself - not the interest.
User avatar
brother7
Posts: 157
Joined: Mon Mar 27, 2017 4:48 pm

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

Post by brother7 »

No wonder what you choose, I'm rooting for you big time.

I can see it now...
  • 2027 - "I decided to invest 100% in Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) and earned 7% market return. My $1 million is now worth $2 million"
  • 2037 - "I kept everything in VTSAX and continued to earn 7% market return. My $2 million is now worth $4 million."
  • 2047 - "I decided to let it ride and the market continued to return 7%. My $4 million is now worth $8 million. I no longer own VTSAX. My shares got exchanged for VITSX Institutional Shares." 8-)
GOOD LUCK!
Topic Author
frankmorris
Posts: 346
Joined: Tue Apr 25, 2017 4:34 pm

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

Post by frankmorris »

rhornback wrote:One thing that I do not see being discussed here, or that much on Bogleheads.org when it comes to asset allocation is the possibility of dividend paying stocks which IMO provide a middle ground between stocks and bonds.

Specifically the vanguard high dividend yield mutual fund. The last time I checked it was paying 3%. Now that is not going to get you rich but it will pay a steady return in a down market (assuming dividends are not cut to much). So you are effectively getting paid to wait in a down market. And you still have the upside of a stock market rally.

Hopefully on a high inflation period companies which are able to achieve pricing power will be able to maintain their dividends.

My experience with times of high inflation, specifically the late 70s is almost ever investment class gets clobbered. The exception is real estate. If we had 5% inflation with my 30 year 3.25% mortgage I would be very happy!!!

I suppose you could also argue gold but I don't really understand it so it is not my cup of tea. I mean it is pretty for jewelry but I do not see the intrinsic value. Like I said, not my cup of tea.
This is similar to my thinking: If I get 2% yield at $1.5M, that's $30,000 a year. Assuming that stays roughly consistent, that's not a bad backup plan. One thing on my to-do list is to research the real dividend amounts paid year-to-year historically to get a sense of the variability of dividends. If that range is, say 20% - that's pretty livable. If you have 85% of companies cutting their dividends in half, that's a different story, tipping a bit more favor toward bonds.
Topic Author
frankmorris
Posts: 346
Joined: Tue Apr 25, 2017 4:34 pm

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

Post by frankmorris »

brother7 wrote:No wonder what you choose, I'm rooting for you big time.

I can see it now...
  • 2027 - "I decided to invest 100% in Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) and earned 7% market return. My $1 million is now worth $2 million"
  • 2037 - "I kept everything in VTSAX and continued to earn 7% market return. My $2 million is now worth $4 million."
  • 2047 - "I decided to let it ride and the market continued to return 7%. My $4 million is now worth $8 million. I no longer own VTSAX. My shares got exchanged for VITSX Institutional Shares." 8-)
GOOD LUCK!
Ha thanks brother7! I'm just lucky enough to be able to make the choice....
aristotelian
Posts: 8936
Joined: Wed Jan 11, 2017 8:05 pm

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

Post by aristotelian »

frankmorris wrote:
Thanks artistotelian - I definitely will continue giving it a lot of thought. I'm not at the point of making a decision yet, just trying to inch closer to one.

In terms of interest rates, maybe I don't understand bonds as well as I thought I had - my understanding is that my interest amount is locked in once I buy a bond or a bond fund. In other words, if I get $2.30/year through a bond purchase, then I will get that same $2.30 each year until I sell the fund. Whereas stock returns fluctuate, bond returns do not. The yield may change, but only because of the value of the bond itself - not the interest.
No, the bond fund you buy contains thousands of bonds that are being bought and sold as well as maturing and being converted into new bonds. The amount they yield rises and falls with both interest rates and bond prices (e.g when the stock market crashes, there is more demand for safe investment, so prices go up). Look at the historical returns of Total Bond Market Index. The income return is as high as 5.94%. The price return is as high as 4.26%. The total return is as high as 10%, with a low of -2.15%. The fund had an income return of 4.95% (total return 5.15%) during the stock market crash of 2008.

You should read a good book on bonds. Stocks are intuitive to understand but bonds are not. There is a lot of money at stake so you should have a good understanding of what you are and are not investing in. Larry Swedroe's Only Winning Bond Strategy is excellent. He advocates something like 30/70 for most people, to put it in perspective.

Buying a bond fund is nothing like buying a CD - although there are people who advocate buying CD's.
User avatar
HomerJ
Posts: 16031
Joined: Fri Jun 06, 2008 12:50 pm

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

Post by HomerJ »

frankmorris wrote:In the bond scenario, I definitely lose - the money won't hold up to 3% inflation.
Where did you get the idea that bonds definitely lose to inflation?

It's certainly a risk, although one can buy inflation-adjusted bonds. But even with normal bonds, there's only been a few 30-year periods where bonds lost to inflation. You certainly aren't guaranteed to lose.
To a potential response of "well, what happens if you need a LOT of money at the WORST part of the market" - I suppose even with a lot of bonds, that still may not be enough. Life happens, and I may lose it all tomorrow, or die of cancer in 5 years. From what I've read, investing means taking calculated risks.
Well, yes, I suppose.

The point we are trying to make... you are in position where, financially at least (can't help you if you get cancer), you've won the game. There's no reason to take calculated risks unless you want to.

It's a very good bet, investing in stocks... But why bet ALL your money on it? Why not keep a couple hundred thousand back, just in case? You said, what's 10% or 20%? Well, it's HUNDREDS of THOUSANDS of dollars... Are you that used to being a millionaire already that you can just wave your hand, and say, what's the point of 90/10? The 10 is so small, it doesn't matter?
Last edited by HomerJ on Sun May 07, 2017 10:44 pm, edited 2 times in total.
User avatar
HomerJ
Posts: 16031
Joined: Fri Jun 06, 2008 12:50 pm

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

Post by HomerJ »

rhornback wrote: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.
What if you both lose your job? Impossible?
rhornback
Posts: 166
Joined: Tue Mar 07, 2017 9:59 am

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

Post by rhornback »

HomerJ wrote:
rhornback wrote: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.
What if you both lose your job? Impossible?
No, not impossible. But what happens to the 80% of Americans with no savings if they lose their jobs. Unemployment insurance. Looking for a new job. Taking something temporary until a better job comes along. I might assemble Ikea furniture with an add on craigslist.

We are talking about risk/reward topics here. With that in mind I am looking at all my assets. Real estate (my home), human capital, stocks, and short term securities.

Speaking of 2007 I know the market went down. I did... nothing. My wife and I were lucky enough to keep on working So in this case our human capital compensated for our equity capital. And the market went back up.

My rate of return from Vanguard from start of investing is 7.5%. Is that great. No, but in 10 years (rule of 72) it has allowed me to double my money.
User avatar
grabiner
Advisory Board
Posts: 29177
Joined: Tue Feb 20, 2007 11:58 pm
Location: Columbia, MD

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

Post by grabiner »

rhornback wrote:One thing that I do not see being discussed here, or that much on Bogleheads.org when it comes to asset allocation is the possibility of dividend paying stocks which IMO provide a middle ground between stocks and bonds.

Specifically the vanguard high dividend yield mutual fund. The last time I checked it was paying 3%. Now that is not going to get you rich but it will pay a steady return in a down market (assuming dividends are not cut to much). So you are effectively getting paid to wait in a down market. And you still have the upside of a stock market rally.
This doesn't work; high-dividend stocks are just as risky than low-dividend stocks. In 2007-2009, High Dividend Yield Index slightly more than the market, even if you reinvested the dividends, and if you didn't reinvest them, you reduced your stock allocation further. Over the history of the High Dividend Yield Index fund, the average-dividend Large-Cap Index and the low-dividend Tax-Managed Capital Appreciation have both tracked it very well.
Wiki David Grabiner
Topic Author
frankmorris
Posts: 346
Joined: Tue Apr 25, 2017 4:34 pm

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

Post by frankmorris »

HomerJ wrote:
frankmorris wrote:In the bond scenario, I definitely lose - the money won't hold up to 3% inflation.
Where did you get the idea that bonds definitely lose to inflation?

It's certainly a risk, although one can buy inflation-adjusted bonds. But even with normal bonds, there's only been a few 30-year periods where bonds lost to inflation. You certainly aren't guaranteed to lose.
To a potential response of "well, what happens if you need a LOT of money at the WORST part of the market" - I suppose even with a lot of bonds, that still may not be enough. Life happens, and I may lose it all tomorrow, or die of cancer in 5 years. From what I've read, investing means taking calculated risks.
Well, yes, I suppose.

The point we are trying to make... you are in position where, financially at least (can't help you if you get cancer), you've won the game. There's no reason to take calculated risks unless you want to.

It's a very good bet, investing in stocks... But why bet ALL your money on it? Why not keep a couple hundred thousand back, just in case? You said, what's 10% or 20%? Well, it's HUNDREDS of THOUSANDS of dollars... Are you that used to being a millionaire already that you can just wave your hand, and say, what's the point of 90/10? The 10 is so small, it doesn't matter?
You know, I just got back from taking a walk and thinking more on this, and it's really interesting - my perspective on this much money. I actually think my perspective is the opposite of what you're suggesting - that, because I'm so used to so little, the idea of LOSING out - even just a little - seems like a big deal. The idea of losing $1,000 on taxes seems huge. The idea of missing an opportunity to invest $100,000 - those are BIG numbers for me. So, it's not so much that I'm so used to being a millionaire that I don't care about a few hundred thousand. It's that I care so much about those small amounts that it's hard to write off investing those dollars in exchange for "peace of mind."

That being said.....I get it. The idea of being a (bigger) house (i already own now), losing my job, having a child (not married and none now, but who knows), etc...The idea that I could weather a multi-year economic storm relatively unscathed, all for the cost of not having invested 20% more? Yes, I get it. Just hard to do the math with compound interest when considering investing $1.5M vs. $1.2M invested over 50 years and say, "Eh, not a big deal - I've already won." Does that make sense, or am I crazy for thinking like that?!
Topic Author
frankmorris
Posts: 346
Joined: Tue Apr 25, 2017 4:34 pm

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

Post by frankmorris »

aristotelian wrote:
frankmorris wrote:
Thanks artistotelian - I definitely will continue giving it a lot of thought. I'm not at the point of making a decision yet, just trying to inch closer to one.

In terms of interest rates, maybe I don't understand bonds as well as I thought I had - my understanding is that my interest amount is locked in once I buy a bond or a bond fund. In other words, if I get $2.30/year through a bond purchase, then I will get that same $2.30 each year until I sell the fund. Whereas stock returns fluctuate, bond returns do not. The yield may change, but only because of the value of the bond itself - not the interest.
No, the bond fund you buy contains thousands of bonds that are being bought and sold as well as maturing and being converted into new bonds. The amount they yield rises and falls with both interest rates and bond prices (e.g when the stock market crashes, there is more demand for safe investment, so prices go up). Look at the historical returns of Total Bond Market Index. The income return is as high as 5.94%. The price return is as high as 4.26%. The total return is as high as 10%, with a low of -2.15%. The fund had an income return of 4.95% (total return 5.15%) during the stock market crash of 2008.

You should read a good book on bonds. Stocks are intuitive to understand but bonds are not. There is a lot of money at stake so you should have a good understanding of what you are and are not investing in. Larry Swedroe's Only Winning Bond Strategy is excellent. He advocates something like 30/70 for most people, to put it in perspective.

Buying a bond fund is nothing like buying a CD - although there are people who advocate buying CD's.
Thanks - you're right, I need to do more reading. I'm adding that book to my short list of upcoming reading. That's good to know. I had largely discounted bonds because I was thinking of bond funds largely the same as bonds:

-In a rising interest rate environment, a fixed interest amount will be less valuable, so locking in a low rate early is bad.
-On top of that, because your bond has low interest, it becomes less valuable over time, reducing what you can sell it for.

Now you've taught me that not only will rates rise if interest rates (more generally) rise, but the value of my "shares" in the fund will also increase over time. Yes, that changes the game for me.
rhornback
Posts: 166
Joined: Tue Mar 07, 2017 9:59 am

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

Post by rhornback »

aristotelian wrote:
frankmorris wrote:
Thanks artistotelian - I definitely will continue giving it a lot of thought. I'm not at the point of making a decision yet, just trying to inch closer to one.

In terms of interest rates, maybe I don't understand bonds as well as I thought I had - my understanding is that my interest amount is locked in once I buy a bond or a bond fund. In other words, if I get $2.30/year through a bond purchase, then I will get that same $2.30 each year until I sell the fund. Whereas stock returns fluctuate, bond returns do not. The yield may change, but only because of the value of the bond itself - not the interest.
No, the bond fund you buy contains thousands of bonds that are being bought and sold as well as maturing and being converted into new bonds. The amount they yield rises and falls with both interest rates and bond prices (e.g when the stock market crashes, there is more demand for safe investment, so prices go up). Look at the historical returns of Total Bond Market Index. The income return is as high as 5.94%. The price return is as high as 4.26%. The total return is as high as 10%, with a low of -2.15%. The fund had an income return of 4.95% (total return 5.15%) during the stock market crash of 2008.

You should read a good book on bonds. Stocks are intuitive to understand but bonds are not. There is a lot of money at stake so you should have a good understanding of what you are and are not investing in. Larry Swedroe's Only Winning Bond Strategy is excellent. He advocates something like 30/70 for most people, to put it in perspective.

Buying a bond fund is nothing like buying a CD - although there are people who advocate buying CD's.
My comment about this is the 10 year return is 4.12%. The vanguard s&p 500 index is 7.51 with a 1.88% yield. So my argument is for that 2.24% yield difference I am giving up a possible 3.39 upside. My time horizon is still 10 years out. I like the upside of the s&p 500 index. If your time horizon is shorter than I feel there is a stronger argument for a bond fund.

Also as I stated earlier I remember higher inflation. During high inflation I would rather own stocks than bonds. Though I do not see high inflation in the foreseeable future so I guess the point is moot.
Topic Author
frankmorris
Posts: 346
Joined: Tue Apr 25, 2017 4:34 pm

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

Post by frankmorris »

rhornback wrote:
aristotelian wrote:
frankmorris wrote:
Thanks artistotelian - I definitely will continue giving it a lot of thought. I'm not at the point of making a decision yet, just trying to inch closer to one.

In terms of interest rates, maybe I don't understand bonds as well as I thought I had - my understanding is that my interest amount is locked in once I buy a bond or a bond fund. In other words, if I get $2.30/year through a bond purchase, then I will get that same $2.30 each year until I sell the fund. Whereas stock returns fluctuate, bond returns do not. The yield may change, but only because of the value of the bond itself - not the interest.
No, the bond fund you buy contains thousands of bonds that are being bought and sold as well as maturing and being converted into new bonds. The amount they yield rises and falls with both interest rates and bond prices (e.g when the stock market crashes, there is more demand for safe investment, so prices go up). Look at the historical returns of Total Bond Market Index. The income return is as high as 5.94%. The price return is as high as 4.26%. The total return is as high as 10%, with a low of -2.15%. The fund had an income return of 4.95% (total return 5.15%) during the stock market crash of 2008.

You should read a good book on bonds. Stocks are intuitive to understand but bonds are not. There is a lot of money at stake so you should have a good understanding of what you are and are not investing in. Larry Swedroe's Only Winning Bond Strategy is excellent. He advocates something like 30/70 for most people, to put it in perspective.

Buying a bond fund is nothing like buying a CD - although there are people who advocate buying CD's.
My comment about this is the 10 year return is 4.12%. The vanguard s&p 500 index is 7.51 with a 1.88% yield. So my argument is for that 2.24% yield difference I am giving up a possible 3.39 upside. My time horizon is still 10 years out. I like the upside of the s&p 500 index. If your time horizon is shorter than I feel there is a stronger argument for a bond fund.

Also as I stated earlier I remember higher inflation. During high inflation I would rather own stocks than bonds. Though I do not see high inflation in the foreseeable future so I guess the point is moot.
Yeah, I think for long-term investment I don't think there's an argument to be had for bonds over stocks. In my particular case, the main benefit would be short-term access to a smaller subsection of my account if I needed to buy a house, pay a doctor, etc. If the stock market tanks, the last thing I'd want to do would be to pull money out of the principal to buy a house. But, assuming relatively consistent dividends, the income produced from dividends is relatively close to bond yields, with the long-term upside of capital appreciation. So if income was the only concern...
Dancer
Posts: 76
Joined: Mon Feb 03, 2014 2:06 am

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

Post by Dancer »

Earlier talk of short vs longer term "bonds" -- as taxable, on the short end, have options: Cash, I-Bonds, E-Bonds (hold 20 years), CDs / ladder, online savings, treasuries (no state taxes), munis (no taxes), etc.

10k/year into I-Bonds for inflation protected "cash".

I'd probably look at 50% stocks, but I'm a conservative investor.
aristotelian
Posts: 8936
Joined: Wed Jan 11, 2017 8:05 pm

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

Post by aristotelian »

rhornback wrote: My comment about this is the 10 year return is 4.12%. The vanguard s&p 500 index is 7.51 with a 1.88% yield. So my argument is for that 2.24% yield difference I am giving up a possible 3.39 upside. My time horizon is still 10 years out. I like the upside of the s&p 500 index. If your time horizon is shorter than I feel there is a stronger argument for a bond fund.

Also as I stated earlier I remember higher inflation. During high inflation I would rather own stocks than bonds. Though I do not see high inflation in the foreseeable future so I guess the point is moot.
Of course S&P has more upside. But OP does not need upside. He has won the game, and needs primarily to preserve capital.

10 years is not a long enough time horizon, IMO. A bear market could go on much longer. There is no guarantee that the next bear market will only last a year.

Regarding inflation, there are bonds for that - TIPS, I-Bonds.

Also someone mentioned taxes. There are bonds for that too. Muni bonds are exempt from federal taxes.
shiftleft
Posts: 70
Joined: Thu Mar 02, 2017 6:24 pm

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

Post by shiftleft »

Hi OP,

I'm in a similar situation as you, just a little tad older (40), and more human capital (low 6 figures/yr). I've been through 2 market crashes in my adult life. I can tell you it's very hard to do the right thing (buy more) in a market crash. In the first I sold everything, although I didn't have much invested (10K), since I was just getting started. In the second, I did better by going 100% into stocks in my tax-advantaged, but I should have been buying a boatload in taxable, but was constantly waiting for the next crash. Hopefully, I'll get things right the third time :)

Anyway, I've been thinking a lot of about AA recently and have been given recommendations anywhere from 30/70 (stocks/bonds) to 80/20. I finally settled on 50/50. Although I could probably let it ride as high as 60/40 or as low as 40/60.

Here are my reasons:
1) I figured the most I could probably handle losing is about 20-25% of my portfolio in a given year, keeping in mind downturns may span multiple years. This number is partially chosen based on the amount of capital invested. I'm being more conservative as I get older (less time and desire to work) and larger sums invested.

2) I want to retire early or at least have the option of changing to something less stressful or more enjoyable. I may like my job now, but things can change in an instant with a new manager, layoff, change in priorities, or whatever. Also you could get married and have kids and realize you'd rather spend more time with them.

3) I've mostly won the game. There's no need to take more risk than necessary. Especially since everything feels expensive right now.

Also being new to this, having the recency bias of having such a long good bull market, and reading all these books on investment may also make you overly enthusiastic and forget that the market can go down a lot. And it may take a good downturn give you a different perspective. Might be good to read a book about what it was like during the Great Depression.

Hope this helps.
dergon
Posts: 27
Joined: Wed May 15, 2013 10:25 am

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

Post by dergon »

I just wanted to jump in and say that I am following this thread with great interest.

I'm a bit older, having just turned 50. I have a high paying job that many people can choose to do into their 60s or even 70s if they wish to do so. Many in my profession are able to do fractional levels of work, going 80%, 60%, 50% etc work time as they age. I suppose people here would say that I have "won the game" already, having made into the low-mid 7 figures in investments.


But my natural state of being is to be 100% in stocks. I was age 40ish and 100% equities as the great recession hit. I lost what the market lost. I didn't like it. But neither did it keep me up at night. I wasn't suicidal or anything. I just kept buying every month according to my regular auto-deduction investment schedule. By the time the market came back around I had made a bunch of money and felt like a genius just for doing nothing different at all.




The only thing that worries me now is a "perfect storm" where the market tanks at the same time as some life crisis (health issue, my industry goes into a bear market for some reason, robot takes my job, etc) and I have to sell equities at the bottom in order to live.




Anyway... I suppose I didn't really offer any advice. Just tossing out another random opinion/data point.
AlohaJoe
Posts: 5766
Joined: Mon Nov 26, 2007 2:00 pm
Location: Saigon, Vietnam

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

Post by AlohaJoe »

HomerJ wrote:But even with normal bonds, there's only been a few 30-year periods where bonds lost to inflation. You certainly aren't guaranteed to lose.
I agree you aren't guaranteed to lose -- that is clearly histrionics -- but I also wouldn't say it is "only a few 30-year periods". Bonds in the US lost to inflation 27.2% of the time over 30-year periods (and 42.9% of the time over 20-year periods). One-in-four is pretty large. And the US -- for reasons that may or may not hold in the future -- had basically the best bonds on the planet after Switzerland, Denmark, and Canada. The average country saw bonds fail to beat inflation 38.6% of the time over 30-year periods.
rhornback
Posts: 166
Joined: Tue Mar 07, 2017 9:59 am

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

Post by rhornback »

dergon wrote:I just wanted to jump in and say that I am following this thread with great interest.

I'm a bit older, having just turned 50. I have a high paying job that many people can choose to do into their 60s or even 70s if they wish to do so. Many in my profession are able to do fractional levels of work, going 80%, 60%, 50% etc work time as they age. I suppose people here would say that I have "won the game" already, having made into the low-mid 7 figures in investments.


But my natural state of being is to be 100% in stocks. I was age 40ish and 100% equities as the great recession hit. I lost what the market lost. I didn't like it. But neither did it keep me up at night. I wasn't suicidal or anything. I just kept buying every month according to my regular auto-deduction investment schedule. By the time the market came back around I had made a bunch of money and felt like a genius just for doing nothing different at all.




The only thing that worries me now is a "perfect storm" where the market tanks at the same time as some life crisis (health issue, my industry goes into a bear market for some reason, robot takes my job, etc) and I have to sell equities at the bottom in order to live.




Anyway... I suppose I didn't really offer any advice. Just tossing out another random opinion/data point.
I am 48. Though I doubt I have the income and stability of the type of job you have. i figure if the perfect storm hits we will all be in trouble. In the perfect storm all asset classes can tank. I suppose except for gold but as indicated earlier that is not my cup of tea.
zuma
Posts: 533
Joined: Thu Dec 29, 2016 12:15 pm
Location: EU

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

Post by zuma »

frankmorris wrote: Question: Is there any solid reason NOT to invest 100% in stocks, perhaps a balance of large cap, TSM, and TISM?
You should design a portfolio to meet your specific investing goals.

If your goals can realistically be met with a 60/40 portfolio (for example), that's a solid reason to not invest 100% in stocks.

My advice would be to start by articulating your objectives rather than seeking approval for 100% stocks.
KlangFool
Posts: 19696
Joined: Sat Oct 11, 2008 12:35 pm

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

Post by KlangFool »

rhornback wrote:
I am 48. Though I doubt I have the income and stability of the type of job you have. i figure if the perfect storm hits we will all be in trouble. In the perfect storm all asset classes can tank. I suppose except for gold but as indicated earlier that is not my cup of tea.
rhornback,

1) Please note that in this context, "perfect storm" mean that both stock market and the person's employment are affected. So, there is no such thing as we will all be in trouble. For example, folks in oil and gas industry are running in a different employment cycle than the rest of the economy. Ditto for many other industries.

This is personal finance. We each have our own "perfect storm".

2) I can survive for 5 years without employment and not selling my stock. So, all asset classes may drop. But, some of us are prepared for this. We could survive a downturn of 5 years or longer. Meanwhile, for those that are 100/0 and unprepared, they probably will not last more than 2 years. If the recession last 2 1/2 years, it will make a significant difference on how well that you are prepared and whether you can survive.

KlangFool
User avatar
backpacker
Posts: 1620
Joined: Mon Sep 22, 2014 2:17 pm

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

Post by backpacker »

frankmorris wrote:Is there any solid reason NOT to invest 100% in stocks, perhaps a balance of large cap, TSM, and TISM?
Telling someone that there are good reasons to put their entire portfolio in stocks is a little bit like telling someone that there are good reasons to have a drink. Generally true, but the person you're talking to might need to drive home, be pregnant, be under age, have a drinking problem, etc. Much of the advice in this thread reflects that. Better to err on the side of advising others to be cautious when your information about their life circumstances and temperament is limited.

That said, here is one of my own reasons for owning a stock-heavy portfolio.

The chart below is from Robert Shiller's classic paper “Do Stock Prices Move Too Much to Be Justified by Subsequent Changes in Dividends?” It was one of the papers that won him the Nobel Prize, so it can't be that bad. :D

The solid line shows the price of stocks and the dotted line shows future dividends. Both series are detrended, meaning that they are relative to the average growth of stocks and dividends. As you can see, stocks prices are wildly more volatile than the future dividends those prices are supposed to predict.

What this shows us is that the price and the future productivity of an asset are very different things. The productivity of the companies you own when buying stocks is much more reliable than the price at which other investors are willing to buy your shares.

Many of the posts in this thread correctly point out that the price of stocks is wildly volatile, and they’re right. If your financial plan or general happiness depends on the price at which others are willing to buy your shares, your stock holdings should be limited. On the other hand, if you build your financial plan around the productivity of your assets, you probably can hold a stock heavy portfolio and do fine.

Take the Great Recession for example. Stock prices fell by -50% but, even at the low, dividends fell by more like -20%. If all you ever saw was the dividend check coming in the mail, you would have been concerned, but not as concerned as everyone who was watching the price of their stocks fall through the floor.

If you plan to have a stock-heavy portfolio and spend the dividends, you need to be sure that you can absorb a permanent -25% drop in the dividends without selling stocks. If not, then you either need to figure out how to spend less or need a more traditional stock/bond portfolio as others have suggested

All of this makes it sounds like I'm a dividend investor, which I'm not. The dividend investors I've met tend to become obsessed with dividends as a measure of productivity when, in fact, its only one way of estimating it. A company is not less productive because it decides to return money in the form of share buy backs than in the form of dividends. Nor is a company less productive because it has productive ways to invest earnings rather than sending them back to shareholders. Dividends are, though, an easy way to estimate the productivity of your investments so that you can focus on that instead of the price.

Image
hulburt1
Posts: 438
Joined: Tue Jul 15, 2014 9:17 pm

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

Post by hulburt1 »

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
Topic Author
frankmorris
Posts: 346
Joined: Tue Apr 25, 2017 4:34 pm

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

Post by frankmorris »

Dancer wrote:Earlier talk of short vs longer term "bonds" -- as taxable, on the short end, have options: Cash, I-Bonds, E-Bonds (hold 20 years), CDs / ladder, online savings, treasuries (no state taxes), munis (no taxes), etc.

10k/year into I-Bonds for inflation protected "cash".

I'd probably look at 50% stocks, but I'm a conservative investor.
I definitely need to do more reading - I don't understand enough, for sure.
Topic Author
frankmorris
Posts: 346
Joined: Tue Apr 25, 2017 4:34 pm

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

Post by frankmorris »

shiftleft wrote:
Hope this helps.
Thanks shiftleft - really appreciate you weighing in. Yes, definitely helps - the more perspectives, the better.
NiceUnparticularMan
Posts: 1740
Joined: Sat Mar 11, 2017 7:51 am

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

Post by NiceUnparticularMan »

backpacker wrote:All of this makes it sounds like I'm a dividend investor, which I'm not. The dividend investors I've met tend to become obsessed with dividends as a measure of productivity when, in fact, its only one way of estimating it. A company is not less productive because it decides to return money in the form of share buy backs than in the form of dividends. Nor is a company less productive because it has productive ways to invest earnings rather than sending them back to shareholders. Dividends are, though, an easy way to estimate the productivity of your investments so that you can focus on that instead of the price.
If you have the data, you can do a more "sophisticated" version of this by tracking real earnings (as opposed to dividends), which controls for changes in dividend policy. Note before assuming all such earnings are realizable indefinitely, you have to deduct something for reinvestment necessary to maintain the real productivity of your companies (on the order of 1-2% of market cap, depending on the period/valuations).

The takeaway will be the same, however--the real productivity of public companies has been way steadier than their market capitalization. And if you can live off that (subject to that need to reinvest 1-2%), you're probably in good shape. Another poster recently described this with an analogy to buying a farm which you intend to pass on to your heirs, and the market price of the farm doesn't matter much as long as it is being productive. I might also note that on this theory, even at relatively high valuations, stocks still seem pretty cheap in light of their expected future real earnings.

Still, though, I don't think this is quite enough to motivate being 100% in stocks. One problem is even real earnings experiences SOME volatility, and you don't want to be withdrawing if that would involve actually selling off productive assets (eating your seed corn, so to speak). Another is that while valuations may not matter much to you in the long run (if you can avoid eating your seed corn), they could matter in the short run to your new purchases of assets, and you wouldn't want to miss some favorable "buying opportunities" just because right then your ability to contribute was hampered. This is really two sides to the same coin: adverse correlations between withdrawals OR contributions and prices could hurt you in the long run. And that may be reason enough to hold some non-stocks as a buffer against such adverse correlations.
Topic Author
frankmorris
Posts: 346
Joined: Tue Apr 25, 2017 4:34 pm

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

Post by frankmorris »

zuma wrote:
frankmorris wrote: Question: Is there any solid reason NOT to invest 100% in stocks, perhaps a balance of large cap, TSM, and TISM?
You should design a portfolio to meet your specific investing goals.

If your goals can realistically be met with a 60/40 portfolio (for example), that's a solid reason to not invest 100% in stocks.

My advice would be to start by articulating your objectives rather than seeking approval for 100% stocks.
Thanks zuma - I agree, my decision needs to be based more on fundamental foals and values rather than "what I'm supposed to do." I think an underlying question here for me, as I formulate those objectives, is what amount of risk makes sense for me to take, within given objectives.
Topic Author
frankmorris
Posts: 346
Joined: Tue Apr 25, 2017 4:34 pm

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

Post by frankmorris »

backpacker wrote:
frankmorris wrote:Is there any solid reason NOT to invest 100% in stocks, perhaps a balance of large cap, TSM, and TISM?
Telling someone that there are good reasons to put their entire portfolio in stocks is a little bit like telling someone that there are good reasons to have a drink. Generally true, but the person you're talking to might need to drive home, be pregnant, be under age, have a drinking problem, etc. Much of the advice in this thread reflects that. Better to err on the side of advising others to be cautious when your information about their life circumstances and temperament is limited.

That said, here is one of my own reasons for owning a stock-heavy portfolio.

The chart below is from Robert Shiller's classic paper “Do Stock Prices Move Too Much to Be Justified by Subsequent Changes in Dividends?” It was one of the papers that won him the Nobel Prize, so it can't be that bad. :D

The solid line shows the price of stocks and the dotted line shows future dividends. Both series are detrended, meaning that they are relative to the average growth of stocks and dividends. As you can see, stocks prices are wildly more volatile than the future dividends those prices are supposed to predict.

What this shows us is that the price and the future productivity of an asset are very different things. The productivity of the companies you own when buying stocks is much more reliable than the price at which other investors are willing to buy your shares.

Many of the posts in this thread correctly point out that the price of stocks is wildly volatile, and they’re right. If your financial plan or general happiness depends on the price at which others are willing to buy your shares, your stock holdings should be limited. On the other hand, if you build your financial plan around the productivity of your assets, you probably can hold a stock heavy portfolio and do fine.

Take the Great Recession for example. Stock prices fell by -50% but, even at the low, dividends fell by more like -20%. If all you ever saw was the dividend check coming in the mail, you would have been concerned, but not as concerned as everyone who was watching the price of their stocks fall through the floor.

If you plan to have a stock-heavy portfolio and spend the dividends, you need to be sure that you can absorb a permanent -25% drop in the dividends without selling stocks. If not, then you either need to figure out how to spend less or need a more traditional stock/bond portfolio as others have suggested

All of this makes it sounds like I'm a dividend investor, which I'm not. The dividend investors I've met tend to become obsessed with dividends as a measure of productivity when, in fact, its only one way of estimating it. A company is not less productive because it decides to return money in the form of share buy backs than in the form of dividends. Nor is a company less productive because it has productive ways to invest earnings rather than sending them back to shareholders. Dividends are, though, an easy way to estimate the productivity of your investments so that you can focus on that instead of the price.

Image
Thanks backpacker - this is fascinating, and some of the info I was looking for. Yes, sounds like income would be at least decently preserved with dividends, but not access to the capital itself (via selling stock) during a downturn.
User avatar
backpacker
Posts: 1620
Joined: Mon Sep 22, 2014 2:17 pm

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

Post by backpacker »

NiceUnparticularMan wrote:
backpacker wrote:All of this makes it sounds like I'm a dividend investor, which I'm not. The dividend investors I've met tend to become obsessed with dividends as a measure of productivity when, in fact, its only one way of estimating it. A company is not less productive because it decides to return money in the form of share buy backs than in the form of dividends. Nor is a company less productive because it has productive ways to invest earnings rather than sending them back to shareholders. Dividends are, though, an easy way to estimate the productivity of your investments so that you can focus on that instead of the price.
If you have the data, you can do a more "sophisticated" version of this by tracking real earnings (as opposed to dividends), which controls for changes in dividend policy. Note before assuming all such earnings are realizable indefinitely, you have to deduct something for reinvestment necessary to maintain the real productivity of your companies (on the order of 1-2% of market cap, depending on the period/valuations).

The takeaway will be the same, however--the real productivity of public companies has been way steadier than their market capitalization. And if you can live off that (subject to that need to reinvest 1-2%), you're probably in good shape. Another poster recently described this with an analogy to buying a farm which you intend to pass on to your heirs, and the market price of the farm doesn't matter much as long as it is being productive. I might also note that on this theory, even at relatively high valuations, stocks still seem pretty cheap in light of their expected future real earnings.

Still, though, I don't think this is quite enough to motivate being 100% in stocks. One problem is even real earnings experiences SOME volatility, and you don't want to be withdrawing if that would involve actually selling off productive assets (eating your seed corn, so to speak). Another is that while valuations may not matter much to you in the long run (if you can avoid eating your seed corn), they could matter in the short run to your new purchases of assets, and you wouldn't want to miss some favorable "buying opportunities" just because right then your ability to contribute was hampered. This is really two sides to the same coin: adverse correlations between withdrawals OR contributions and prices could hurt you in the long run. And that may be reason enough to hold some non-stocks as a buffer against such adverse correlations.
That other poster may have in fact been me. :D

Yes, I much prefer your earnings with a deduction for reinvestment way of tracking productivity. Part of the difficulty will be determining what portion of a company's investment is "necessary" for its continued productivity, but picking some standard deduction will work pretty well.

I completely agree that my observation doesn't settle the questions of how much to hold in stocks. For one thing, with such wild prices, you might think that you could make money selling your stock to the market when high and rebuying it when low. For another, it will depend on how flexible your spending is. If you can easily cut your spending by -20% when dividends fall by -20%, you should be fine.
MathWizard
Posts: 4649
Joined: Tue Jul 26, 2011 1:35 pm

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

Post by MathWizard »

I would get in the market for a while. Maybe you already are.

Get more of a feel for your risk tolerance first, then ratchet up.

I started at 50/50, went to 80/20 then went 100% through 2 decades , dropping back to 80/20 just recently.

I was less than 100% for the first 6 years. Part of this is what your spouse can handle if you are married and have joint finances.

Most important is to know your behavior. In your case you are expecting a windfall.
You should plan what to do if you do not get it right now. Once you have it, preserve it first while you figure out your behavior.
NiceUnparticularMan
Posts: 1740
Joined: Sat Mar 11, 2017 7:51 am

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

Post by NiceUnparticularMan »

backpacker wrote:That other poster may have in fact been me. :D
Hah! So I am assuming you are inclined to agree . . . .
Yes, I much prefer your earnings with a deduction for reinvestment way of tracking productivity. Part of the difficulty will be determining what portion of a company's investment is "necessary" for its continued productivity, but picking some standard deduction will work pretty well.
Yeah, that's a trick, and it is really unknowable since now you are trying to predict the future evolution of capitalism and the world economy. 2% is probably safe, but that pushes your average expected withdrawal rate down significantly (versus something like 1%).
I completely agree that my observation doesn't settle the questions of how much to hold in stocks. For one thing, with such wild prices, you might think that you could make money selling your stock to the market when high and rebuying it when low.
I'd be nervous selling the farm on the assumption I would be able to buy it back later for less, including accounting for the missed productivity in the meantime. My concern is that it really does seem to me like even when valuations are high in historic terms, valuations are usually still pretty low in light of expected future earnings, so there is a reasonable possibility you will never get back in again at a better price.
For another, it will depend on how flexible your spending is. If you can easily cut your spending by -20% when dividends fall by -20%, you should be fine.
I agree this is key, but over at least short periods, earnings have dropped more than 20%:

http://www.multpl.com/s-p-500-earnings/

And in fact not eating your seed corn in these cases (including accounting for the need to keep reinvesting for future productivity) might mean temporarily not taking any withdrawal at all, and instead going back into contribution mode.
User avatar
HomerJ
Posts: 16031
Joined: Fri Jun 06, 2008 12:50 pm

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

Post by HomerJ »

rhornback wrote:
dergon wrote:I just wanted to jump in and say that I am following this thread with great interest.

I'm a bit older, having just turned 50. I have a high paying job that many people can choose to do into their 60s or even 70s if they wish to do so. Many in my profession are able to do fractional levels of work, going 80%, 60%, 50% etc work time as they age. I suppose people here would say that I have "won the game" already, having made into the low-mid 7 figures in investments.


But my natural state of being is to be 100% in stocks. I was age 40ish and 100% equities as the great recession hit. I lost what the market lost. I didn't like it. But neither did it keep me up at night. I wasn't suicidal or anything. I just kept buying every month according to my regular auto-deduction investment schedule. By the time the market came back around I had made a bunch of money and felt like a genius just for doing nothing different at all.




The only thing that worries me now is a "perfect storm" where the market tanks at the same time as some life crisis (health issue, my industry goes into a bear market for some reason, robot takes my job, etc) and I have to sell equities at the bottom in order to live.




Anyway... I suppose I didn't really offer any advice. Just tossing out another random opinion/data point.
I am 48. Though I doubt I have the income and stability of the type of job you have. i figure if the perfect storm hits we will all be in trouble. In the perfect storm all asset classes can tank. I suppose except for gold but as indicated earlier that is not my cup of tea.
Losing your job at the same time the stock market crashes isn't really what I would call a "perfect storm" event. Those two events are usually correlated. Recessions, job losses, and stock market crashes go hand-in-hand.

You guys are very likely to be fine, and quite rich, at 100% stocks. But don't fool yourselves that it takes a 1 in a million "perfect storm" to lose investing 100% in stocks, especially when you are older. Jobs DO disappear, 10-15 year bear markets HAVE happened.
Gadget
Posts: 633
Joined: Fri Mar 17, 2017 1:38 pm

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

Post by Gadget »

I was convinced in 100 percent stocks before visiting this forum and changing all my investments for the better (mostly by reducing er everywhere, damn financial advisors). I was always a good saver, just not a smart one. I realized that since my and my wife's career started in 2008, I had no idea how a significant portfolio loss would affect us.

Some of the personal stories about real life experiences in bear markets hit home. So did the charts showing how little in yearly rate you're really giving up by having more bonds and how much you reduce volatility from that bond allocation.

When it boils down to it, you invest in index funds because you are content with receiving the market rate, not beating it. That same philosophy to me applies to bond allocation. Why beat the less volatile allocation if you don't really have to to retire well?

FYI, I settled on approximately age minus 10 for my bond allocation. Still probably riskier than some here, but far from the 100 percent stocks I was originally planning on. I'm 33.
User avatar
knpstr
Posts: 2890
Joined: Thu Nov 20, 2014 8:57 pm
Location: Michigan

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

Post by knpstr »

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.
Very little is needed to make a happy life; it is all within yourself, in your way of thinking. -Marcus Aurelius
User avatar
HomerJ
Posts: 16031
Joined: Fri Jun 06, 2008 12:50 pm

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

Post by HomerJ »

Gadget wrote:When it boils down to it, you invest in index funds because you are content with receiving the market rate, not beating it. That same philosophy to me applies to bond allocation. Why beat the less volatile allocation if you don't really have to to retire well?
This. Great post.
User avatar
Phineas J. Whoopee
Posts: 9675
Joined: Sun Dec 18, 2011 6:18 pm

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

Post by Phineas J. Whoopee »

rhornback wrote:One thing that I do not see being discussed here, or that much on Bogleheads.org when it comes to asset allocation is the possibility of dividend paying stocks which IMO provide a middle ground between stocks and bonds.
The topic of dividend paying stocks is frequently discussed.
rhornback wrote:Specifically the vanguard high dividend yield mutual fund. The last time I checked it was paying 3%. Now that is not going to get you rich but it will pay a steady return in a down market (assuming dividends are not cut to much). So you are effectively getting paid to wait in a down market. And you still have the upside of a stock market rally.
...
The point I'm about to make and document is true, sometimes disputed, and makes certain people angry (present company excepted, of course). Dividends come directly out of share prices. You would have come out economically the same if the company didn't pay a dividend and you simply sold an equivalent value of shares.

It's true for stock funds because it's true for the underlying stocks.

PJW
KeithZz
Posts: 35
Joined: Sun Feb 19, 2017 1:00 pm

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

Post by KeithZz »

I am 32, but I only have 40 percent stock. No matter how many graphics you saw, how much you learned. What really matters is how you sleep at night. I was thinking 100 percent like you before investment, but when I dig in, I realized what I really want is 40/60. You already know how to invest, low cost, diversification, index. That is about it. Nothing more, nothing less. Next step is put your money in, if you feel great after all your money buy in, then that is the proper position for you. You can't really stay the course if you can't sleep at night. Sleep at night will eventually more importantl than anything you saw here and anything you learned before. You won't know where yourself should be before you actually put money in. :sharebeer
KlangFool
Posts: 19696
Joined: Sat Oct 11, 2008 12:35 pm

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

Post by KlangFool »

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
User avatar
knpstr
Posts: 2890
Joined: Thu Nov 20, 2014 8:57 pm
Location: Michigan

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

Post by knpstr »

KlangFool wrote: 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
What can you do? Spend/give $12 million more dollars.

Yes, it does not likely matter for that individual directly, short of some various extreme luxury purchases.
But it means more to some vs others to continue to build wealth as far as inheritance and charity aspects for your local community are concerned.

Milton Friedman talked about how these factors are often even greater drivers for humans than providing for themselves, particularly the drive to leave money behind for family.

For example if you get to say $10M what is the risk of a 100/0 portfolio? There is virtually none. A 70% drop would still be $3M and even just taking dividends alone, at current yields, could be $180,000-$200,000 per year so you wouldn't even need to sell shares to raise cash.
Very little is needed to make a happy life; it is all within yourself, in your way of thinking. -Marcus Aurelius
rhornback
Posts: 166
Joined: Tue Mar 07, 2017 9:59 am

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

Post by rhornback »

HomerJ wrote:
rhornback wrote:
dergon wrote:I just wanted to jump in and say that I am following this thread with great interest.

I'm a bit older, having just turned 50. I have a high paying job that many people can choose to do into their 60s or even 70s if they wish to do so. Many in my profession are able to do fractional levels of work, going 80%, 60%, 50% etc work time as they age. I suppose people here would say that I have "won the game" already, having made into the low-mid 7 figures in investments.


But my natural state of being is to be 100% in stocks. I was age 40ish and 100% equities as the great recession hit. I lost what the market lost. I didn't like it. But neither did it keep me up at night. I wasn't suicidal or anything. I just kept buying every month according to my regular auto-deduction investment schedule. By the time the market came back around I had made a bunch of money and felt like a genius just for doing nothing different at all.




The only thing that worries me now is a "perfect storm" where the market tanks at the same time as some life crisis (health issue, my industry goes into a bear market for some reason, robot takes my job, etc) and I have to sell equities at the bottom in order to live.




Anyway... I suppose I didn't really offer any advice. Just tossing out another random opinion/data point.
I am 48. Though I doubt I have the income and stability of the type of job you have. i figure if the perfect storm hits we will all be in trouble. In the perfect storm all asset classes can tank. I suppose except for gold but as indicated earlier that is not my cup of tea.
Losing your job at the same time the stock market crashes isn't really what I would call a "perfect storm" event. Those two events are usually correlated. Recessions, job losses, and stock market crashes go hand-in-hand.

You guys are very likely to be fine, and quite rich, at 100% stocks. But don't fool yourselves that it takes a 1 in a million "perfect storm" to lose investing 100% in stocks, especially when you are older. Jobs DO disappear, 10-15 year bear markets HAVE happened.
I can plow a field all day long
I can catch catfish from dusk 'til dawn
We make our own whiskey and our own smoke, too
Ain't too many things these ole boys can't do
We grow good ole tomatoes and homemade wine
And a country boy can survive
Country folks can survive

https://www.youtube.com/watch?v=3cQNkIrg-Tk
Post Reply