Help Late Early Accumulators Be Comfortable Right Now with (Bogle-appropriate) Aggressive AA

[adamsapple19]

I'll start this post with possibly the most quoted investing quote I've seen (here and seemingly everywhere else): “Be Fearful When Others Are Greedy and Greedy When Others Are Fearful” - Warren Buffet

Let me also confirm that I fully commit to low expense, broad index fund, passive investing. I fully embrace the Boglehead mindset. I find great comfort and ease in the content and wisdom of the posts I read here.

Based on our age (mid 30s) we should be - and we are - taking substantial appropriate risk in the market, to the tune of 90/10 per Vanguard TR funds (2045).

But in the back of my mind I can't help but feel continually uneasy about pumping (90/10) into equities right now. Every time I hear about yet another market metric record high I honestly feel a little disgusted. 2018 is the first year we are paying ourselves first to the maximum extent our budget allows. Looking at the below S&P chart straight off Vanguard, could there literally be a worse year in history to have begun investing heavily for retirement?



I found a recent thread very interesting (if not somewhat frustrating): "Anyone tired of the stock market going up?" It was pretty enlightening to see the numerous and various responses, seemingly based primarily on where a person is at in time in relationship to their retirement. I could mention a dozen fascinating responses but the below two are most relevant to my question:

"Who's doing all the buying, the pros or the performance/index chasers? If it's the latter, this will end very badly for them." - This resonates strongly w me and reinforces the concern I have about being one of the many who are pumping large %s of our income into TR funds right now (for the simple purpose of a stable retirement) .. but to who's benefit?

Moderator Mel Lindauer said the following in that thread: "Yes, younger folks making regular contributions to their 401k or similar retirement plans should pray for a prolonged down market. Remember, the only two prices that really matter are the price you pay the day you buy and the price you get on the day you sell. Everything in between is merely "noise. So continue to make your contributions when the market tanks, knowing that over the longer term, you're buying at "sale" prices." - I don't particularly want the market to make a sudden drop nor do I pray for a prolonged down market - that has significant impacts on every single working person's life. But this does reinforce my concern that our current aggressive AA may not be entirely appropriate. After all, where are these supposed "sale prices"?

My actionable question here is basically: given the aggressive AA recommended for our time line, is a ton of money really being left on the table if we temporarily moved to something like 80/20 or 75/25 in this unending, vertically-moving market? Based on some posts I've seen in multiple threads, this might even allow for additional ammunition for when the market at least isn't moving near vertically.

Am I engaging in blatant market timing with this type of thinking? Or is this at all reasonably strategic? I sense that some "find your comfortable AA and stick with it" type responses will come. This isn't really where I'm at. I'll circle back now to the Warren Buffet quote at top. Given our time line I absolutely want to be buying up as many broad index equity funds as possible. But how can that be reconciled with a market moving near vertically for so long, so "greedily"?

[ssquared87]

80/20 based on past returns will give you proportionally less risk vs, the loss in returns, but the difference really isn't that significant.

If you can't sleep at night, you've taken on too much risk. I'm 30, I have 90/10 and couldn't care less. I can't remember the last time i looked at my 401k statement because as Mel Lindauer said in that article you mention, everything in between is noise. I'm comfortable with that, but if you are thinking about it all the time, you've exceeded your risk appetitive even if it is appropriate for your age.

[coastalinvestor]

@adamsapple - you & I are in a similar boat - we are around the same age and stage in our investing careers. I am currently at 90/10 as well but - for the reasons you have described I am considering going to 80/20 ot 85/15 ... obviously not a huge change from 90/10 but it will give me a little bit more cash on hand to buy if the market goes on sale. I’m also not a greedy little piggie so I’m ok “leaving a little bit of money on the table.”

[rudeboy]

Yup I'm also in the same boat as you guys. I'm early thirties, began investing last year and can't help but feel it's been an unfortunate time to get started.

Then again, it wouldn't be unrealistic for the good run to continue for awhile longer, given the relatively low average return this century thanks to two bear markets in 10 years. How would you feel if you went to 85/15 now, only to see the market keep going up? This is a question I am also asking myself and have not yet settled on an answer.

I can tell you what I don't want to do is change my AA today, and then change it again a month or two later, and on and on. So I'm going to give myself some time to process the information I'm learning while I firm up my IPS, all the while continuing with my current plan, which is to buy equities when I can.

There's no reason to rush the decision -- if the market crashes in the next few weeks, it really won't matter all that much in the grand scheme as long as we keep buying and holding.

[adamsapple19]

if the market crashes in the next few weeks, it really won't matter all that much in the grand scheme as long as we keep buying and holding.

That's not the issue (at all), it's the consistent vertical climb of the market.

I'll concede that our recent substantial boost to retirement accounts does have me watching things more closely. But I don't think I'd be looking at this any differently no matter how much I was paying attention.

[Ged]

What is the time frame? 30-40 years?

When I started investing 40 years ago the S&P was around 90. Economic cycle market fluctuations are not important over that kind of time scale.

[TheAncientOne]

Going from 90/10 to 80/20 is fine if it makes you feel better but it won't change things much. I'd argue that if you feel that the market is frothy (and most all of us do) then take it upon yourself to go to 50/50 for the next two years. See where you are then and possibly readjust.

Lots of us thought the market was overvalues at the beginning of 2017 only to leave money on the table when the S&P 500 went up another 25%. This end of cycle melt up makes it more likely that the market will catch up this year or next, not less.

[Sandtrap]

Whether 90/10 or 60/40 is based on a comprehensive view of your entire financial situation. It can't be decided in isolation.
IE:
How solid is your income stream? Does it cover all of your needs and retirement contributions with room to spare?
Debts? Mortgage? New loans?
How much do you already have? Can you afford to ride out a "dip or big dip"?
Investment horizon/timeline. . early retirement goals, etc?
And so forth.

And, taking an aggressive allocation and undue risk for questionable reasons:
Making up for lost time?
Trying to market time?
Trying to make rapid gains for short term goals?
And so forth.

And, self knowledge.
What would you do if your equities (that make up 90% of your portfolio) drop more than 50% ???
And so forth.

j

[rudeboy]

if the market crashes in the next few weeks, it really won't matter all that much in the grand scheme as long as we keep buying and holding.

That's not the issue (at all), it's the consistent vertical climb of the market.

I'll concede that our recent substantial boost to retirement accounts does have me watching things more closely. But I don't think I'd be looking at this any differently no matter how much I was paying attention.

Why would a vertical climb bother you if said climb didn't imply risk of a subsequent fall? If you had no fear of a crash, a vertical climb would be nothing but good news.

[Svensk Anga]

I am not an early accumulator, but I pretend to be! I am late 50's with a somewhat oversized retirement portfolio. To my mind, part of the portfolio is for funding our retirement and the balance is intended for our heirs, who are 30-somethings. I decided that 90/10 is appropriate for the heirs. Like you, I have been questioning lately whether I should fiddle with the 90/10 in light of the recent run-up. I decided against.

Yes we may get a correction (>-10%) or even a bear (>-20%) before too long. But you cannot expect to time it perfectly. Maybe you get out before the peak and get back in somewhat after the trough. So if we get a correction, you will be doing well to avoid half of it. So maybe you save 5-10% of what you pull out of the market. Do you have the conviction to pull it all out? Probably not. If you pull 20% out of equities and avoid 5-10% of losses on that, you have saved 1 to 2% of your portfolio. And that is assuming you time it fairly well. Nobody rings a bell for time to get in or to get out so those moves are just a guess. Seems not worth the trouble in the long run.

The market is always in equilibrium between those who think it is too cheap (stock buyers) and those who think it is too expensive (the sellers). Professor Damordaran here lays out his reasoning why we might still expect decent returns ahead. http://aswathdamodaran.blogspot.com/201 ... cy-of.html He estimates an equity risk premium of 5.08%. He also shows a graph that puts this in historical context. 5% looks quite good historically. There are caveats of course, but it seems unlikely that the equity risk premium has gone negative. That is, over the long haul, you are likely better off in stocks than in bonds/cash.

[adamsapple19]

Whether 90/10 or 60/40 is based on a comprehensive view of your entire financial situation. It can't be decided in isolation.
IE:
How solid is your income stream? Does it cover all of your needs and retirement contributions with room to spare?

Both Roths maxed, 403b at 60% of max

Debts? Mortgage? New loans?

Mortgage 70K, 25yrs remaining (I bought right)
Student Loans 36K
No consumer debt, we each drive paid off older vehicles

How much do you already have? Can you afford to ride out a "dip or big dip"?

44K in retirement accounts
Would welcome some kind of dip to be honest, at least some return to earth

Investment horizon/timeline. . early retirement goals, etc?

25-35 yrs - likely toward the higher end
One can dream

And, taking an aggressive allocation and undue risk for questionable reasons:
Making up for lost time?
Trying to market time?
Trying to make rapid gains for short term goals?
And so forth.

-Aggressive allocation is based on Vanguard TR funds for our horizon
-We have made our budget super efficient to increase retirement allocation, in that sense we are trying to make up for lost time, but our AA is appropriate for our horizon
-I may be trying to time it with my consideration of a more conservative AA
-No

What would you do if your equities (that make up 90% of your portfolio) drop more than 50% ???

I'd work overnight shifts @ mcdonalds or where ever to put as much money in as possible @ 100/0

[Grt2bOutdoors]

You need to do some reading:
Start here: If You Can - find it at etf.com, type If You Can + etf.com in your google search, download it and start reading. Then start reading the books he recommended.

As for worse times in investing:
September 1929
Anytime in 1930-1931
1973
August 1987
1990
1999
2007

The best time to invest - today (actually Monday, markets are closed on weekends and national holidays). The next best time is tomorrow.
In order to harvest crops one must first plant a seeds. Some seeds will inevitably fail to grow to maturity because of afflictions such as disease, weather, animals. Most will though if enough time and effort is made. Farmers don’t stop planting because the price of corn is low, they switch crops to more profitable ones and vice versa. Stop reading the news, watching tv and listening to your friends. The market over the last two hundred plus years has been trending up. To suggest a permanent plateau and decline is to believe something more catastrophic awaits. You need to read more history - it’s not different this time.

[harvestbook]

I want to stay in because the dividends keep churning regardless and if reinvested will already be buying cheap if the market declines. That plus total stock market yields are not much lower than the total bond fund at this point. Compounding only works if you stay in and let the wheels grind. I feel like if you are still accumulating and have a longish horizon, dips don't matter because you're still buying anyway--those who are in or near retirement should've already moved to a safer AA.

[sambb]

this second guessing tells me you should be in target retirement of your age at 65, set it and forget it. youll be happy you did this in 20 years

[adamsapple19]

You need to do some reading:
Start here: If You Can - find it at etf.com, type If You Can + etf.com in your google search, download it and start reading. Then start reading the books he recommended.

I have read the ETF. It's sobering from the get-go. This is the "awakening" state of mind I've been in for the past couple of years.

As for worse times in investing:
September 1929
Anytime in 1930-1931
1973
August 1987
1990
1999
2007

Am I incorrect in thinking that these exact times would literally be the best times to have begun investing heavily for a 25-35 yr retirement horizon?

The best time to invest - today (actually Monday, markets are closed on weekends and national holidays). The next best time is tomorrow.
In order to harvest crops one must first plant a seeds. Some seeds will inevitably fail to grow to maturity because of afflictions such as disease, weather, animals. Most will though if enough time and effort is made. Farmers don’t stop planting because the price of corn is low, they switch crops to more profitable ones and vice versa. Stop reading the news, watching tv and listening to your friends. The market over the last two hundred plus years has been trending up. To suggest a permanent plateau and decline is to believe something more catastrophic awaits. You need to read more history - it’s not different this time.

Well said, point taken. I would just say that I am not suggesting a permanent plateau or anything of the sorts. I am just trying to reconcile traditional investing wisdom (the Warren Buffet quote) with the current state of the market and our specific situation.. and gauge whether an AA adjustment is appropriate or not.

[Agggm]

Yup I'm also in the same boat as you guys. I'm early thirties, began investing last year and can't help but feel it's been an unfortunate time to get started.

Then again, it wouldn't be unrealistic for the good run to continue for awhile longer, given the relatively low average return this century thanks to two bear markets in 10 years. How would you feel if you went to 85/15 now, only to see the market keep going up? This is a question I am also asking myself and have not yet settled on an answer.

I can tell you what I don't want to do is change my AA today, and then change it again a month or two later, and on and on. So I'm going to give myself some time to process the information I'm learning while I firm up my IPS, all the while continuing with my current plan, which is to buy equities when I can.

There's no reason to rush the decision -- if the market crashes in the next few weeks, it really won't matter all that much in the grand scheme as long as we keep buying and holding.

With your long time horizon, the relatively small proportion you're presumably investing now vs how much you'll invest in the future, the "high" valuation of today's stock market is almost insignificant.

[Sandtrap]

Read About Bob, The Worst Market Timer
What happens if you only invested at market highs?
http://awealthofcommonsense.com/2014/0 ... ket-timer/

[drk]

As for worse times in investing:
September 1929
Anytime in 1930-1931
1973
August 1987
1990
1999
2007

Am I incorrect in thinking that these exact times would literally be the best times to have begun investing heavily for a 25-35 yr retirement horizon?

I like this as a piece of contrarian thinking. Assuming stable employment, a large correction would be a tremendous opportunity right now precisely because you're better equipped to react to it. Even better would be a large correction after a 20% melt-up.

[SimplicityNow]

I cannot reconcile Warren Buffet's quote with your fear.

Another statement made by Warren Buffet is that his suggestion to the advisor managing his wife's accounts when Warren passes would be to invest 90% S&P 500 Index Fund/10% short term treasuries. I don't know her age but I am guessing she is older then you

In my opinion, and its just one person's opinion 90/10 is an aggressive asset allocation for mid thirties regardless of if the market is presently overvalued or undervalued.

Many here would consider anywhere from 65/35 up to 85/15 reasonable. I think based on your worry maybe you should pick something less aggressive like 75/25. The returns will be similar but lower in the long term but you will sleep better at night.

The other issue is you say you want to accumulate, feel you are a late starter, etc. so my question is, if not stocks then where are you going to put the extra money not going into stocks? Bonds? Many think they are overvalued as well.

There is no free lunch. Investing in stocks carries risk. And as one of the wiser Bogleheads, Nisiprius states and I paraphrase : To get the risk premium, you really do need to take the risk.

Read a few books, especially on asset allocation, Ferri & Swedroe both have good ones.

[marklar13]

I would also take that chart you posted of the SP500 with a grain of salt (in the OP). I think you probably want a log scale to view a chart going back that far. The arithmetic scale makes it look like everything was smooth sailing up until the year ~2000. I don't think that is an accurate representation of the market.

Not trying to sway you one way or the other, but that's something that jumped out at me.

[TG2]

Moderator Mel Lindauer said the following in that thread: "Yes, younger folks making regular contributions to their 401k or similar retirement plans should pray for a prolonged down market. Remember, the only two prices that really matter are the price you pay the day you buy and the price you get on the day you sell. Everything in between is merely "noise. So continue to make your contributions when the market tanks, knowing that over the longer term, you're buying at "sale" prices."

Mel is right. There were people at my workplace who were aware that I knew a bit about investing. During the downturns of 2002 and 2008 some came to me. I was asked, "Aren't you worried about the market going down?" I said, "NO!! I want it to go damn near zero! I'm still buying! Why would I want to buy at a higher price? Let it go up later."

If you've got a 25-year time frame I wouldn't worry too much about it, but you should know that this is coming from someone who is at 100/0 even in retirement.

[trigger08]

The "backtest asset allocation" tool at portfoliovisualizer.com has the option to include a fixed periodic contribution amount. With a modest starting investment and regular contributions over many years, you might be surprised how little difference there has been between a 90/10 allocation and a more conservative portfolio.

Picking some numbers and dates at random:
Starting investment: $50,000
Contribute $1,000 monthly (inflation adjusted)
Rebalance at 5%/25% bands

Portfolio 1 = 55 US / 35 Int'l / 10 Total US Bond
Portfolio 2 = 40 US / 20 Int'l / 40 Total US Bond



I would try to choose an AA you feel comfortable with, be "greedy" by continuing to save/invest what you can, and stay the course.

[Olemiss540]

I am in the same age group and have decided the target date fund is the way to go.

If the market declined 30-40 percent it would be great news for us. Don't be fearful of the next correction, because it would be beneficial to our long term wealth (assuming level employment). You do not have to time it perfectly to make money, and in fact your thought process is the very reason a majority of investors LAG market returns.

[Rowan Oak]

Read About Bob, The Worst Market Timer
What happens if you only invested at market highs?
http://awealthofcommonsense.com/2014/0 ... ket-timer/

That helps put things in perspective.

[3funder]

this second guessing tells me you should be in target retirement of your age at 65, set it and forget it. youll be happy you did this in 20 years

+1

[Soon2BXProgrammer]

Looking at the below S&P chart straight off Vanguard, could there literally be a worse year in history to have begun investing heavily for retirement?

Only look at long time horizons in a log scale.

anything else doesn't make sense.. if you look at (while it doesn't have recent data, i'm sure you can find with google a more recent example) you will notice over the long run the chart is linear..

this is because when things go up x% a year on average, it makes a normal chart look exponential, because of compounding returns... in the short run a fixed scale chart makes sense. Long run.. log scale is a must

ii don't endorse this link, just an example from google:
http://www.affinity-consulting.com/Grap ... -scale.pdf

[MotoTrojan]

I would also take that chart you posted of the SP500 with a grain of salt (in the OP). I think you probably want a log scale to view a chart going back that far. The arithmetic scale makes it look like everything was smooth sailing up until the year ~2000. I don't think that is an accurate representation of the market.

Not trying to sway you one way or the other, but that's something that jumped out at me.

Came to say the same thing. Log chart is the only way to look at the long term trend. Same reason it isn’t that strange to be hitting 1000 point milestones in Dow faster and faster.

[KyleAAA]

Yes, this is blatant market timing. Your discomfort is a sign that you’re investing beyond your risk tolerance. I would suggest you probably should move to a more conservative asset allocation, but not as a temporary measure due to valuations but as a permanent measure reflecting a more nuanced understanding of your true tolerance for risk. The only real mistake you can make in investing is overestimating your risk tolerance. Pretty much any reasonable allocation will work so long as you can stick with it. Your discomfort is a strong sign that you probably won’t be able to stick with it.

[adamsapple19]

Just wanted to come back to this and thank everyone for the responses/insight. I've reviewed all the information and it's been informative. I clearly have much to learn, am thankful for the feedback, and look forward to continuing to learn as the years go by.

I did just want to push back on Bob, the worst market timer. We have done nothing but increase contributions per pay period. I've been practically hoping for some kind of correction. Buying high and low are both unavoidable and profitable. My "frustration" stems solely from the fact that 1) the market does nothing but go sky high 2) we have just recently started contributing much larger sums and 3) wondering when the sale prices, the low buys, will happen. Obviously none of this is in my control and the game is won in the long run.

Perhaps having had meaningful skin in the game during only a market run-up is what has me bothered. Perhaps when I finally experience a dip I'll feel better, finally getting some bargain prices for the long run. I think ultimately it's the current lack of volatility (my only meaningful experience with investing thus far) that has had me bothered.

The comments about the arithmetic graph vs a log graph were enlightening. Compared to the graph in the OP from Vanguard, I found the below log graph of the S&P 500 from 1927 to date. This definitely puts things into perspective more clearly.

[stm]

I did just want to push back on Bob, the worst market timer. We have done nothing but increase contributions per pay period. I've been practically hoping for some kind of correction. Buying high and low are both unavoidable and profitable. My "frustration" stems solely from the fact that 1) the market does nothing but go sky high 2) we have just recently started contributing much larger sums and 3) wondering when the sale prices, the low buys, will happen. Obviously none of this is in my control and the game is won in the long run.

I think index'ing is also part of having the mindset that you're going to win some and you're going to lose some, but in the long run you'll be ok. I am about 20 years into my career at the moment. Started investing, and with a small inheritance that was 1X annual salary, in 1997. Went 100/0. Dot.com implosion lost 50% of everything, that hurt but stayed the course. It recovered and then some. I straddled the run up to 2008 by being in grad school 2006-2010. Didn't have money to invest on the way up, and lost 60% of everything on the way down. Stayed the course 100/0. 8 years later without a 100K+ a year job, we broke 2 comma net worth last year.

Take to heart the lesson from Bob above. If you truly believing in indexing, staying the course no matter what happens is the winning part of the formula. I know it's hard but learn to tune out your emotions and short term noise.

[remomnyc]

I'm glad you read about Bob, the world's worst market timer. You should also read Swedroe's Lessons from 2016, specifically lesson 2.

http://www.etf.com/sections/index-inves ... nopaging=1

In a nutshell, returns are lumpy and if you miss the best days, you miss out on a lot of the return in the market.

I believe it was Peter Lynch who said, "The real key to making money in stocks in not to get scared out of them" and "Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves." Pick an appropriate allocation and stay the course.