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### How do you quantify the risk differential between 85/15 and 70/30?

Posted: Sun Apr 29, 2018 2:40 pm
As a quantitative matter, how much difference would it really make if I were 70/30 instead of 85/15?

This question refers to the accumulation stage, not the withdrawal stage.

Conceptually 85/15 carries more risk. But how do you calculate the extent of the risk and potential reward, quantitatively, so as to make a truly informed risk assessment?

I mean, if the bottom falls out of the market you are going to get clobbered whether you are 70% stocks or 85%. So maybe the upside potential for gain is worth it, maybe it's not.

Here is a simple example of how I put numbers to the concepts:

Let's say on a portfolio of \$1 million, you are 85/15. If the market drops 50% overnight, you are looking at a diminution in value of stock holdings from \$850k down to \$425k. With a 70/30 mix your stock holdings drop in value from \$700k to \$350k. A difference of \$75k between the two down side results.

On the up side, let's say that over 10 years the 85/15 portfolio earns 6% (growth of \$790,847) while the 70/30 earns 5% (growth of 628,894). That is a difference of \$161,953, about 220% of the down side risk.

### Re: How do you quantify the risk differential between 85/15 and 70/30?

Posted: Sun Apr 29, 2018 2:47 pm
I would "quantify" it as if I was withdrawing 4% from my portfolio, the 85/15 would have over 3.5 years of withdrawals to smooth out my stock withdrawals, where as the 70/30 would be over 7 years worth of withdrawals.

### Re: How do you quantify the risk differential between 85/15 and 70/30?

Posted: Sun Apr 29, 2018 2:50 pm
Are you talking about the accumulation stage or the withdrawal stage?

An additional \$75K loss might be viewed differently depending on which stage you are in, even though quantitatively the difference is the same.

This might be of interest: https://personal.vanguard.com/us/insigh ... llocations

### Re: How do you quantify the risk differential between 85/15 and 70/30?

Posted: Sun Apr 29, 2018 2:55 pm
JoMoney wrote:
Sun Apr 29, 2018 2:47 pm
I would "quantify" it as if I was withdrawing 4% from my portfolio, the 85/15 would have over 3.5 years of withdrawals to smooth out my stock withdrawals, where as the 70/30 would be over 7 years worth of withdrawals.
Thanks. Seems like a legit quantification for someone in the withdrawal phase or close to it.

But on a longer time horizon, like 10 years, where withdrawals are not at issue, is there anything significant missing from my way of quantifying the risk?

### Re: How do you quantify the risk differential between 85/15 and 70/30?

Posted: Sun Apr 29, 2018 2:58 pm
delamer wrote:
Sun Apr 29, 2018 2:50 pm
Are you talking about the accumulation stage or the withdrawal stage?

An additional \$75K loss might be viewed differently depending on which stage you are in, even though quantitatively the difference is the same.

This might be of interest: https://personal.vanguard.com/us/insigh ... llocations
Thanks. I responded to the other post. I am not talking about the withdrawal phase. I am talking about a time horizon of 10 years or so.

### Re: How do you quantify the risk differential between 85/15 and 70/30?

Posted: Sun Apr 29, 2018 3:06 pm
FOGU wrote:
Sun Apr 29, 2018 2:58 pm
delamer wrote:
Sun Apr 29, 2018 2:50 pm
Are you talking about the accumulation stage or the withdrawal stage?

An additional \$75K loss might be viewed differently depending on which stage you are in, even though quantitatively the difference is the same.

This might be of interest: https://personal.vanguard.com/us/insigh ... llocations
Thanks. I responded to the other post. I am not talking about the withdrawal phase. I am talking about a time horizon of 10 years or so.
Di you mean that you expect to start making withdrawals in 10 years?

### Re: How do you quantify the risk differential between 85/15 and 70/30?

Posted: Sun Apr 29, 2018 3:08 pm
If you are invested in a portfolio that has more or less randomly sampled returns from some more or less stable hypothetical distribution of returns, then to know what value the portfolio will attain assuming also some rate of contributions and withdrawals, then you have to generate a statistical model of the outcome using either Monte Carlo or historical periods data or by convoluting statistical distributions. In any case the outcome is a distribution of possible outcomes with various probabilities.

An example of a historical periods model where you can see this is FireCalc (There are several other similar models with different wrinkles.). You can go into that model and adjust the portfolio as well as the time span and view the nature of the outcome. On the investigate tab you can opt to have the output data supplied as an Excel file.

I believe this is the most simple way to do this though one can certainly approximate the results from statistical formulas.

### Re: How do you quantify the risk differential between 85/15 and 70/30?

Posted: Sun Apr 29, 2018 3:10 pm
delamer wrote:
Sun Apr 29, 2018 3:06 pm
FOGU wrote:
Sun Apr 29, 2018 2:58 pm
delamer wrote:
Sun Apr 29, 2018 2:50 pm
Are you talking about the accumulation stage or the withdrawal stage?

An additional \$75K loss might be viewed differently depending on which stage you are in, even though quantitatively the difference is the same.

This might be of interest: https://personal.vanguard.com/us/insigh ... llocations
Thanks. I responded to the other post. I am not talking about the withdrawal phase. I am talking about a time horizon of 10 years or so.
Di you mean that you expect to start making withdrawals in 10 years?
Yes.

### Re: How do you quantify the risk differential between 85/15 and 70/30?

Posted: Sun Apr 29, 2018 3:36 pm
dbr wrote:
Sun Apr 29, 2018 3:08 pm
If you are invested in a portfolio that has more or less randomly sampled returns from some more or less stable hypothetical distribution of returns, then to know what value the portfolio will attain assuming also some rate of contributions and withdrawals, then you have to generate a statistical model of the outcome using either Monte Carlo or historical periods data or by convoluting statistical distributions. In any case the outcome is a distribution of possible outcomes with various probabilities.

An example of a historical periods model where you can see this is FireCalc (There are several other similar models with different wrinkles.). You can go into that model and adjust the portfolio as well as the time span and view the nature of the outcome. On the investigate tab you can opt to have the output data supplied as an Excel file.

I believe this is the most simple way to do this though one can certainly approximate the results from statistical formulas.
Thanks for this. I ran some simulations of both allocations in www.cfiresim.com. It seems that with these simulation calculators the most crucial data point is the spending. I put in \$0 spending and there was some difference in overall achievement between the two allocation mixes, but not a difference that I would consider terribly significant. I guess I am generally convinced by JoMoney's comment, that it is more a question of when you need the money and how long you would need to ride out a down market.

### Re: How do you quantify the risk differential between 85/15 and 70/30?

Posted: Sun Apr 29, 2018 3:47 pm
FOGU wrote:
Sun Apr 29, 2018 3:10 pm
delamer wrote:
Sun Apr 29, 2018 3:06 pm
FOGU wrote:
Sun Apr 29, 2018 2:58 pm
delamer wrote:
Sun Apr 29, 2018 2:50 pm
Are you talking about the accumulation stage or the withdrawal stage?

An additional \$75K loss might be viewed differently depending on which stage you are in, even though quantitatively the difference is the same.

This might be of interest: https://personal.vanguard.com/us/insigh ... llocations
Thanks. I responded to the other post. I am not talking about the withdrawal phase. I am talking about a time horizon of 10 years or so.
Di you mean that you expect to start making withdrawals in 10 years?
Yes.
So the question is how would you feel if in 9 months and 6 years, you lost \$75,000 more than you “could” have?

Would you be able to balance that against the bigger returns that you’d received in the interim by being more aggressive?

(Caveat that it probably isn’t realistic to think there won’t be a correction in the next 9.5 years. And maybe a recovery too. But nobody knows.)

And what do you plan for an asset allocation in 10 years?

### Re: How do you quantify the risk differential between 85/15 and 70/30?

Posted: Sun Apr 29, 2018 3:49 pm
FOGU wrote:
Sun Apr 29, 2018 2:40 pm
I mean, if the bottom falls out of the market you are going to get clobbered whether you are 70% stocks or 85%. So maybe the upside potential for gain is worth it, maybe it's not.
Uncertainty is part of investing. You cannot eliminate uncertainty through a tweak to stock allocation. The source of the reward is risk. It's risk of loss and risk of gain. If you adopt a more conservative allocation for a long time period then for most start point end point pairs you are going to have less money. This will either comfort you with taking risk, or it won't. That depends to some extent on your temperament.

### Re: How do you quantify the risk differential between 85/15 and 70/30?

Posted: Sun Apr 29, 2018 4:22 pm
delamer wrote:
Sun Apr 29, 2018 3:47 pm
FOGU wrote:
Sun Apr 29, 2018 3:10 pm
delamer wrote:
Sun Apr 29, 2018 3:06 pm
FOGU wrote:
Sun Apr 29, 2018 2:58 pm
delamer wrote:
Sun Apr 29, 2018 2:50 pm
Are you talking about the accumulation stage or the withdrawal stage?

An additional \$75K loss might be viewed differently depending on which stage you are in, even though quantitatively the difference is the same.

This might be of interest: https://personal.vanguard.com/us/insigh ... llocations
Thanks. I responded to the other post. I am not talking about the withdrawal phase. I am talking about a time horizon of 10 years or so.
Di you mean that you expect to start making withdrawals in 10 years?
Yes.
So the question is how would you feel if in 9 months and 6 years, you lost \$75,000 more than you “could” have?

Would you be able to balance that against the bigger returns that you’d received in the interim by being more aggressive?

(Caveat that it probably isn’t realistic to think there won’t be a correction in the next 9.5 years. And maybe a recovery too. But nobody knows.)

And what do you plan for an asset allocation in 10 years?
I assume you meant 9 years and 6 months. So I take the question to be how would I feel if I got clobbered? Well, like anyone else I would probably not feel too good about that. But if the gains are there over the preceding years then yes I do believe I could accept the smaller loss even at that crucial point in time.

Approaching the withdrawal phase of life I plan to scale to something on the order of 70/30. So far I am not convinced there is a material benefit to going any more conservative than that. Maybe there will be a good moment to dial down the aggressiveness in a fell swoop, or maybe I'll do it with new accumulation little by little in the years preceding. It is an ongoing project.

### Re: How do you quantify the risk differential between 85/15 and 70/30?

Posted: Sun Apr 29, 2018 4:24 pm
whodidntante wrote:
Sun Apr 29, 2018 3:49 pm
FOGU wrote:
Sun Apr 29, 2018 2:40 pm
I mean, if the bottom falls out of the market you are going to get clobbered whether you are 70% stocks or 85%. So maybe the upside potential for gain is worth it, maybe it's not.
Uncertainty is part of investing. You cannot eliminate uncertainty through a tweak to stock allocation. The source of the reward is risk. It's risk of loss and risk of gain. If you adopt a more conservative allocation for a long time period then for most start point end point pairs you are going to have less money. This will either comfort you with taking risk, or it won't. That depends to some extent on your temperament.
True, true and true. What I am getting after here is quantification.

### Re: How do you quantify the risk differential between 85/15 and 70/30?

Posted: Sun Apr 29, 2018 4:38 pm
If you have enough money, then all you care about is downside risk. If you think you may not have enough money, then the expected value is more important. How you perceive the risk is not a major consideration here. In other words, if you are well on your way to achieving your target, then more bonds makes sense. If you are nervous about not accumulating enough, then more stocks.

### Re: How do you quantify the risk differential between 85/15 and 70/30?

Posted: Sun Apr 29, 2018 5:12 pm
bogglizer wrote:
Sun Apr 29, 2018 4:38 pm
If you have enough money, then all you care about is downside risk. If you think you may not have enough money, then the expected value is more important. How you perceive the risk is not a major consideration here. In other words, if you are well on your way to achieving your target, then more bonds makes sense. If you are nervous about not accumulating enough, then more stocks.
This is a good insight and I agree. With these asset allocations 85/15, 70/30, 60/40, etc., we can all understand intuitively that each carries a relative risk/reward ratio. Each investor will make a decision based on individual circumstances. I am trying to figure a way to put numbers to the concept, at least a manageable range of numbers, so as to make decisions that are more quantitatively informed in terms of potential for gain or loss.

### Re: How do you quantify the risk differential between 85/15 and 70/30?

Posted: Sun Apr 29, 2018 6:28 pm
FOGU wrote:
Sun Apr 29, 2018 4:24 pm
whodidntante wrote:
Sun Apr 29, 2018 3:49 pm
FOGU wrote:
Sun Apr 29, 2018 2:40 pm
I mean, if the bottom falls out of the market you are going to get clobbered whether you are 70% stocks or 85%. So maybe the upside potential for gain is worth it, maybe it's not.
Uncertainty is part of investing. You cannot eliminate uncertainty through a tweak to stock allocation. The source of the reward is risk. It's risk of loss and risk of gain. If you adopt a more conservative allocation for a long time period then for most start point end point pairs you are going to have less money. This will either comfort you with taking risk, or it won't. That depends to some extent on your temperament.
True, true and true. What I am getting after here is quantification.
There is little quantification for the future, all you have is statistical analysis using past returns. The best allocation in terms of past returns is 100% stocks. You are comparing 85% with 70%. Why not compare 85% with 100%? What's the difference between a 40% loss and a 50% loss?

It's really all about investor psychology. What's your comfort zone that let's you sleep at night? (Or how much can you risk, without landing in the poor house if things go bad or making drastic changes in AA when the market tanks?)
FOGU wrote:
Sun Apr 29, 2018 5:12 pm
This is a good insight and I agree. With these asset allocations 85/15, 70/30, 60/40, etc., we can all understand intuitively that each carries a relative risk/reward ratio. Each investor will make a decision based on individual circumstances. I am trying to figure a way to put numbers to the concept, at least a manageable range of numbers, so as to make decisions that are more quantitatively informed in terms of potential for gain or loss.
cFireSim gives you the quantitative answers for past returns. For any allocation, what's the best, worst, average, etc sequence that occurred in the past. More detail than the summary at Vanguard that delamer referenced.

### Re: How do you quantify the risk differential between 85/15 and 70/30?

Posted: Sun Apr 29, 2018 6:43 pm
I look at it that if it isn't going to change my lifestyle at this stage, what's the point?

### Re: How do you quantify the risk differential between 85/15 and 70/30?

Posted: Sun Apr 29, 2018 7:56 pm
tennisplyr wrote:
Sun Apr 29, 2018 6:43 pm
I look at it that if it isn't going to change my lifestyle at this stage, what's the point?
I don't understand. What's the point of what?

### Re: How do you quantify the risk differential between 85/15 and 70/30?

Posted: Sun Apr 29, 2018 8:03 pm
@rkhusky

I was comparing two asset allocations as an example to show how I view and how I quantify the potential risk and reward for different allocation. We could compare any allocations you want, including 100% stocks with 100% mattress. I understand there are other factors to consider, e.g., the investor psychology you mention. I am trying to focus on a quantitative effort with this particular question.

### Re: How do you quantify the risk differential between 85/15 and 70/30?

Posted: Sun Apr 29, 2018 8:07 pm
FOGU wrote:
Sun Apr 29, 2018 2:40 pm
As a quantitative matter, how much difference would it really make if I were 70/30 instead of 85/15?

This question refers to the accumulation stage, not the withdrawal stage.

Conceptually 85/15 carries more risk. But how do you calculate the extent of the risk and potential reward, quantitatively, so as to make a truly informed risk assessment?
I think you've stumbled into what "risk parity" advocates are talking about. They come up with charts like this:

The risk of equities (at least as measured by volatility) so overwhelms everything else that small changes in asset allocation -- and 15% counts as small -- don't make a big difference. Even if you have a (supposedly quite safe) 50/50 allocation you can still lose a whopping 40% of your portfolio due to an equity plunge.

Measuring risk is hard. Hardly anyone even agrees what "risk" is. I don't think anyone is actually making a "truly informed risk assessment". We all make best efforts and adjust as we learn more about ourselves and our investments.

### Re: How do you quantify the risk differential between 85/15 and 70/30?

Posted: Sun Apr 29, 2018 8:14 pm
bogglizer wrote:
Sun Apr 29, 2018 4:38 pm
If you are nervous about not accumulating enough, then more stocks.
If you are nervous about not accumulating enough, then more stocks and increase your contributions/saving rate. More stocks only is not the answer for someone who might "not be able to make it"

### Re: How do you quantify the risk differential between 85/15 and 70/30?

Posted: Sun Apr 29, 2018 8:18 pm
FOGU wrote:
Sun Apr 29, 2018 2:40 pm

Psychological effect is what you may be omitting. Losing \$75K in theory is one thing, but in reality is another. I wasn't investing during 2008 (I wasnt in USA at all actually), but I read a lot of posts here and watched a lot of "old news" on youtube to get the sense of "how it really feels to be an investor during the bear market". I then chose 85%-15% AA!!

### Re: How do you quantify the risk differential between 85/15 and 70/30?

Posted: Sun Apr 29, 2018 8:25 pm
Consider these when determining your allocation:
Particularly recency bias and the strong bull run we've had.

### Re: How do you quantify the risk differential between 85/15 and 70/30?

Posted: Sun Apr 29, 2018 8:34 pm
bogglizer wrote:
Sun Apr 29, 2018 4:38 pm
If you have enough money, then all you care about is downside risk. If you think you may not have enough money, then the expected value is more important. How you perceive the risk is not a major consideration here. In other words, if you are well on your way to achieving your target, then more bonds makes sense. If you are nervous about not accumulating enough, then more stocks.
So I'm pretty sure I won't have a problem because I have a pension and significant inheritance coming but I'm still very low on the net worth scale. So, I should be more conservative in my own portfolio? I thought it would be the other way around because I have "back-up"

### Re: How do you quantify the risk differential between 85/15 and 70/30?

Posted: Sun Apr 29, 2018 8:43 pm
FOGU wrote:
Sun Apr 29, 2018 2:40 pm
As a quantitative matter, how much difference would it really make if I were 70/30 instead of 85/15?

This question refers to the accumulation stage, not the withdrawal stage.

Conceptually 85/15 carries more risk. But how do you calculate the extent of the risk and potential reward, quantitatively, so as to make a truly informed risk assessment?

I mean, if the bottom falls out of the market you are going to get clobbered whether you are 70% stocks or 85%. So maybe the upside potential for gain is worth it, maybe it's not.

Here is a simple example of how I put numbers to the concepts:

Let's say on a portfolio of \$1 million, you are 85/15. If the market drops 50% overnight, you are looking at a diminution in value of stock holdings from \$850k down to \$425k. With a 70/30 mix your stock holdings drop in value from \$700k to \$350k. A difference of \$75k between the two down side results.

On the up side, let's say that over 10 years the 85/15 portfolio earns 6% (growth of \$790,847) while the 70/30 earns 5% (growth of 628,894). That is a difference of \$161,953, about 220% of the down side risk.

It's been mentioned, but sequence of returns is important here.

If you're 60 and planning on retiring at 62...

60 to 61 you get 6%...

61 to 62 you get 6%...

you turn 62 and kablooey, you just lost 50%.

So instead of withdrawing 40k off of your 1M bucks... you'll probably do:

- go all bonds!
- pull 20k only and eat alpo!

- combination of the above...

Just because our last rebound from 08/09 was fairly quick does not mean that's how it'll happen again.

### Re: How do you quantify the risk differential between 85/15 and 70/30?

Posted: Sun Apr 29, 2018 8:55 pm
FOGU wrote:
Sun Apr 29, 2018 4:24 pm
whodidntante wrote:
Sun Apr 29, 2018 3:49 pm
FOGU wrote:
Sun Apr 29, 2018 2:40 pm
I mean, if the bottom falls out of the market you are going to get clobbered whether you are 70% stocks or 85%. So maybe the upside potential for gain is worth it, maybe it's not.
Uncertainty is part of investing. You cannot eliminate uncertainty through a tweak to stock allocation. The source of the reward is risk. It's risk of loss and risk of gain. If you adopt a more conservative allocation for a long time period then for most start point end point pairs you are going to have less money. This will either comfort you with taking risk, or it won't. That depends to some extent on your temperament.
True, true and true. What I am getting after here is quantification.
You can quantify in the way that makes sense for what you want to understand. If you want to model the risk, you can use standard deviation or failure risk in a monte carlo simulation. If you want to quantify risk of going from champagne riches to Alpo nightmares, you can use worst realistic drawdown or around 50% for the stock portion and 10% for the bond portion.

### Re: How do you quantify the risk differential between 85/15 and 70/30?

Posted: Sun Apr 29, 2018 9:04 pm
mikeyzito22 wrote:
Sun Apr 29, 2018 8:34 pm
bogglizer wrote:
Sun Apr 29, 2018 4:38 pm
If you have enough money, then all you care about is downside risk. If you think you may not have enough money, then the expected value is more important. How you perceive the risk is not a major consideration here. In other words, if you are well on your way to achieving your target, then more bonds makes sense. If you are nervous about not accumulating enough, then more stocks.
So I'm pretty sure I won't have a problem because I have a pension and significant inheritance coming but I'm still very low on the net worth scale. So, I should be more conservative in my own portfolio? I thought it would be the other way around because I have "back-up"
If you are covered for retirement already, then the risk is irrelevant, and you are just playing. In order to make a definite statement about two portfolios, you need criteria on which to base the decision. For myself, I prefer the probability that I don't end up eating cat food from a shopping card someday. Once everything is framed in terms of P[cat food], the mathematical framework becomes more obvious. If all you are doing is maximizing wealth, then buy all stocks.

### Re: How do you quantify the risk differential between 85/15 and 70/30?

Posted: Sun Apr 29, 2018 9:10 pm
whodidntante wrote:
Sun Apr 29, 2018 8:55 pm
you can use worst realistic drawdown or around 50% for the stock portion and 10% for the bond portion.
The US stock market has drawn down way more than 50% in the past, so that clearly isn't a "worst realistic drawdown". And bonds have had a drawdown of over 40% (1916-1920).

If you want a "worst realistic drawdown" then I'd assume stocks go down 75% at the same time as bonds go down 40%. Anything else is "but I think things are different/better/safer now", which, okay, sure. But given a scenario where stocks drop 75% and bonds drop 40%, I'm not really sure what any of us can do with that scenario. Aren't we all in trouble no matter our asset allocation? So what's the point of the exercise?

### Re: How do you quantify the risk differential between 85/15 and 70/30?

Posted: Sun Apr 29, 2018 9:12 pm
bogglizer wrote:
Sun Apr 29, 2018 9:04 pm
mikeyzito22 wrote:
Sun Apr 29, 2018 8:34 pm
bogglizer wrote:
Sun Apr 29, 2018 4:38 pm
If you have enough money, then all you care about is downside risk. If you think you may not have enough money, then the expected value is more important. How you perceive the risk is not a major consideration here. In other words, if you are well on your way to achieving your target, then more bonds makes sense. If you are nervous about not accumulating enough, then more stocks.
So I'm pretty sure I won't have a problem because I have a pension and significant inheritance coming but I'm still very low on the net worth scale. So, I should be more conservative in my own portfolio? I thought it would be the other way around because I have "back-up"
If you are covered for retirement already, then the risk is irrelevant, and you are just playing. In order to make a definite statement about two portfolios, you need criteria on which to base the decision. For myself, I prefer the probability that I don't end up eating cat food from a shopping card someday. Once everything is framed in terms of P[cat food], the mathematical framework becomes more obvious. If all you are doing is maximizing wealth, then buy all stocks.
Thank you for the insight. However, I'm not quite 40 and the idea of having some cash/2 percent yield stuff around may make the next 20 years more enjoyable. But you are then saying, if the retirement is in the bag, to max out stock. I get it, its just some others have said the exact opposite. Again, thank you for talking to me in earnest. So far on this forum I have not had people take me seriously yet. Just trying to learn thanks!

### Re: How do you quantify the risk differential between 85/15 and 70/30?

Posted: Mon Apr 30, 2018 8:05 am
mikeyzito22 wrote:
Sun Apr 29, 2018 8:34 pm
bogglizer wrote:
Sun Apr 29, 2018 4:38 pm
If you have enough money, then all you care about is downside risk. If you think you may not have enough money, then the expected value is more important. How you perceive the risk is not a major consideration here. In other words, if you are well on your way to achieving your target, then more bonds makes sense. If you are nervous about not accumulating enough, then more stocks.
So I'm pretty sure I won't have a problem because I have a pension and significant inheritance coming but I'm still very low on the net worth scale. So, I should be more conservative in my own portfolio? I thought it would be the other way around because I have "back-up"
The only way to get an estimate is to model the outcome of your expected income streams plus what you can withdraw from your future assets and compare that to what you want to spend. Depending on the comparison you know if you need to invest aggressively to try to get there or perhaps you don't need an aggressive portfolio. The outcome is complex because more aggressive portfolios offer more expected return but also more uncertainty. More conservative portfolios are more stable but a price is paid in low returns. The trade off of the two may not be as simple as a naive idea of "risk." You should look at some of the planning models such as CFireSim, the Fidelity Planner, iORP, Retirement Optimizer, FireCalc, etc. The point is to get an idea how this looks though not necessarily to get a finely tuned engineering answer.

### Re: How do you quantify the risk differential between 85/15 and 70/30?

Posted: Mon Apr 30, 2018 8:28 am
mikeyzito22 wrote:
Sun Apr 29, 2018 9:12 pm
bogglizer wrote:
Sun Apr 29, 2018 9:04 pm
mikeyzito22 wrote:
Sun Apr 29, 2018 8:34 pm
bogglizer wrote:
Sun Apr 29, 2018 4:38 pm
If you have enough money, then all you care about is downside risk. If you think you may not have enough money, then the expected value is more important. How you perceive the risk is not a major consideration here. In other words, if you are well on your way to achieving your target, then more bonds makes sense. If you are nervous about not accumulating enough, then more stocks.
So I'm pretty sure I won't have a problem because I have a pension and significant inheritance coming but I'm still very low on the net worth scale. So, I should be more conservative in my own portfolio? I thought it would be the other way around because I have "back-up"
If you are covered for retirement already, then the risk is irrelevant, and you are just playing. In order to make a definite statement about two portfolios, you need criteria on which to base the decision. For myself, I prefer the probability that I don't end up eating cat food from a shopping card someday. Once everything is framed in terms of P[cat food], the mathematical framework becomes more obvious. If all you are doing is maximizing wealth, then buy all stocks.
Thank you for the insight. However, I'm not quite 40 and the idea of having some cash/2 percent yield stuff around may make the next 20 years more enjoyable. But you are then saying, if the retirement is in the bag, to max out stock. I get it, its just some others have said the exact opposite. Again, thank you for talking to me in earnest. So far on this forum I have not had people take me seriously yet. Just trying to learn thanks!
I have also noticed that some people here recommend the opposite. I have no idea what their logic is.

### Re: How do you quantify the risk differential between 85/15 and 70/30?

Posted: Mon Apr 30, 2018 8:50 am
bogglizer wrote:
Mon Apr 30, 2018 8:28 am
mikeyzito22 wrote:
Sun Apr 29, 2018 9:12 pm

Thank you for the insight. However, I'm not quite 40 and the idea of having some cash/2 percent yield stuff around may make the next 20 years more enjoyable. But you are then saying, if the retirement is in the bag, to max out stock. I get it, its just some others have said the exact opposite. Again, thank you for talking to me in earnest. So far on this forum I have not had people take me seriously yet. Just trying to learn thanks!
I have also noticed that some people here recommend the opposite. I have no idea what their logic is.
I'm not sure which is the opposite of what, but the only sure recommendation I am reading here is to allocate your assets and take risk according to what you want to accomplish. Asset allocation is a matter of applying personal preference and judgement to the situation. The main effect of "having retirement in the bag" is that the options are more wide open than they are for people who are painted into a corner of not having the resources to meet their desires. In the world of need/ability/willingness it is the difference between having no need and no ability and having ability but no need. People that have both need and ability or neither have a fairly clear course what to do. Those who have need and no ability need a Plan B.

### Re: How do you quantify the risk differential between 85/15 and 70/30?

Posted: Mon Apr 30, 2018 8:58 am
OP,

1) What is your annual expense?

2) What is your portfolio size in term of annual expense?

3) What is your portfolio size in term of annual expense after the stock suffer a 50% loss?

4) Over the next 10 years, there will be at least one or more recessions. You and your spouse may be unemployed for quite some time while the stock market drops 50%. If the unemployment period lasts longer than your emergency fund, you will need to sell your portfolio in order to feed that family.

At that point in time, what will be the number of years that you can survive if your AA is

A) 85/15?

B) 70/30?

And, how much permanent loss will you suffer? Please note that it is no longer a paper loss.

Over a long run, the stock has a higher expected return than the bond. 10 years is not a long time. There are times when the bond return is higher.

The risk-adjusted return of 85/15 is horrible. A proper AA is between 70/30 and 30/70. Anything else is a lousy bet.

KlangFool

### Re: How do you quantify the risk differential between 85/15 and 70/30?

Posted: Mon Apr 30, 2018 9:13 am
FOGU wrote:
Sun Apr 29, 2018 2:40 pm
As a quantitative matter, how much difference would it really make if I were 70/30 instead of 85/15?

This question refers to the accumulation stage, not the withdrawal stage.

Conceptually 85/15 carries more risk. But how do you calculate the extent of the risk and potential reward, quantitatively, so as to make a truly informed risk assessment?

I mean, if the bottom falls out of the market you are going to get clobbered whether you are 70% stocks or 85%. So maybe the upside potential for gain is worth it, maybe it's not.

Here is a simple example of how I put numbers to the concepts:

Let's say on a portfolio of \$1 million, you are 85/15. If the market drops 50% overnight, you are looking at a diminution in value of stock holdings from \$850k down to \$425k. With a 70/30 mix your stock holdings drop in value from \$700k to \$350k. A difference of \$75k between the two down side results.

On the up side, let's say that over 10 years the 85/15 portfolio earns 6% (growth of \$790,847) while the 70/30 earns 5% (growth of 628,894). That is a difference of \$161,953, about 220% of the down side risk.

In your two examples, the 1MM portfolio at 85% stock would drop to 575,000. The portfolio with 70% stock would drop to 650,000. This assumes a 50% market drop and no drop in bonds.

Here's some data from Vanguard on losses/gains vs asset allocation. Of course we cannot forget that this is based on what did happen. If something new and worse occurs, those historical numbers would all change. Of course, that is the element that carries the risk--we cannot nail down what might happen.

https://personal.vanguard.com/us/insigh ... llocations

Paul

### Re: How do you quantify the risk differential between 85/15 and 70/30?

Posted: Mon Apr 30, 2018 9:23 am
I don't think it makes sense to tabulate how large a loss might occur to a portfolio except to give the investor some perspective on whether or not he would be likely to respond to that in a stupid way by selling out in a panic. Otherwise everything is a result of the long term trajectory of the portfolio which is not determined by any single large decline in value, even the "sequence of return" risk crowd notwithstanding. Of course someone who might anticipate liquidating everything at a certain time or in the short run would not be heavily into stocks. But that is obvious.

More than that, the possibility of large negative excursions goes hand in hand with high volatility, hand in hand with greater expected return. So in that department there is no new news. What the right trade-off of risk and return is depends on what one is trying to do. In some cases, such as safe withdrawal rate, the two nearly offset over a wide range.

### Re: How do you quantify the risk differential between 85/15 and 70/30?

Posted: Mon Apr 30, 2018 10:24 am
dbr wrote:
Mon Apr 30, 2018 9:23 am
I don't think it makes sense to tabulate how large a loss might occur to a portfolio except to give the investor some perspective on whether or not he would be likely to respond to that in a stupid way by selling out in a panic. Otherwise everything is a result of the long term trajectory of the portfolio which is not determined by any single large decline in value, even the "sequence of return" risk crowd notwithstanding. Of course someone who might anticipate liquidating everything at a certain time or in the short run would not be heavily into stocks. But that is obvious.

More than that, the possibility of large negative excursions goes hand in hand with high volatility, hand in hand with greater expected return. So in that department there is no new news. What the right trade-off of risk and return is depends on what one is trying to do. In some cases, such as safe withdrawal rate, the two nearly offset over a wide range.
dbr,

I disagreed.

Unless someone has perfect job security that will survive every recession and economic crisis, it is always possible that someone could be unemployed in a recession. And, that person's unemployment period could last longer than the emergency fund.

<<he would be likely to respond to that in a stupid way by selling out in a panic.>>

It is not stupid to sell your investment to feed your family. Someone has to do that when they run out of the emergency fund.

<<More than that, the possibility of large negative excursions goes hand in hand with high volatility, hand in hand with greater expected return.>>

As per the historical record, the recession occurs regularly. The last recession was 2007/2009. It is rational and logical to assume that there will be at least one recession over the next 10 years.

KlangFool

### Re: How do you quantify the risk differential between 85/15 and 70/30?

Posted: Mon Apr 30, 2018 8:01 pm
AlohaJoe wrote:
Sun Apr 29, 2018 9:10 pm
whodidntante wrote:
Sun Apr 29, 2018 8:55 pm
you can use worst realistic drawdown or around 50% for the stock portion and 10% for the bond portion.
The US stock market has drawn down way more than 50% in the past, so that clearly isn't a "worst realistic drawdown". And bonds have had a drawdown of over 40% (1916-1920).

If you want a "worst realistic drawdown" then I'd assume stocks go down 75% at the same time as bonds go down 40%. Anything else is "but I think things are different/better/safer now", which, okay, sure. But given a scenario where stocks drop 75% and bonds drop 40%, I'm not really sure what any of us can do with that scenario. Aren't we all in trouble no matter our asset allocation? So what's the point of the exercise?
Yes, but that's why I'm using the word "realistic." Draw the line at a 75% drawdown or more if you wish. We won't see the next black swan coming and we don't know how big it will be.

### Re: How do you quantify the risk differential between 85/15 and 70/30?

Posted: Mon Apr 30, 2018 8:04 pm
bogglizer wrote:
Mon Apr 30, 2018 8:28 am
mikeyzito22 wrote:
Sun Apr 29, 2018 9:12 pm

I have also noticed that some people here recommend the opposite. I have no idea what their logic is.
I'm not sure which is the opposite of what, but the only sure recommendation I am reading here is to allocate your assets and take risk according to what you want to accomplish. Asset allocation is a matter of applying personal preference and judgment to the situation. The main effect of "having retirement in the bag" is that the options are more wide open than they are for people who are painted into a corner of not having the resources to meet their desires. In the world of need/ability/willingness it is the difference between having no need and no ability and having ability but no need. People that have both need and ability or neither have a fairly clear course what to do. Those who have need and no ability need a Plan B.
I think what people miss is that the hard part is not what to do, but is the earlier step of knowing what they need/want to accomplish. I work every day with scientists who are brilliant at what they do, but are almost uniformly unable to differentiate between what they need and what they want. At the time of retirement, there are really two target numbers. The first is the minimum amount required to survive without discomfort. The second the amount of money at which more doesn't make one significantly happier. For some of us, those two numbers are almost the same. Other people want more luxury in retirement if they can achieve it. Just telling people that they need to know what they want to accomplish isn't really enough.

### Re: How do you quantify the risk differential between 85/15 and 70/30?

Posted: Thu May 03, 2018 12:49 pm
dbr wrote:
Mon Apr 30, 2018 8:50 am
bogglizer wrote:
Mon Apr 30, 2018 8:28 am
mikeyzito22 wrote:
Sun Apr 29, 2018 9:12 pm

Thank you for the insight. However, I'm not quite 40 and the idea of having some cash/2 percent yield stuff around may make the next 20 years more enjoyable. But you are then saying, if the retirement is in the bag, to max out stock. I get it, its just some others have said the exact opposite. Again, thank you for talking to me in earnest. So far on this forum I have not had people take me seriously yet. Just trying to learn thanks!
I have also noticed that some people here recommend the opposite. I have no idea what their logic is.
I'm not sure which is the opposite of what, but the only sure recommendation I am reading here is to allocate your assets and take risk according to what you want to accomplish. Asset allocation is a matter of applying personal preference and judgement to the situation. The main effect of "having retirement in the bag" is that the options are more wide open than they are for people who are painted into a corner of not having the resources to meet their desires. In the world of need/ability/willingness it is the difference between having no need and no ability and having ability but no need. People that have both need and ability or neither have a fairly clear course what to do. Those who have need and no ability need a Plan B.
Well said.

### Re: How do you quantify the risk differential between 85/15 and 70/30?

Posted: Thu May 10, 2018 7:45 am
People that have both need and ability or neither have a fairly clear course what to do.

Sorry for having a thick skull, but what would be the fairly clear course?

### Re: How do you quantify the risk differential between 85/15 and 70/30?

Posted: Thu May 10, 2018 8:25 am
Don’t forget the behavioral aspect, which is difficult to quantify but can outweigh the rational aspects.

For example, I see a lot of members posting semi-gleefully about their optimum 100/0 AA. That’s fine and all, assuming they will be able to stick it out when they see 50% of their portfolio evaporate (which could be hundreds of thousands of dollars at that point) and 99% of the news media claims, correctly or incorrectly, that it could take years to recover (if ever). If a 70/30 AA lets you stay the course and make zero behavioral mistakes compared to a single mistake or excessive worrying with 85/15 portfolio, I think that can easily outweigh anything else.

### Re: How do you quantify the risk differential between 85/15 and 70/30?

Posted: Thu May 10, 2018 8:30 am
FOGU wrote:
Sun Apr 29, 2018 2:40 pm
As a quantitative matter, how much difference would it really make if I were 70/30 instead of 85/15?

This question refers to the accumulation stage, not the withdrawal stage.

Conceptually 85/15 carries more risk. But how do you calculate the extent of the risk and potential reward, quantitatively, so as to make a truly informed risk assessment?

I mean, if the bottom falls out of the market you are going to get clobbered whether you are 70% stocks or 85%. So maybe the upside potential for gain is worth it, maybe it's not.

Here is a simple example of how I put numbers to the concepts:

Let's say on a portfolio of \$1 million, you are 85/15. If the market drops 50% overnight, you are looking at a diminution in value of stock holdings from \$850k down to \$425k. With a 70/30 mix your stock holdings drop in value from \$700k to \$350k. A difference of \$75k between the two down side results.

On the up side, let's say that over 10 years the 85/15 portfolio earns 6% (growth of \$790,847) while the 70/30 earns 5% (growth of 628,894). That is a difference of \$161,953, about 220% of the down side risk.

This is the best chart I have found. It's from vanguard so I assume it's good as gospel around here.

https://personal.vanguard.com/us/insigh ... llocations

80/20

Average annual return 9.5%
Best year (1933) 45.4%
Worst year (1931) –34.9%
Years with a loss 23 of 91

60/40

Average annual return 8.7%
Best year (1933) 36.7%
Worst year (1931) –26.6%
Years with a loss 21 of 91

You are losing 9% of your growth and you are 8.5% more likely to lose money in a given year.

### Re: How do you quantify the risk differential between 85/15 and 70/30?

Posted: Thu May 10, 2018 8:34 am
FOGU wrote:
Thu May 10, 2018 7:45 am
People that have both need and ability or neither have a fairly clear course what to do.

Sorry for having a thick skull, but what would be the fairly clear course?
If a person both needs to take risk and has the ability to take risk, then they invest in a high risk portfolio to earn the return needed and if they fall short they have the ability to cope with that by adjusting objectives or pursuing available sources of more income and saving. A person who has neither need nor ability to take risk doesn't take risk. A person who has no need to take risk but high ability has choices. They can decide to do more with the rewards of taking risk or they can follow the advice to take no more risk than needed, keeping in mind that the marginal utility of wealth declines with wealth and that risk is often underestimated. A person who has need to take risk but no ability is behind the eight ball and is going to have to go outside the investment box for solutions.

### Re: How do you quantify the risk differential between 85/15 and 70/30?

Posted: Thu May 10, 2018 9:03 am
I think it's worth keeping in mind that the worst case might possibly be worse than anything we've seen before in the US. Not likely, mind you, but possible.

A 50% loss in stocks is often used for planning purposes, but don't confuse that for worst case. In the great depression, the market dropped nearly 90% peak to trough over 3 years...

http://thegreatdepressioncauses.com/fac ... ck-market/

### Re: How do you quantify the risk differential between 85/15 and 70/30?

Posted: Thu May 10, 2018 9:06 am
viewtopic.php?t=187870

Read the first post in this thread quoting Taylor Larimore on the Great Depression

### Re: How do you quantify the risk differential between 85/15 and 70/30?

Posted: Thu May 10, 2018 10:48 am
I wouldn't assume that stocks will beat bonds or the next 10 years or even 20.

Didn't we just recently finish a 30year period where bonds beat stocks ?

### Re: How do you quantify the risk differential between 85/15 and 70/30?

Posted: Thu May 10, 2018 11:03 am
dziuniek wrote:
Thu May 10, 2018 10:48 am
I wouldn't assume that stocks will beat bonds or the next 10 years or even 20.

Didn't we just recently finish a 30year period where bonds beat stocks ?
No we most certainly didn't.

Stocks returned an annual return of 9.678% over the last 30 years. Please show me where bonds have averaged +9% over the last 30.

If you try to pick numbers to make the stock market look bad and choose 30 years ending in the 2007 recession you actually get greater than 10% annual growth. You are going to have to do some serious mathematical gymnastics to get bonds to beat stocks over 10+ years.

### Re: How do you quantify the risk differential between 85/15 and 70/30?

Posted: Thu May 10, 2018 11:52 am
I'd suggest that this allocation question is better analyzed as a question of psychology than finance.

The question of what happens if the market goes down 50% is a key consideration. If you had been at 85/15, will you rebalance? Or will you freeze? Or will you sell?

For most people, being at 70/30 will be more conducive to productive behavior or at least less damaging behavior in sharp downturns than being at 85/15.

My opinion, best wishes.

### Re: How do you quantify the risk differential between 85/15 and 70/30?

Posted: Thu May 10, 2018 12:16 pm
FOGU wrote:
Sun Apr 29, 2018 2:40 pm
As a quantitative matter, how much difference would it really make if I were 70/30 instead of 85/15?
OP, if you're minimally conversant with spreadsheets, I would suggest that you play around with the Simba backtesting spreadsheet. This will allow you to model various Asset Allocations and see how they performed in the past. Multiple metrics are automatically calculated, capturing some facets of risk. This isn't to say that the future will not be different (it will!), but well, at least this should give you some factual and quantifiable basis to reflect upon.

As various posters alluded to, defining 'risk' is actually tricky and is a personal assessment for sure. Personally, I try to advise people to think about their top-3 high-level financial goals, and their top-3 financial fears. Which isn't an easy exercise, actually. Then and only then can you try to match various metrics to your own perception of risk & reward. Just don't forget that the lack of reward is a very significant risk in itself - something many people seem to forget.

### Re: How do you quantify the risk differential between 85/15 and 70/30?

Posted: Thu May 10, 2018 12:27 pm
CnC wrote:
Thu May 10, 2018 11:03 am
dziuniek wrote:
Thu May 10, 2018 10:48 am
I wouldn't assume that stocks will beat bonds or the next 10 years or even 20.

Didn't we just recently finish a 30year period where bonds beat stocks ?
No we most certainly didn't.
viewtopic.php?t=88293#p1268227