Asset Allocation Mechanics

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Scassi
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Joined: Wed May 16, 2018 2:43 pm

Asset Allocation Mechanics

Post by Scassi » Wed May 16, 2018 3:47 pm

First thanks for a great resource!

I have read the starter threads re info to be provided usually: But my question to the board is more basic/general. If more specific info is needed I will add.

We are out of balance asset allocation wise.

Some facts:

H=58yo; W=53yo. W will have state pension and medical benefits from 55. Both will have SS. No debt.

Global inv/cash equivalent assets = $1.6M.

$800K in Vanguard taxable - b/t Index 500/Index Ext Mkt/Index SCap/Intermediate Bond; But at roughly 80/20 stock to bond
$800K in IRA or 403B accounts - a lot of different stuff we can get into if nec; But again at roughly 80/20 stock to bond. Not Roth.

The question is how would the collective attack re-balancing in a general sense given tax ramifications, etc.? Best to do it under the non-taxable? A blend? How/% between both? Thoughts?

Happy to add info if needed (if I can) and thank you in advance!


PS - First learned of low cost investing from a book and found Vanguard, luckily, in college started soon after secondary school - hence the 4 V funds as that is what was offered then.... I 'stayed the course' but did not really know if what I was doing was objectively "right" except it seemed to be working. Yet in trying to explain the logic for same to the spousal unit detail was wanting, so to speak.... My workout regimen is indoor rowing. To avoid boredom I often listen to online lectures: Art, history, literature, etc, etc., and sometimes economics. Listening one day many years later I came upon this: https://www.youtube.com/watch?v=wRdx7kVNQ_E . A lecture by David Swensen, Yale U's Endowment head. Worth a listen. Almost all of his conclusions support low cost indexing which I was happy to hear ... :happy

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Tyler Aspect
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Re: Asset Allocation Mechanics

Post by Tyler Aspect » Wed May 16, 2018 7:01 pm

The most important preparation step in investing is to thinking about how you will determine your asset allocation in terms of the percentages of stocks versus bonds. When we are young we can hold more stocks for a higher return. As we grow old then we should hold more bonds to have more stability.

I have presented below a typical asset allocation glide path chart, offering a range of possible allocations between aggressive, normal, and conservative.

Image
  • 80% stock / 20% bond, total return 2004 to 2014: 2.22X, worst drawdown: -43.4%
  • 60% stock / 40% bond, total return 2004 to 2014: 2.11X, worst drawdown: -33.1%
  • 40% stock / 60% bond, total return 2004 to 2014: 1.97X, worst drawdown: -21.5%
Image
Past result does not predict future performance. Mentioned investments may lose money. Contents are presented "AS IS" and any implied suitability for a particular purpose are disclaimed.

Scassi
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Re: Asset Allocation Mechanics

Post by Scassi » Wed May 16, 2018 7:13 pm

Yeah Tyler agreed.... But here we are.

My question really is how to fix it from here with the least amount of pain (ie, tax/loss)...

We will take steps but I was hoping the board could shed a light going forward.

Thanks in advance for any thoughts!

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patrick013
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Re: Asset Allocation Mechanics

Post by patrick013 » Thu May 17, 2018 11:48 am

Tax Loss Harvest when the next downturn occurs. Reallocate
into your best AA afterwards. In the IRA reallocate anytime.

Tax-efficient Fund Placement
age in bonds, buy-and-hold, 10 year business cycle

Doctor Rhythm
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Re: Asset Allocation Mechanics

Post by Doctor Rhythm » Thu May 17, 2018 4:15 pm

You're asking a great question, but I'm not sure if it can be answered properly without knowing a lot of other details like how much you'll pay in capital gains taxes (including current and future tax brackets), how much more you can contribute in the future, when you will start taking out withdrawals from each account, etc.

Based on your age, I assume you're trying to reduce your 80% stock exposure. My general thoughts (in order) are:

1. First, stop putting any more money your stock funds (either through contributions or through automatic reinvestment of capital gains and dividends).
2. Put future contributions, dividend, and capital gains into your bond funds.
3. You could reasonably reallocate (tax-free) within your IRA to make it more bond-heavy to offset the stock-heavy non-retirement account. The big question is how far to go in that direction. If your target is 60/40 overall, would you be willing to make your IRA 40/60 to balance out the 80/20 in your non-retirement account? I think that depends a lot on some of the questions I posed above. For instance, if you don't plan to touch your IRA until you hit 70.5 years, having such a conservative asset allocation there may not be desirable.
4. Any remaining imbalance can be dealt with by (taxable) exchanges in your non-retirement accounts.

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siamond
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Re: Asset Allocation Mechanics

Post by siamond » Thu May 17, 2018 4:42 pm

Scassi wrote:
Wed May 16, 2018 3:47 pm
We are out of balance asset allocation wise.
[...]
Some facts: [...] roughly 80/20 stock to bond
If I understand well, you are currently at 80/20, this wasn't really planned, and you'd like to rebalance to... something else. Trouble is you didn't define what is this 'something else', so it is hard to start answering your question.

Note that there is nothing wrong in being 80/20 in your mid-50s. Heck, this is exactly where I am, and this is BY DESIGN. And I have zero intention of using a glide path or whatever, this is a fixed allocation. This is my personal choice though, based on my personal circumstances. I am not saying this is the right choice for you, I am just trying to say that there are myriads of possible targets for you, and you may want to be more specific to elicit proper answers? (just trying to help here)

If you really do not know what is your target, then it's an entirely different question (that's fine too, just please clarify).

soccerrules
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Re: Asset Allocation Mechanics

Post by soccerrules » Thu May 17, 2018 4:54 pm

You could move all of your funds in your tax deferred accounts to bonds and be at an AA of 40% Stocks and 60% Bonds for whole portfolio.
Taxable 80/20 % - $640k/$160K
Tax Def 0/100 % - $0 / $800K

If you wanted something in between 80/20 and 40/60 , sell less Stocks in Tax Deferred to hit new desired AA.

As recommended redirect dividends to other funds aligned with new AA or easier send to MM/Cash in the account and then rebalance 1-2 times a year, or if your AA gets out of range too much. I use 3-5% off kilter to rebalance. New monies should be directed according to your desired AA as well.
Don't let your outflow exceed your income or your upkeep will be your downfall.

btenny
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Re: Asset Allocation Mechanics

Post by btenny » Thu May 17, 2018 5:07 pm

Sell all or most of your stocks in tax deferred and buy bonds. This will not cause any tax events. Review AA if you only do this single step and do nothing to taxable account. I am pretty sure this will reduce you AA to a more modest number and solve the problem. I recommend you go to 60/40 AA or so.

Good Luck.

Scassi
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Re: Asset Allocation Mechanics

Post by Scassi » Fri May 18, 2018 12:42 pm

Thank you all for taking the time to read and reply! See following for more specific thoughts/questions...

I kind of like having equal parts post tax accts and pre tax accts as i think it can only add flexibility re the future advantages/disadvantages of each type of acct on disbursement, but freely admit this is more based upon supposition than knowledge. If that 'assumption' is patently incorrect please "learn me".. Also, partick013 thank you very much for the link

That said, tho, the above consideration is not a controlling determiner. I think AA outweighs same. Re same, I would like to get to the 60 Stk/40 Bond range in a few years. Then 'take stock', so to speak, and re-adjust from there :wink: . But, again, I freely admit this is more based upon supposition/knowledge gleaned from online resources (such as here) than on true knowledge (something that I could objectively validate to another).

Your collective posts have been quite helpful and given me some things to think upon.

PS- I wish the Board had a multiple quote per post feature (or if it does I haven't figured it out... :happy )...

Scassi
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Re: Asset Allocation Mechanics

Post by Scassi » Fri May 18, 2018 12:50 pm

Thanks DR.

I have done recommendations 1 & 2 in the taxable accts: Reminds me to look into doing the same in the pre tax accts.

I have to think on rec 3 a bit and your qualifications are noted and sensible.

Re the fist paragraph I agree. There is a little paralysis by analysis going on as there are a great many unknowns in the 'details'. I need to think on this and when I can articulate it better re-post as a separate query...
Doctor Rhythm wrote:
Thu May 17, 2018 4:15 pm
You're asking a great question, but I'm not sure if it can be answered properly without knowing a lot of other details like how much you'll pay in capital gains taxes (including current and future tax brackets), how much more you can contribute in the future, when you will start taking out withdrawals from each account, etc.

Based on your age, I assume you're trying to reduce your 80% stock exposure. My general thoughts (in order) are:

1. First, stop putting any more money your stock funds (either through contributions or through automatic reinvestment of capital gains and dividends).
2. Put future contributions, dividend, and capital gains into your bond funds.
3. You could reasonably reallocate (tax-free) within your IRA to make it more bond-heavy to offset the stock-heavy non-retirement account. The big question is how far to go in that direction. If your target is 60/40 overall, would you be willing to make your IRA 40/60 to balance out the 80/20 in your non-retirement account? I think that depends a lot on some of the questions I posed above. For instance, if you don't plan to touch your IRA until you hit 70.5 years, having such a conservative asset allocation there may not be desirable.
4. Any remaining imbalance can be dealt with by (taxable) exchanges in your non-retirement accounts.

Scassi
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Joined: Wed May 16, 2018 2:43 pm

Re: Asset Allocation Mechanics

Post by Scassi » Fri May 18, 2018 1:33 pm

siamond - Yes you've understood. I did not put the % in on purpose as I wanted the focus to be on the mechanics of taking what from where/putting what where, etc... Re target see the my initial reply post above.

Your second paragraph is interesting. As noted above, I freely admit any knowledge on AA is more based upon supposition/knowledge gleaned from online resources (such as here) than on true knowledge (something that I could objectively validate to another).

I'd be interested in expanded thoughts on AA.

I understand it to be a hedge on the risk/reward spectrum: A more equally risk weighted portfolio will approach the realized gains of a higher weighted risk portfolio without the increased risk of loss associated with a higher risk portfolio or the decreased performance of a low risk portfolio over time by history. Of course there is no free lunch, so the counter argument is that the more equally risk weighted portfolio will under perform the higher risk weighted portfolio in certain circumstances (from the tech bubble to present say?). And of course vice versa.

Speaking about me then it seems to me then that really what AA is about is psychological comfort. If that is correct (and I am not sure that it is) how do people decide on the correct AA? I would suspect things like present savings, future savings or income, other future expectations (inheritance, buy-out, sale-windfall, etc), time horizon to need, health, .. anything else? ..; are the usual factors. Is my thinking correct? For me, it would be helpful to try to circle the decision tree that goes into determining the %ages of stk to bonds as then I would have some true basis for the same...
siamond wrote:
Thu May 17, 2018 4:42 pm
If I understand well, you are currently at 80/20, this wasn't really planned, and you'd like to rebalance to... something else. Trouble is you didn't define what is this 'something else', so it is hard to start answering your question.

Note that there is nothing wrong in being 80/20 in your mid-50s. Heck, this is exactly where I am, and this is BY DESIGN. And I have zero intention of using a glide path or whatever, this is a fixed allocation. This is my personal choice though, based on my personal circumstances. I am not saying this is the right choice for you, I am just trying to say that there are myriads of possible targets for you, and you may want to be more specific to elicit proper answers? (just trying to help here)

If you really do not know what is your target, then it's an entirely different question (that's fine too, just please clarify).

dcabler
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Re: Asset Allocation Mechanics

Post by dcabler » Fri May 18, 2018 3:01 pm

Scassi wrote:
Fri May 18, 2018 1:33 pm

Speaking about me then it seems to me then that really what AA is about is psychological comfort. If that is correct (and I am not sure that it is) how do people decide on the correct AA? I would suspect things like present savings, future savings or income, other future expectations (inheritance, buy-out, sale-windfall, etc), time horizon to need, health, .. anything else? ..; are the usual factors. Is my thinking correct? For me, it would be helpful to try to circle the decision tree that goes into determining the %ages of stk to bonds as then I would have some true basis for the same...
Yes, it can be. Many people start with the question that goes something like this: Are you likely to freak out if your portfolio loses 20% in a year? What about 30% or more? That tends to push people in the direction of having less stock and more bonds. Or do you see that as just noise that always happens and you just keep on keeping on. Only you can answer that. If you were investing in the 2000-2003 or the 2008 timeframe, was was your AA and how did it feel?

As for me, I am not yet retired (somewhere between 2 and 5 years away) and I'm at 50/50. Why? I remember 2008 and don't want to relive that, especially if something like that happens just before or just after I retire. Of course there are no guarantees that my particular 50/50 allocation would perform the same way in the next correction, but I'm guessing on at least some degree of similarity with past corrections. Siamond maintains the Simba backtesting spreadsheet here on bogleheads and you can take a look at how your portfolio might have performed in the past during market corrections. Past may not predict the future, yada yada, but it at least gives you a rough idea of the possibilities. Anyway, once I have a few years of retirement under my belt I'll start to consider a rising glide path, especially once we get close to starting SS.

Regarding fixed AA, falling or rising glidepaths, there are many articles on those subjects that are pretty easy to find.

Finally, regarding your AA you might want to think about what sort of withdrawal method you might want to use once you are retired and how that relates to your AA. Again, the possibilities are seemingly endless and depend on any sources of fixed income you might have relative to your expenses and how much tolerance you might have for having withdrawals that fluctuate year-to-year.

dcabler
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Re: Asset Allocation Mechanics

Post by dcabler » Fri May 18, 2018 3:29 pm

Scassi wrote:
Wed May 16, 2018 3:47 pm
First thanks for a great resource!

I have read the starter threads re info to be provided usually: But my question to the board is more basic/general. If more specific info is needed I will add.

We are out of balance asset allocation wise.

Some facts:

H=58yo; W=53yo. W will have state pension and medical benefits from 55. Both will have SS. No debt.

Global inv/cash equivalent assets = $1.6M.

$800K in Vanguard taxable - b/t Index 500/Index Ext Mkt/Index SCap/Intermediate Bond; But at roughly 80/20 stock to bond
$800K in IRA or 403B accounts - a lot of different stuff we can get into if nec; But again at roughly 80/20 stock to bond. Not Roth.

The question is how would the collective attack re-balancing in a general sense given tax ramifications, etc.? Best to do it under the non-taxable? A blend? How/% between both? Thoughts?

Happy to add info if needed (if I can) and thank you in advance!


PS - First learned of low cost investing from a book and found Vanguard, luckily, in college started soon after secondary school - hence the 4 V funds as that is what was offered then.... I 'stayed the course' but did not really know if what I was doing was objectively "right" except it seemed to be working. Yet in trying to explain the logic for same to the spousal unit detail was wanting, so to speak.... My workout regimen is indoor rowing. To avoid boredom I often listen to online lectures: Art, history, literature, etc, etc., and sometimes economics. Listening one day many years later I came upon this: https://www.youtube.com/watch?v=wRdx7kVNQ_E . A lecture by David Swensen, Yale U's Endowment head. Worth a listen. Almost all of his conclusions support low cost indexing which I was happy to hear ... :happy
Several folks have already answered some of your questions, but I'll give my own real-world example. We have multiple accounts: A taxable account with Fidelity and one with Vanguard. My wife has a rollover IRA at Fidelity and so do I. I also have a 401K at my current job and I have a deferred compensation account from a previous job. Plus I have an HSA with my current employer.

For years, I kept the same AA in each and every account. Why? Well, it was just easier to rebalance when things got out of whack. But it wasn't very tax efficient because I had taxable bonds in my taxable accounts. So, late last year I decided to do the great reshuffle of 2017, though it bled into 2018 for reasons I'll note later. I have an overall target of 50% stocks and 50% bonds. I decided to leave the HSA, my current 401K and my deferred compensation account out of the reshuffle since the remainder of my accounts represented 98% of my total holdings. It just wasn't worth the hassle to add that 2% into the mix, so they still are allocated between stocks and bonds. Some day I'll leave this company and the 401K will get rolled over anyway. The deferred compensation account only has 4 years of payouts left and I take the check I get every year and deposit it back into one of my taxable accounts. And the HSA is for medical expenses some time after I'm retired.

Within the accounts that were part of the re-shuffle, 60% of the money is in tax deferred accounts and 40% is in taxable. With the intention of my taxable accounts being all stocks, my rollover IRAs would be mostly bonds, but would still have some stock because of my 50/50 target allocation. That's OK, it gives me some buffer in my rollover IRAs for future rebalancing without having a taxable event.

First thing was to sell all of the bonds in the taxable accounts. As it turned out, the cost basis for them was negative so this maneuver turned out to be a Tax Loss Harvest as well. The proceeds from this sale were used to purchase stock funds in the same accounts. So now my taxable accounts are all stock funds.

Now, I couldn't immediately repurchase exactly the same bond funds in my rollover IRA accounts as I had in my taxable accounts or I would have run into the Wash Sale Rule as well as Fidelity's restrictions on frequent trading. So, in my rollover account, I sold some stock funds and bought a bond fund that was close to what I wanted - something I could at least live with for 30 days. I bought enough to get to my 50% bond allocation and the remainder stayed in stock funds. 30 days later, it's 2018 and I sold that bond fund and bought what I really wanted. Rebalance complete and (hopefully) a little more tax efficient.

Scassi
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Re: Asset Allocation Mechanics

Post by Scassi » Fri May 18, 2018 8:25 pm

Thanks dcabler for the thoughtful replies. You given me some additional points to research and consider. Unfortunately, yes, "the possibilities are endless" and because much of the data input is unknowable (occurring in the future) the "math" is more belief and speculation (maybe better said as "educated guesses") than plug and play formula.
dcabler wrote:
Fri May 18, 2018 3:01 pm
Yes, it can be. Many people start with the question that goes something like this: Are you likely to freak out if your portfolio loses 20% in a year? What about 30% or more? That tends to push people in the direction of having less stock and more bonds. Or do you see that as just noise that always happens and you just keep on keeping on. Only you can answer that. If you were investing in the 2000-2003 or the 2008 timeframe, was was your AA and how did it feel?
I had NP then and looked at it as an opportunity to buy low. In some way this lead to the present %ages as the run out was long and hard and outpaced the more passive re-balancing techniques used.

BUT, like for you, retirement is coming into focus as a reality and not just some future "ideal". So, my present mind set is now more similar to yours (relating to not re-living 2008) as expressed. What i worry about a bit is that the basis for such thinking is really psychological and not necessarily knowledge driven.

I think I have to educate my self a bit more and you and all have given some great leads as to where to start....

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siamond
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Re: Asset Allocation Mechanics

Post by siamond » Fri May 18, 2018 9:26 pm

Scassi wrote:
Fri May 18, 2018 8:25 pm
BUT, like for you, retirement is coming into focus as a reality and not just some future "ideal". So, my present mind set is now more similar to yours (relating to not re-living 2008) as expressed. What i worry about a bit is that the basis for such thinking is really psychological and not necessarily knowledge driven.
Oh yes, for sure, psychology and behavior are crucial factors here. Definitely not to be neglected. But also sometimes obfuscating knowledge and past evidence. The glide path thing is a good example of that. Nobody can justify those based on sheer numbers and past evidence (as anybody having tried to run the numbers can attest). And yet there is a powerful 'feel good, feel safe' perception about it that cannot be denied. And that's not necessarily wrong; if this is the way for somebody to make a plan, feel good about it, and stick to it, well, that's a good thing. In other words, your decision making should really be driven by a mix of knowledge and of psychology/behavior - both sides of the equation being equally important.

May I suggest two things as you refine your thinking:
- if you're somewhat numbers-minded, then expand quantitative knowledge, using tools like cFIREsim, Portfolio Charts and, if you're spreadsheet-inclined, the Simba backtesting spreadsheet.
- reflect on what are your top-level financial goals and your top-level primary fears. Then reflect on how *you* would define 'risk'. Which should be a multi-faceted mix of behavioral/psychological considerations with more quantitative considerations. Do not fall for the non-sense of equating risk with volatility, this is a very short-sighted perspective. A really good read is 'Deep Risk' by William Bernstein, to better appreciate the various facets of risk.

And then play with various target AAs, share your thoughts on this forum, ask questions, and get opinions (which will be very diverse, and often quite biased by the personal circumstances of the poster, but still, this might trigger something in your own mind). This isn't an easy process. Took me several years to converge on a solid retirement plan that I truly believe in.

Scassi
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Re: Asset Allocation Mechanics

Post by Scassi » Sat May 19, 2018 2:59 pm

siamond, thank you very much for the info and links. I have some homework to do :happy ... I agree fully with yours below and that mindset is how I am trying to approach things. I think it somewhat intellectually dishonest for me to think that one AA approach is "wrong" and another "right" if I cannot understand or (better yet since it is 'our' money) convince/explain the basis for one choice over the other and without in large part reducing the preference to 'well, I am more comfortable/sleep better with...' not that the latter is a bad thing in any way... Be best to be able to do both :wink:
siamond wrote:
Fri May 18, 2018 9:26 pm
Oh yes, for sure, psychology and behavior are crucial factors here. Definitely not to be neglected. But also sometimes obfuscating knowledge and past evidence. The glide path thing is a good example of that. Nobody can justify those based on sheer numbers and past evidence (as anybody having tried to run the numbers can attest). And yet there is a powerful 'feel good, feel safe' perception about it that cannot be denied. And that's not necessarily wrong; if this is the way for somebody to make a plan, feel good about it, and stick to it, well, that's a good thing. In other words, your decision making should really be driven by a mix of knowledge and of psychology/behavior - both sides of the equation being equally important.

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Sandtrap
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Re: Asset Allocation Mechanics

Post by Sandtrap » Sat May 19, 2018 3:38 pm

You can do multiple quotes within the same post by using the "quote" button after you cut n paste the quote into the post. Begin the pasted quote with . . [quoote] and end it with [/quoote]. (minus the extra "o" for quote).

Here's a link to help you hammer out your IPS Statement:
Define General Investment Goals and Objectives (what is your plan?)
https://www.bogleheads.org/wiki/Invest ... statement

And, some tools to help organize funds across the board. The Morningstar tool will do so across brokerage accounts.
ONLINE FINANCIAL TOOLS
PORFOLIO VISUALIZERS, PROJECTIONS, AND ANALYSIS
https://www.portfoliovisualizer.com
Firecalc. Retirement. How long will your money last?
https://www.firecalc.com
Morningstar Instant Xray
http://www.morningstar.com/portfolio.ht ... Entry.aspx
Optimal Retirement Planner (I-ORP)
https://www.i-orp.com/paper/index.html


aloha
j

dcabler
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Re: Asset Allocation Mechanics

Post by dcabler » Sun May 20, 2018 7:15 am

Scassi wrote:
Sat May 19, 2018 2:59 pm
siamond, thank you very much for the info and links. I have some homework to do :happy ... I agree fully with yours below and that mindset is how I am trying to approach things. I think it somewhat intellectually dishonest for me to think that one AA approach is "wrong" and another "right" if I cannot understand or (better yet since it is 'our' money) convince/explain the basis for one choice over the other and without in large part reducing the preference to 'well, I am more comfortable/sleep better with...' not that the latter is a bad thing in any way... Be best to be able to do both :wink:
siamond wrote:
Fri May 18, 2018 9:26 pm
Oh yes, for sure, psychology and behavior are crucial factors here. Definitely not to be neglected. But also sometimes obfuscating knowledge and past evidence. The glide path thing is a good example of that. Nobody can justify those based on sheer numbers and past evidence (as anybody having tried to run the numbers can attest). And yet there is a powerful 'feel good, feel safe' perception about it that cannot be denied. And that's not necessarily wrong; if this is the way for somebody to make a plan, feel good about it, and stick to it, well, that's a good thing. In other words, your decision making should really be driven by a mix of knowledge and of psychology/behavior - both sides of the equation being equally important.
That's basically how I ended up where I currently am. I've looked at the size of our pile, looked at social security and taxes. When the time comes, I'll ultimately end up using a form of VPW when I get to withdrawals I've backtested it to see what sort of variability I'll have with a SS and Ibond floor, knowing full well that every possible scenario that could happen hasn't already happened. So I've also created some made-up stressors to see what might happen, including 2008. Mix all of that into a great big gumbo pot and and state explicitly what I want to do in my IPS and that's where I ended up where I am. As I noted in my original post, if after a few years of retirement my pile has increased in size relative to inflation, I'll consider upping my stock percentage. Thought my "need" to take on more risk may be diminished my "ability" to do so will have increased, allowing for possible increased spending or increasing the likelihood of leaving a more sizeable bequest.

You shouldn't ignore the past nor can you ignore your own state of mind. Investing does require some math, but in the end there is still a leap of faith and, sadly, no one-size-fits-all plug and play solution.

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