Why not go 100% stocks?

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david1082b
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Re: Why not go 100% stocks?

Post by david1082b » Mon Jun 25, 2018 8:49 pm

emlowe wrote:
Mon Jun 25, 2018 4:47 pm
steve roy wrote:
Mon Jun 25, 2018 4:08 pm
Go the Warren Buffett route:

90% S & P 500; 10% bonds.
Specifically 10% in "short-term government bonds"

"My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.)"
That's his advice for his wife when he is gone. To go the Warren Buffett route you'd have to buy Berkshire Hathaway stock really, or perhaps deep value stocks if you're trying to immitate investing style.

drk
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Re: Why not go 100% stocks?

Post by drk » Mon Jun 25, 2018 10:13 pm

masonstone wrote:
Mon Jun 25, 2018 10:35 am
I'm in a dual physician household and enjoy working and being productive. [...] My household income is approximately 900K with approximately 120K of annual expenses.
These are the only details that matter. In effect, you already own the best bond position you could possibly purchase: your medical training. So, go for it, or don't. It doesn't really matter.

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steve roy
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Re: Why not go 100% stocks?

Post by steve roy » Mon Jun 25, 2018 11:12 pm

david1082b wrote:
Mon Jun 25, 2018 8:49 pm
emlowe wrote:
Mon Jun 25, 2018 4:47 pm
steve roy wrote:
Mon Jun 25, 2018 4:08 pm
Go the Warren Buffett route:

90% S & P 500; 10% bonds.
Specifically 10% in "short-term government bonds"

"My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.)"
That's his advice for his wife when he is gone. To go the Warren Buffett route you'd have to buy Berkshire Hathaway stock really, or perhaps deep value stocks if you're trying to immitate investing style.
Yup, I was thinking of Warren's advice to the Mrs. ... Because it's kind of late in the day to buy Berkshire-Hathaway now that Warren's in the second half of his eighties. (Besides, you'll get a chunk of B-H when purchasing the S & P 500.)

H-Town
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Re: Why not go 100% stocks?

Post by H-Town » Mon Jun 25, 2018 11:33 pm

drk wrote:
Mon Jun 25, 2018 10:13 pm
masonstone wrote:
Mon Jun 25, 2018 10:35 am
I'm in a dual physician household and enjoy working and being productive. [...] My household income is approximately 900K with approximately 120K of annual expenses.
These are the only details that matter. In effect, you already own the best bond position you could possibly purchase: your medical training. So, go for it, or don't. It doesn't really matter.
^ This.

But I would also buy LTD insurance until you save up a meaningful amounts relatively to your income, i.e. $10 million.

CarpeDiem22
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Re: Why not go 100% stocks?

Post by CarpeDiem22 » Tue Jun 26, 2018 1:36 am

cj2018 wrote:
Mon Jun 25, 2018 12:24 pm
CarpeDiem22 wrote:
Mon Jun 25, 2018 12:13 pm
Two reasons for not going 100% stocks:

1. Adding some bonds increases your return while reducing risk (source: Intelligent Asset Allocator by William Bernstein)
2. During a financial crisis, assets like stocks and real estate go on sale. An investor who has the cash/bonds in this situation can buy these assets and reap good returns later when things normalise. Bonds don't dip so much, so an investor can convert bonds to stocks in such a scenario. Not having any bonds won't allow you to do so.
#2 is sound advice. Mechanically, It's the same as re-balancing to a target AA.

What about holding some gold to hedge against currency risk and also provide ammunition during market downturn. Would that be a good alteranative to bonds for this specific purpose? I guess the liquidity of converting gold -> cash -> equity during recession is not as good as bond -> cash -> equity.
Personally, I do not buy gold (as an investment) even though gold is "perceived" as a safe store of value. Since it has no intrinsic value, people may not value gold as much in the future as they did in the last recession. Agree on the liquidity part, though.

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Que1999
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Re: Why not go 100% stocks?

Post by Que1999 » Tue Jun 26, 2018 2:22 am

I wish I had that income with 1/9th of my income used for my annual expenses. If I did, I would absolutely plow my money right into VTSAX and let it compound for 20 years.... Ultimately getting to a 1% or 2% withdrawal rate when/if I finally needed to pull from that account for income. 100% stock with those huge contributions for years will leave you with a massive pot of gold... So big a 50% drop in value and you'll still be perfectly fine.... allowing you to withdraw and still live very comfortable after all those years of contributions and compounding. Good for you, that's some 'problem' to have! :beer

ignition
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Re: Why not go 100% stocks?

Post by ignition » Tue Jun 26, 2018 5:01 am

Boglegrappler wrote:
Mon Jun 25, 2018 2:17 pm
I think the issue is behavioral.

Being 100% in stocks is going to put you, at some point, with certainty, at risk for not "staying the course'. Once you've decided to modify the 'stay the course' rule, then you are at sea and all bets are off.

Take a look at what happened in the late 60s til August of 1982 and reflect on whether you would have been able to just sit there in equities. the Dow hit 1,000 for the first and second times in 68 (I think) and 1972, and then fell all the way to about 450 ish in 74-75. It was still meandering around 800 ish in the early 1980s.

Look at this article cover story from Business Week in 1979 and consider whether you would have been staying the course.

http://ritholtz.com/1979/08/the-death-of-equities/

It took another three years before blast-off occurred starting the boom that we've been in since.

I'd be curious to hear from anyone who was 100% in stocks over that period. You won't find many.
Bonds were also slaughtered over that period due to high inflation. Absolutely the worst time to retire in the last 100+ years with a balanced portfolio. Better examples would be 1929 or 2008. (that being said I'm also 100% stocks. Will go to 90/10 or 80/20 in retirement)

dekecarver
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Re: Why not go 100% stocks?

Post by dekecarver » Tue Jun 26, 2018 5:25 am

I did then, changed up a bit as I got older; my 80 year old dad is still 100%. My thought is if you start at an early age with a 30-40 year horizon to let it ride e.g. 100% Mid Cap, there comes a point where you have accumulated enough that if the market dropped 50%, you'd still have enough not to worry about it; that's only as good as your risk tolerance. What's interesting is back testing different models in Simba's spread sheet. That really shows the drag that bonds have on a portfolio regardless of the 'feel good' that they give some investors.

masonstone
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Re: Why not go 100% stocks?

Post by masonstone » Tue Jun 26, 2018 11:50 am

Thank you for your input. As I am young now with good disability insurance, I will keep my money in 100% stocks. As I get older, I will shift a portion of the money to bonds.

rgs92
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Re: Why not go 100% stocks?

Post by rgs92 » Tue Jun 26, 2018 12:05 pm

For some reason I know mainly 2 types of people, those who think the stock market is gambling and never put a dime in it, and those who put all there savings in the market.

It's funny how few follow the crucial thoughtful age/circumstance moderate asset-allocation model that (I would say) 99% of Bogleheads do.

So I would say, given that you have a high income but still, because such an income can be precarious, just go 60/40 and put it all in VBIAX (Vanguard balanced index Admiral).

cj2018
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Re: Why not go 100% stocks?

Post by cj2018 » Tue Jun 26, 2018 12:36 pm

ignition wrote:
Tue Jun 26, 2018 5:01 am
Boglegrappler wrote:
Mon Jun 25, 2018 2:17 pm
I think the issue is behavioral.

Being 100% in stocks is going to put you, at some point, with certainty, at risk for not "staying the course'. Once you've decided to modify the 'stay the course' rule, then you are at sea and all bets are off.

Take a look at what happened in the late 60s til August of 1982 and reflect on whether you would have been able to just sit there in equities. the Dow hit 1,000 for the first and second times in 68 (I think) and 1972, and then fell all the way to about 450 ish in 74-75. It was still meandering around 800 ish in the early 1980s.

Look at this article cover story from Business Week in 1979 and consider whether you would have been staying the course.

http://ritholtz.com/1979/08/the-death-of-equities/

It took another three years before blast-off occurred starting the boom that we've been in since.

I'd be curious to hear from anyone who was 100% in stocks over that period. You won't find many.
Bonds were also slaughtered over that period due to high inflation. Absolutely the worst time to retire in the last 100+ years with a balanced portfolio. Better examples would be 1929 or 2008. (that being said I'm also 100% stocks. Will go to 90/10 or 80/20 in retirement)
I like your style - 100% stocks (well-diversified indexed funds i hope) during accumulation stage and 90/10 or 80/20 during preservation stage. Pretty sound strategy.

By definition, fixed-income securities (CDs, bonds, SS, annuities) are slaughtered when there's high inflation. That's why i feel kinda bad for elder folks who rely largely on SS during their retirements - they are getting assaulted by the hidden-tax of inflation every sec and they don't feel it. Can't really blame them though since it's too late for them at that point to do anything about it. I know, tough pill to swallow but it's just the cold-heart truth.

I think bonds or fixed-securities in general serve only 2 purposes:
  • smooth the ride and reduce volatility
  • provides ammunition when equities are on sale via AA re balancing
That's it! It neither preserve wealth nor protect the purchasing power of the currency for as long as we have inflation. In fact, the Fed literally stated in the mission that they are "targeting a 2% inflation rate", and I certainly admire their complete transparency on this one lol. For that, I personally believe under our current economic system, 3 things are guaranteed. Death, Tax, and Inflation.

Thoughts? :sharebeer

cj2018
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Re: Why not go 100% stocks?

Post by cj2018 » Tue Jun 26, 2018 12:56 pm

dekecarver wrote:
Tue Jun 26, 2018 5:25 am
I did then, changed up a bit as I got older; my 80 year old dad is still 100%. My thought is if you start at an early age with a 30-40 year horizon to let it ride e.g. 100% Mid Cap, there comes a point where you have accumulated enough that if the market dropped 50%, you'd still have enough not to worry about it; that's only as good as your risk tolerance. What's interesting is back testing different models in Simba's spread sheet. That really shows the drag that bonds have on a portfolio regardless of the 'feel good' that they give some investors.
+1

Kudos to your 80yr old dad who's 100% equity - he's a winner! Sounds like he made a higher-than average wage during his working time and invested early and wisely. In turn, he was able to build a large enough nest egg to live off. Quite an achievement and only obtained by a small % of population :sharebeer

Now, i will share you a little secret i suspect a lot of BHs here aren't even really aware of. The truly wealthy don't have a large exposure to Fixed Income, period. Checkout "the great chart below from VisualCapitalist.com that highlights how much each asset is as a percentage of net worth from the Federal Reserve of Consumer Finances":

Image

Credit:

https://www.financialsamurai.com/net-wo ... of-wealth/
https://www.financialsamurai.com/should ... ople-dont/


Notice that households with NW > $5M and up, their fixed-income and primary home AA drop dramatically compared to $1M and below.

My personal guidance is if your nest egg is somewhere between $500K to $2M, have a lot of fixed income will serve you and make you "feel" well, can't deny the psychological benefit of the smooth ride anyway. However, if you are targeting $3M and up NW for your family and heirs, e.g. $3M, $5M, $10M+, having <10% in fixed income in AA is sound.

ignition
Posts: 171
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Re: Why not go 100% stocks?

Post by ignition » Fri Jun 29, 2018 3:00 pm

cj2018 wrote:
Tue Jun 26, 2018 12:36 pm
I like your style - 100% stocks (well-diversified indexed funds i hope)
Of course!
cj2018 wrote:
Tue Jun 26, 2018 12:36 pm
By definition, fixed-income securities (CDs, bonds, SS, annuities) are slaughtered when there's high inflation. That's why i feel kinda bad for elder folks who rely largely on SS during their retirements - they are getting assaulted by the hidden-tax of inflation every sec and they don't feel it. Can't really blame them though since it's too late for them at that point to do anything about it. I know, tough pill to swallow but it's just the cold-heart truth.

I think bonds or fixed-securities in general serve only 2 purposes:
  • smooth the ride and reduce volatility
  • provides ammunition when equities are on sale via AA re balancing
That's it! It neither preserve wealth nor protect the purchasing power of the currency for as long as we have inflation. In fact, the Fed literally stated in the mission that they are "targeting a 2% inflation rate", and I certainly admire their complete transparency on this one lol. For that, I personally believe under our current economic system, 3 things are guaranteed. Death, Tax, and Inflation.

Thoughts? :sharebeer
Yes, I agree for the most part.

I think you can expect bonds to roughly keep pace with inflation, which they did over the last century. In the 1800's they apparently had almost the same return as stocks, but there was almost no inflation during that period.

Also, keeping bonds as dry powder and rebalancing sounds good in theory, but in reality it doesn't seem to improve returns as the bonds are too much of a drag during the good times. The reason I would hold some bonds in retirement is that you can sell bonds for cash flow so you don't have to sell any stocks at the bottom during a stock market crash.

DesertDiva
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Re: Why not go 100% stocks?

Post by DesertDiva » Fri Jun 29, 2018 3:20 pm

I used to be much closer to 100% stock funds than I am now. What changed? I read Jack Bogle's opinions on asset allocation and market timing and gave it serious consideration.

schrute
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Re: Why not go 100% stocks?

Post by schrute » Fri Jun 29, 2018 6:46 pm

masonstone wrote:
Mon Jun 25, 2018 10:35 am
I'm relatively young, 35, and plan to work for the next two decades. I'm in a dual physician household and enjoy working and being productive. I don't really enjoy site-seeing and traveling as much. My household income is approximately 900K with approximately 120K of annual expenses.

My question is, why not keep 100% of my assets in stocks? The only thing holding me from putting 100% in stocks is to be able to take advantage of a market downturn. So for example if there's a recession, I can take advantage of it by shifting money from bonds to stocks in that scenario. If I'm 100% stocks I wouldn't be able to do that.

What do the bogleheads think? Your input is appreciated.
What is a breakdown if your 120K expenses?

masonstone
Posts: 136
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Re: Why not go 100% stocks?

Post by masonstone » Mon Jul 02, 2018 7:31 pm

schrute wrote:
Fri Jun 29, 2018 6:46 pm
masonstone wrote:
Mon Jun 25, 2018 10:35 am
I'm relatively young, 35, and plan to work for the next two decades. I'm in a dual physician household and enjoy working and being productive. I don't really enjoy site-seeing and traveling as much. My household income is approximately 900K with approximately 120K of annual expenses.

My question is, why not keep 100% of my assets in stocks? The only thing holding me from putting 100% in stocks is to be able to take advantage of a market downturn. So for example if there's a recession, I can take advantage of it by shifting money from bonds to stocks in that scenario. If I'm 100% stocks I wouldn't be able to do that.

What do the bogleheads think? Your input is appreciated.
What is a breakdown if your 120K expenses?
Food 36k, House 36k, childs day care 12k, insurance 5k, miscellaneous the rest

schrute
Posts: 221
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Re: Why not go 100% stocks?

Post by schrute » Mon Jul 02, 2018 10:12 pm

masonstone wrote:
Mon Jul 02, 2018 7:31 pm
schrute wrote:
Fri Jun 29, 2018 6:46 pm
masonstone wrote:
Mon Jun 25, 2018 10:35 am
I'm relatively young, 35, and plan to work for the next two decades. I'm in a dual physician household and enjoy working and being productive. I don't really enjoy site-seeing and traveling as much. My household income is approximately 900K with approximately 120K of annual expenses.

My question is, why not keep 100% of my assets in stocks? The only thing holding me from putting 100% in stocks is to be able to take advantage of a market downturn. So for example if there's a recession, I can take advantage of it by shifting money from bonds to stocks in that scenario. If I'm 100% stocks I wouldn't be able to do that.

What do the bogleheads think? Your input is appreciated.
What is a breakdown if your 120K expenses?
Food 36k, House 36k, childs day care 12k, insurance 5k, miscellaneous the rest
36K food, do you guys eat out alot?

WanderingDoc
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Re: Why not go 100% stocks?

Post by WanderingDoc » Mon Jul 02, 2018 10:20 pm

schrute wrote:
Mon Jul 02, 2018 10:12 pm
masonstone wrote:
Mon Jul 02, 2018 7:31 pm
schrute wrote:
Fri Jun 29, 2018 6:46 pm
masonstone wrote:
Mon Jun 25, 2018 10:35 am
I'm relatively young, 35, and plan to work for the next two decades. I'm in a dual physician household and enjoy working and being productive. I don't really enjoy site-seeing and traveling as much. My household income is approximately 900K with approximately 120K of annual expenses.

My question is, why not keep 100% of my assets in stocks? The only thing holding me from putting 100% in stocks is to be able to take advantage of a market downturn. So for example if there's a recession, I can take advantage of it by shifting money from bonds to stocks in that scenario. If I'm 100% stocks I wouldn't be able to do that.

What do the bogleheads think? Your input is appreciated.
What is a breakdown if your 120K expenses?
Food 36k, House 36k, childs day care 12k, insurance 5k, miscellaneous the rest
36K food, do you guys eat out alot?
That is pretty low for a reasonably HCOL area. I've spent $12-14K per year on just myself no matter where I lived. $30-40K+ for a family of 3 is minimum if you eat out 3-5X per week, buy organic or grass fed stuff etc.
Don't wait to buy real estate. Buy real estate, and wait. | Rent where you live, buy where others pay your mortgage for you.

flyingaway
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Re: Why not go 100% stocks?

Post by flyingaway » Tue Jul 03, 2018 12:49 am

Making'$900k a year and wanting to work for 20 more years? Yes, you can be 100% in stocks or in almost anything else. If I were you, I would start worrying about why I want to work for 20 more years.

msk
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Re: Why not go 100% stocks?

Post by msk » Tue Jul 03, 2018 4:10 am

I see no negative against 100% stocks except nervousness. I am 100%, worldwide by free market weight. Age 74, NW in low 8 figures. During the past two market collapses I used margin to purchase one-year Call Options once the collapse fall went beyond 25% from peak. You do not need cash nor bonds to benefit from a bounce back recovery. One-year Call Options cost about 5%, i.e. you spend $50k (from your brokerage margin) to benefit from a million $ of SPY (=SP 500). If the bounce back is > 5% within a year, you smile. If the bounce back is less than 5% a year later you lose a maximum of $50k.

minimalistmarc
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Re: Why not go 100% stocks?

Post by minimalistmarc » Tue Jul 03, 2018 6:00 am

flyingaway wrote:
Tue Jul 03, 2018 12:49 am
Making'$900k a year and wanting to work for 20 more years? Yes, you can be 100% in stocks or in almost anything else. If I were you, I would start worrying about why I want to work for 20 more years.
Some people like their job you know

minimalistmarc
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Re: Why not go 100% stocks?

Post by minimalistmarc » Tue Jul 03, 2018 6:03 am

WanderingDoc wrote:
Mon Jul 02, 2018 10:20 pm
schrute wrote:
Mon Jul 02, 2018 10:12 pm
masonstone wrote:
Mon Jul 02, 2018 7:31 pm
schrute wrote:
Fri Jun 29, 2018 6:46 pm
masonstone wrote:
Mon Jun 25, 2018 10:35 am
I'm relatively young, 35, and plan to work for the next two decades. I'm in a dual physician household and enjoy working and being productive. I don't really enjoy site-seeing and traveling as much. My household income is approximately 900K with approximately 120K of annual expenses.

My question is, why not keep 100% of my assets in stocks? The only thing holding me from putting 100% in stocks is to be able to take advantage of a market downturn. So for example if there's a recession, I can take advantage of it by shifting money from bonds to stocks in that scenario. If I'm 100% stocks I wouldn't be able to do that.

What do the bogleheads think? Your input is appreciated.
What is a breakdown if your 120K expenses?
Food 36k, House 36k, childs day care 12k, insurance 5k, miscellaneous the rest
36K food, do you guys eat out alot?
That is pretty low for a reasonably HCOL area. I've spent $12-14K per year on just myself no matter where I lived. $30-40K+ for a family of 3 is minimum if you eat out 3-5X per week, buy organic or grass fed stuff etc.

Lol that is beyond ridiculous.

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Reb Tevye
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Re: Why not go 100% stocks?

Post by Reb Tevye » Tue Jul 03, 2018 6:26 am

MotoTrojan wrote:
Mon Jun 25, 2018 10:59 am
masonstone wrote:
Mon Jun 25, 2018 10:55 am
However the main disadvantage I see with going 100% stocks is an inability of taking advantage of a market downturn to buy stocks. In 2008 the Dow fell from ~16000 to ~6000. If I don't have any money in bonds I wouldn't be able to buy stocks at such a low cost other than with income generated.
I believe it’s proven that longterm you benefit more from full stock exposure than having dry powder for a downturn. Maybe play with portfoliovisualizer.com with 100/0 and XX/XX allocations and quarterly or annual rebalancing through long time periods.
At that age and income, the OP has his own personal dry powder factory. Assuming that the income is secure. They can even buy bonds in a stock downturn if they decide their sleep is impaired by the stock losses.

I think it’s important for the OP to learn sooner rather than later what their risk tolerance is. Better now than when they are looking at their future huge asset account balance.
"So, what would have been so terrible if I had a small fortune?"

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Reb Tevye
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Re: Why not go 100% stocks?

Post by Reb Tevye » Tue Jul 03, 2018 6:33 am

WanderingDoc wrote:
Mon Jul 02, 2018 10:20 pm
schrute wrote:
Mon Jul 02, 2018 10:12 pm
masonstone wrote:
Mon Jul 02, 2018 7:31 pm
schrute wrote:
Fri Jun 29, 2018 6:46 pm
masonstone wrote:
Mon Jun 25, 2018 10:35 am
I'm relatively young, 35, and plan to work for the next two decades. I'm in a dual physician household and enjoy working and being productive. I don't really enjoy site-seeing and traveling as much. My household income is approximately 900K with approximately 120K of annual expenses.

My question is, why not keep 100% of my assets in stocks? The only thing holding me from putting 100% in stocks is to be able to take advantage of a market downturn. So for example if there's a recession, I can take advantage of it by shifting money from bonds to stocks in that scenario. If I'm 100% stocks I wouldn't be able to do that.

What do the bogleheads think? Your input is appreciated.
What is a breakdown if your 120K expenses?
Food 36k, House 36k, childs day care 12k, insurance 5k, miscellaneous the rest
36K food, do you guys eat out alot?
That is pretty low for a reasonably HCOL area. I've spent $12-14K per year on just myself no matter where I lived. $30-40K+ for a family of 3 is minimum if you eat out 3-5X per week, buy organic or grass fed stuff etc.
Indeed, $36k isn’t even the cost of premiums for my company’s retiree medical plan for a family of 3.
"So, what would have been so terrible if I had a small fortune?"

Bacchus01
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Re: Why not go 100% stocks?

Post by Bacchus01 » Tue Jul 03, 2018 6:37 am

You don’t need to have an amount for a downturn, you have it coming in presumably every few weeks.

How many docs went on the unemployment line in the Great Recession? Answer: not very many.

You didn’t give the rest of your scenario but if you haven’t yet, get those loans paid off!

I’m older (45) and our household income is about half yours, but with ~$3M in net worth, we are 95% equity in our invested assets. If you can take the risk and stomach it, I would.

jalbert
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Re: Why not go 100% stocks?

Post by jalbert » Tue Jul 03, 2018 7:39 am

masonstone wrote:
Mon Jun 25, 2018 10:55 am
However the main disadvantage I see with going 100% stocks is an inability of taking advantage of a market downturn to buy stocks. In 2008 the Dow fell from ~16000 to ~6000. If I don't have any money in bonds I wouldn't be able to buy stocks at such a low cost other than with income generated.
Yes, that is a big advantage of holding bonds. Another is not having to watch your portfolio drop 55% like it would have in 2008/2009 or 80% like it would have in 1929-1932.
Index fund investor since 1987.

bgf
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Re: Why not go 100% stocks?

Post by bgf » Tue Jul 03, 2018 7:59 am

jalbert wrote:
Tue Jul 03, 2018 7:39 am
masonstone wrote:
Mon Jun 25, 2018 10:55 am
However the main disadvantage I see with going 100% stocks is an inability of taking advantage of a market downturn to buy stocks. In 2008 the Dow fell from ~16000 to ~6000. If I don't have any money in bonds I wouldn't be able to buy stocks at such a low cost other than with income generated.
Yes, that is a big advantage of holding bonds. Another is not having to watch your portfolio drop 55% like it would have in 2008/2009 or 80% like it would have in 1929-1932.
that is not an advantage. bonds return less than stocks over the long term, including all the bear markets, panics, and crashes.

rebalancing from bonds into stocks during a bear market just means you were leaving equity returns on the table during the prior bull market. people pay plenty of attention to owning bonds during a bear market, but pretty much no one, for whatever reason, tracks how much money they are losing out on by owning bonds during a bull market. that lower volatility does not come cheap.
“TE OCCIDERE POSSUNT SED TE EDERE NON POSSUNT NEFAS EST"

Skyccord
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Re: Why not go 100% stocks?

Post by Skyccord » Tue Jul 03, 2018 11:15 am

What I have found extremely interesting in the responses to this post is nobody is asking questions.

1. Do you have any student loan debt?
2. Do you have any other debt?
3. Do you have a mortgage?
4. How about your spouse?
5. Do you plan on working till 65?
6. Do you plan on having kids?
7. What kind of lifestyle do you live? 300k house or $10 million house?

I know you mentioned your expenses but without knowing what they fully entail you are just giving us a P&L and not your balance sheet. You can haev some long term debt in there.
Last edited by Skyccord on Tue Jul 03, 2018 11:34 am, edited 1 time in total.

H-Town
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Re: Why not go 100% stocks?

Post by H-Town » Tue Jul 03, 2018 11:26 am

CarpeDiem22 wrote:
Mon Jun 25, 2018 12:13 pm
Two reasons for not going 100% stocks:

1. Adding some bonds increases your return while reducing risk (source: Intelligent Asset Allocator by William Bernstein)
2. During a financial crisis, assets like stocks and real estate go on sale. An investor who has the cash/bonds in this situation can buy these assets and reap good returns later when things normalise. Bonds don't dip so much, so an investor can convert bonds to stocks in such a scenario. Not having any bonds won't allow you to do so.
Just want to add a comment on #2: since the OP's time horizon is 25 years away, he is forgoing equity return for lower bond return. The difference between stock and bond return is significantly higher than the premium from rebalancing bond to stock during market downturn. The primary objective of holding bond is to lower the volatility (also reducing overall return). It's not for "market-timing" rebalancing opportunities.

OP's pension should provide enough safety net so that he can go for more aggressive AA.

masonstone
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Re: Why not go 100% stocks?

Post by masonstone » Tue Jul 03, 2018 12:06 pm

Skyccord wrote:
Tue Jul 03, 2018 11:15 am
What I have found extremely interesting in the responses to this post is nobody is asking questions.

1. Do you have any student loan debt?
2. Do you have any other debt?
3. Do you have a mortgage?
4. How about your spouse?
5. Do you plan on working till 65?
6. Do you plan on having kids?
7. What kind of lifestyle do you live? 300k house or $10 million house?

I know you mentioned your expenses but without knowing what they fully entail you are just giving us a P&L and not your balance sheet. You can haev some long term debt in there.
To answer your questions:

1. Do you have any student loan debt? No
2. Do you have any other debt? Mortgage
3. Do you have a mortgage? Yes, 400K left
4. How about your spouse? no debt
5. Do you plan on working till 65? Probably to around 60ish
6. Do you plan on having kids? I have 1 kid, plan on 1 more
7. What kind of lifestyle do you live? 300k house or $10 million house? I have a 500K house

cj2018
Posts: 116
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Re: Why not go 100% stocks?

Post by cj2018 » Tue Jul 03, 2018 12:09 pm

msk wrote:
Tue Jul 03, 2018 4:10 am
I see no negative against 100% stocks except nervousness. I am 100%, worldwide by free market weight. Age 74, NW in low 8 figures. During the past two market collapses I used margin to purchase one-year Call Options once the collapse fall went beyond 25% from peak. You do not need cash nor bonds to benefit from a bounce back recovery. One-year Call Options cost about 5%, i.e. you spend $50k (from your brokerage margin) to benefit from a million $ of SPY (=SP 500). If the bounce back is > 5% within a year, you smile. If the bounce back is less than 5% a year later you lose a maximum of $50k.
Hi msk - thank you for the comment and knowledge, particularly for sharing your specific strategy given your age and NW bracket. Not something i get to hear and learn everyday! Regarding "you do not need cash nor bonds to benefit from a bounce back recovery" - i have to admit that's refreshing to hear and even at my age (28) and marginal tax bracket (35%), I've never thought of taking a leveraged position to do so. This really shows why the wealthier you are, they more risks you can take.

Now a few more questions -
  • who do you think are typically on the other side writing you the 5%, one-year Call Options? they are basically taking the exact opposite position from you and saying the market wouldn't bounce back >5% within a year. And of course a two-year Call option would cost more than 5% (if such contract exists).
  • Any particular reasons why you chose One-year Call or that's what exists in the marketplace?
  • Lastly, a rather silly question but If you don't mind, did this strategy worked for you during the past two market collapses? I'm assuming yes.
Thank you.

masonstone
Posts: 136
Joined: Thu Feb 01, 2018 4:01 pm

Re: Why not go 100% stocks?

Post by masonstone » Tue Jul 03, 2018 12:14 pm

msk wrote:
Tue Jul 03, 2018 4:10 am
I see no negative against 100% stocks except nervousness. I am 100%, worldwide by free market weight. Age 74, NW in low 8 figures. During the past two market collapses I used margin to purchase one-year Call Options once the collapse fall went beyond 25% from peak. You do not need cash nor bonds to benefit from a bounce back recovery. One-year Call Options cost about 5%, i.e. you spend $50k (from your brokerage margin) to benefit from a million $ of SPY (=SP 500). If the bounce back is > 5% within a year, you smile. If the bounce back is less than 5% a year later you lose a maximum of $50k.
I didn't know you can put a call option for an index fund.

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vineviz
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Re: Why not go 100% stocks?

Post by vineviz » Tue Jul 03, 2018 12:29 pm

cj2018 wrote:
Tue Jul 03, 2018 12:09 pm
Regarding "you do not need cash nor bonds to benefit from a bounce back recovery" - i have to admit that's refreshing to hear and even at my age (28) and marginal tax bracket (35%), I've never thought of taking a leveraged position to do so.
You might read the book “Lifecycle Investing” by Ayres and Nalebuff. They make an interesting case for young investors to use leverage early in their careers (phasing it out by age 40 or 50) to smooth their equity exposure over their lifetime.

http://www.lifecycleinvesting.net/index.html

They discuss the cheapest ways to do it, but an easy way would be to put a portion of your equity portfolio into a leveraged ETF (e.g. ProShares UltraPro S&P500 [UPRO] or ProShares UltraPro Russell2000 [URTY]).

With careful rebalancing and disciplined delevering once you reach your target equity exposure, this can be an effective investment approach during the early half of an accumulation phase.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

cj2018
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Re: Why not go 100% stocks?

Post by cj2018 » Tue Jul 03, 2018 12:31 pm

masonstone wrote:
Tue Jul 03, 2018 12:14 pm
msk wrote:
Tue Jul 03, 2018 4:10 am
I see no negative against 100% stocks except nervousness. I am 100%, worldwide by free market weight. Age 74, NW in low 8 figures. During the past two market collapses I used margin to purchase one-year Call Options once the collapse fall went beyond 25% from peak. You do not need cash nor bonds to benefit from a bounce back recovery. One-year Call Options cost about 5%, i.e. you spend $50k (from your brokerage margin) to benefit from a million $ of SPY (=SP 500). If the bounce back is > 5% within a year, you smile. If the bounce back is less than 5% a year later you lose a maximum of $50k.
I didn't know you can put a call option for an index fund.
I believe the underlying value of the call option in this case is based on the full value of the level of the S&P 500 index, not any particular index or mutual fund.

cj2018
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Re: Why not go 100% stocks?

Post by cj2018 » Tue Jul 03, 2018 1:03 pm

vineviz wrote:
Tue Jul 03, 2018 12:29 pm
cj2018 wrote:
Tue Jul 03, 2018 12:09 pm
Regarding "you do not need cash nor bonds to benefit from a bounce back recovery" - i have to admit that's refreshing to hear and even at my age (28) and marginal tax bracket (35%), I've never thought of taking a leveraged position to do so.
You might read the book “Lifecycle Investing” by Ayres and Nalebuff. They make an interesting case for young investors to use leverage early in their careers (phasing it out by age 40 or 50) to smooth their equity exposure over their lifetime.

http://www.lifecycleinvesting.net/index.html

They discuss the cheapest ways to do it, but an easy way would be to put a portion of your equity portfolio into a leveraged ETF (e.g. ProShares UltraPro S&P500 [UPRO] or ProShares UltraPro Russell2000 [URTY]).

With careful rebalancing and disciplined delevering once you reach your target equity exposure, this can be an effective investment approach during the early half of an accumulation phase.
Thank you, this is interesting.

pechy2925
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Re: Why not go 100% stocks?

Post by pechy2925 » Tue Jul 03, 2018 1:07 pm

I don't see a reason not too with an income that high. To me it seems like you'll have your bases covered regardless whether you decide to play it safe vs high risk (100% stocks). If I was in your shoes, I'd go high risk for the next 20 years or so, see where you land. Either way you'll be okay, why not make it a bit more fun? I'm pretty much 100% stocks with the exception of my target fund in my 401 and our household is making wayyy less.

cjcerny
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Re: Why not go 100% stocks?

Post by cjcerny » Tue Jul 03, 2018 2:04 pm

The only reason not to be 100% in stocks is because the volatility may be too high for you. Volatility causes stress and dumb mistakes, like selling when the stock market plunges. Volatility is even more stressful if you are retired. Bonds lower the volatility of your portfolio. You won't really know if the volatility is too high, however, until the stock market tanks hard, which it does every so often.

dbr
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Re: Why not go 100% stocks?

Post by dbr » Tue Jul 03, 2018 2:07 pm

cjcerny wrote:
Tue Jul 03, 2018 2:04 pm
The only reason not to be 100% in stocks is because the volatility of the same is too high for you. Volatility causes stress and dumb mistakes, like selling when the stock market plunges. Volatility is even more stressful if you are retired. Bonds lower the volatility of your portfolio.
Volatility is not just stress. Volatility compounds over time to produce uncertainty in long term results. The investor needs to look and consider whether or not the range of possible outcomes meets his objectives compared to the range of possible outcomes for some other selection of risk and return.

msk
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Re: Why not go 100% stocks?

Post by msk » Wed Jul 04, 2018 1:59 am

cj2018 wrote:
Tue Jul 03, 2018 12:09 pm
msk wrote:
Tue Jul 03, 2018 4:10 am
I see no negative against 100% stocks except nervousness. I am 100%, worldwide by free market weight. Age 74, NW in low 8 figures. During the past two market collapses I used margin to purchase one-year Call Options once the collapse fall went beyond 25% from peak. You do not need cash nor bonds to benefit from a bounce back recovery. One-year Call Options cost about 5%, i.e. you spend $50k (from your brokerage margin) to benefit from a million $ of SPY (=SP 500). If the bounce back is > 5% within a year, you smile. If the bounce back is less than 5% a year later you lose a maximum of $50k.
Hi msk - thank you for the comment and knowledge, particularly for sharing your specific strategy given your age and NW bracket. Not something i get to hear and learn everyday! Regarding "you do not need cash nor bonds to benefit from a bounce back recovery" - i have to admit that's refreshing to hear and even at my age (28) and marginal tax bracket (35%), I've never thought of taking a leveraged position to do so. This really shows why the wealthier you are, they more risks you can take.

Now a few more questions -
  • who do you think are typically on the other side writing you the 5%, one-year Call Options? they are basically taking the exact opposite position from you and saying the market wouldn't bounce back >5% within a year. And of course a two-year Call option would cost more than 5% (if such contract exists).
  • Any particular reasons why you chose One-year Call or that's what exists in the marketplace?
  • Lastly, a rather silly question but If you don't mind, did this strategy worked for you during the past two market collapses? I'm assuming yes.
Thank you.
Hi! Sensible questions.
The time to take risks (moderate ones!) is when you are single and still young. By the time you are 45 and your kids are about to go to college, you get rather nervous. Who sells the Calls? People who feel that the market is going sideways, like so far in 2018. Let us say you own a million $ worth of the SP500 (=SPY). Your guess is that by end of one year from today the SP500 will still be where it is now, roughly. You will collect around 1.5% to 2% in dividends (less tax of course). Let's call it 2% dividends for simplicity. Happy? No! You are greedy, so you sell Calls to me and you collect another 5%. At the end of one year, with the SP500 just going sideways, you have made 2%+5% (= 7%). Not bad, eh? If the SP500 has gone up, you do not benefit more, but you are happy with 7%. If the SP500 has dropped, say, by 10% your portfolio lost just 10%-7% (=3%). Hence the optimists expecting a quick bounce back (like myself) buy Calls from the gloomy chaps who expect either the market going sideways or falling moderately further. Those who expect drastically greater market falls play with Puts. But that's another side of the story.

You can play with options with maturity periods varying from days to a "few" years. Of course, a two year option will be worth more than a one-year option. I chose one-year options because of the steepness of the market falls. Guesswork. A very steep fall leads to overshooting, more than a grim, painfully slow and grinding fall. In the latter case I'll be tempted to go for two-year Calls.

Yes, the strategy did work for me in the two collapses post 2000. If I recall correctly I made about $50k in one and about $140k in the other, though I do not recall which one was which. I was playing with million$ chunks worth of Calls. Which was reasonable for my NW at the time. I was always aware that each $50k bet (5% of a million $) could disappear totally. Way back in the 1980s and 1990s I did not have a good feel how options really worked but that was when I fumbled and learnt. Another point is I was with TDAmeritrade as my brokers. Margin loans with them used to be around 8+% p.a. but I have now switched to Interactive Brokers and margin loans cost < 3% in our current low interest environment. Anyone interested in options, now is the time to learn; with the market just yo-yoing. It is possible to play with options without exposing yourself to huge losses. Extreme greed can easily lead to extreme losses!

CarpeDiem22
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Re: Why not go 100% stocks?

Post by CarpeDiem22 » Wed Jul 04, 2018 2:12 am

thangngo wrote:
Tue Jul 03, 2018 11:26 am
CarpeDiem22 wrote:
Mon Jun 25, 2018 12:13 pm
Two reasons for not going 100% stocks:

1. Adding some bonds increases your return while reducing risk (source: Intelligent Asset Allocator by William Bernstein)
2. During a financial crisis, assets like stocks and real estate go on sale. An investor who has the cash/bonds in this situation can buy these assets and reap good returns later when things normalise. Bonds don't dip so much, so an investor can convert bonds to stocks in such a scenario. Not having any bonds won't allow you to do so.
Just want to add a comment on #2: since the OP's time horizon is 25 years away, he is forgoing equity return for lower bond return. The difference between stock and bond return is significantly higher than the premium from rebalancing bond to stock during market downturn. The primary objective of holding bond is to lower the volatility (also reducing overall return). It's not for "market-timing" rebalancing opportunities.

OP's pension should provide enough safety net so that he can go for more aggressive AA.
I certainly agree with you regarding objective of holding bonds, and what you say is as per the Boglehead principles. My comment was a little non-Boglehead-ish, influenced by market-timing value investors who say that one should not be afraid of holding cash/bonds in a overvalued market (unlike institutional investors), to deploy the same when assets become cheap. You comment made me think about the opportunity cost of holding the cash/bonds during a long time period like 25 years, which I did not take into account earlier.

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DWesterb2iz2
Posts: 73
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Re: Why not go 100% stocks?

Post by DWesterb2iz2 » Wed Jul 04, 2018 4:42 am

These is an analogous situation described on The White Coat Investor blog. There is a great post there about 150 great, simple portfolios that I keep book marked. The first portfolio is this:

Portfolio 1: The S&P 500 Portfolio

100% Vanguard S&P 500 Index Fund

Don’t laugh. I know a very successful two-physician couple who invest in nothing but this, are 7 years out of residency, have a net worth in the $1-2 Million range. Their investment plan is working fine. Every investment dollar, whether in a retirement account or a taxable account, goes into this single fund. It is simple, very low cost, diversified among 500 different companies, and has a long track record of exceptional returns.

https://www.whitecoatinvestor.com/150-p ... han-yours/

cj2018
Posts: 116
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Re: Why not go 100% stocks?

Post by cj2018 » Thu Jul 05, 2018 11:57 am

msk wrote:
Wed Jul 04, 2018 1:59 am
cj2018 wrote:
Tue Jul 03, 2018 12:09 pm
msk wrote:
Tue Jul 03, 2018 4:10 am
I see no negative against 100% stocks except nervousness. I am 100%, worldwide by free market weight. Age 74, NW in low 8 figures. During the past two market collapses I used margin to purchase one-year Call Options once the collapse fall went beyond 25% from peak. You do not need cash nor bonds to benefit from a bounce back recovery. One-year Call Options cost about 5%, i.e. you spend $50k (from your brokerage margin) to benefit from a million $ of SPY (=SP 500). If the bounce back is > 5% within a year, you smile. If the bounce back is less than 5% a year later you lose a maximum of $50k.
Hi msk - thank you for the comment and knowledge, particularly for sharing your specific strategy given your age and NW bracket. Not something i get to hear and learn everyday! Regarding "you do not need cash nor bonds to benefit from a bounce back recovery" - i have to admit that's refreshing to hear and even at my age (28) and marginal tax bracket (35%), I've never thought of taking a leveraged position to do so. This really shows why the wealthier you are, they more risks you can take.

Now a few more questions -
  • who do you think are typically on the other side writing you the 5%, one-year Call Options? they are basically taking the exact opposite position from you and saying the market wouldn't bounce back >5% within a year. And of course a two-year Call option would cost more than 5% (if such contract exists).
  • Any particular reasons why you chose One-year Call or that's what exists in the marketplace?
  • Lastly, a rather silly question but If you don't mind, did this strategy worked for you during the past two market collapses? I'm assuming yes.
Thank you.
Hi! Sensible questions.
The time to take risks (moderate ones!) is when you are single and still young. By the time you are 45 and your kids are about to go to college, you get rather nervous. Who sells the Calls? People who feel that the market is going sideways, like so far in 2018. Let us say you own a million $ worth of the SP500 (=SPY). Your guess is that by end of one year from today the SP500 will still be where it is now, roughly. You will collect around 1.5% to 2% in dividends (less tax of course). Let's call it 2% dividends for simplicity. Happy? No! You are greedy, so you sell Calls to me and you collect another 5%. At the end of one year, with the SP500 just going sideways, you have made 2%+5% (= 7%). Not bad, eh? If the SP500 has gone up, you do not benefit more, but you are happy with 7%. If the SP500 has dropped, say, by 10% your portfolio lost just 10%-7% (=3%). Hence the optimists expecting a quick bounce back (like myself) buy Calls from the gloomy chaps who expect either the market going sideways or falling moderately further. Those who expect drastically greater market falls play with Puts. But that's another side of the story.

You can play with options with maturity periods varying from days to a "few" years. Of course, a two year option will be worth more than a one-year option. I chose one-year options because of the steepness of the market falls. Guesswork. A very steep fall leads to overshooting, more than a grim, painfully slow and grinding fall. In the latter case I'll be tempted to go for two-year Calls.

Yes, the strategy did work for me in the two collapses post 2000. If I recall correctly I made about $50k in one and about $140k in the other, though I do not recall which one was which. I was playing with million$ chunks worth of Calls. Which was reasonable for my NW at the time. I was always aware that each $50k bet (5% of a million $) could disappear totally. Way back in the 1980s and 1990s I did not have a good feel how options really worked but that was when I fumbled and learnt. Another point is I was with TDAmeritrade as my brokers. Margin loans with them used to be around 8+% p.a. but I have now switched to Interactive Brokers and margin loans cost < 3% in our current low interest environment. Anyone interested in options, now is the time to learn; with the market just yo-yoing. It is possible to play with options without exposing yourself to huge losses. Extreme greed can easily lead to extreme losses!
Thank you for the response - very insightful to hear the thinking behind your strategy.

jalbert
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Re: Why not go 100% stocks?

Post by jalbert » Fri Jul 06, 2018 3:12 am

that is not an advantage. bonds return less than stocks over the long term, including all the bear markets, panics, and crashes
That doesn't mean you will have the nerve to stay the course when your portfolio is down 65%.

And having some bonds to rebalance is not guaranteed to have left cash on the table:

https://www.portfoliovisualizer.com/bac ... asury3=100
Index fund investor since 1987.

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vineviz
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Re: Why not go 100% stocks?

Post by vineviz » Fri Jul 06, 2018 7:07 am

jalbert wrote:
Fri Jul 06, 2018 3:12 am
And having some bonds to rebalance is not guaranteed to have left cash on the table:

https://www.portfoliovisualizer.com/bac ... asury3=100
There are never any guarantees in investing, but - from a total return perspective - holding bonds during the accumulation phase has on average been very bad choice.

Looking back at each rolling 30-year period (that's about how long my stereotypical investor is working and saving for retirement) starting in 1930 (that's when my data set begins), there is NO 30-year period where a 90/10 or 80/20 portfolio using intermediate bonds returned more than a 100% large cap stock portfolio. Keeping 10% in intermediate bonds to rebalance "just in case" cost the investor an average of 45 bps per year in return.

It's true that there is a cluster of 30-year periods beginning in about 1980 in which a 90/10 or 80/20 portfolio using long-term bonds outperformed a 100% large cap stock portfolio.

But the odds aren't good: a 90/10 portfolio helped in only 15% of investment periods and by an average of only about 6bps during the WINNING periods. The 90/10 portfolio still averaged a CAGR that was 45 bps below that of the 100% stock portfolio even with the 15% chance of outperforming. Worse yet, the 80/20 portfolio using long-term bonds only helped in 7% of cases and reduced returns by 92 bps on average.

So, in conclusion, I'd say that the idea that holding bonds in a portfolio will improve RETURNS due to rebalancing is myth. If you are lucky enough to be born in the right year, lucky enough to choose the PERFECT bond duration, and lucky enough to choose the PERFECT bond allocation you STILL have roughly 10:1 odds of decreasing your returns.

Basically, holding bonds as an investor during your accumulation phase is a wager in which you have a 90% chance of losing 45 bps and a 10% chance of winning 6 bps. What rational person takes that bet?

Don't get me wrong, I'm not saying every investor should be 100% stock during accumulation. Bonds almost always reduce the volatility of a portfolio, and can often do so enough to improve risk-adjusted return. Almost everyone is risk-averse to some degree or other, so dampening volatility can prevent behavioral errors in many investors which lower returns by more than the bond allocation will.

For someone who is steadily adding money to a 401k or IRA, though, the savings themselves dampen the volatility of the account balance much more than a small bond allocation will. And by the time the investor reaches retirement age, their investment horizon and cash flow needs might very well dictate a much lower stock allocation.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

bgf
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Re: Why not go 100% stocks?

Post by bgf » Fri Jul 06, 2018 7:42 am

jalbert wrote:
Fri Jul 06, 2018 3:12 am
that is not an advantage. bonds return less than stocks over the long term, including all the bear markets, panics, and crashes
That doesn't mean you will have the nerve to stay the course when your portfolio is down 65%.

And having some bonds to rebalance is not guaranteed to have left cash on the table:

https://www.portfoliovisualizer.com/bac ... asury3=100
i understand that. i was responding directly to the specific statements quoted.
“TE OCCIDERE POSSUNT SED TE EDERE NON POSSUNT NEFAS EST"

bgf
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Re: Why not go 100% stocks?

Post by bgf » Fri Jul 06, 2018 7:45 am

vineviz wrote:
Fri Jul 06, 2018 7:07 am
jalbert wrote:
Fri Jul 06, 2018 3:12 am
And having some bonds to rebalance is not guaranteed to have left cash on the table:

https://www.portfoliovisualizer.com/bac ... asury3=100
There are never any guarantees in investing, but - from a total return perspective - holding bonds during the accumulation phase has on average been very bad choice.

Looking back at each rolling 30-year period (that's about how long my stereotypical investor is working and saving for retirement) starting in 1930 (that's when my data set begins), there is NO 30-year period where a 90/10 or 80/20 portfolio using intermediate bonds returned more than a 100% large cap stock portfolio. Keeping 10% in intermediate bonds to rebalance "just in case" cost the investor an average of 45 bps per year in return.

It's true that there is a cluster of 30-year periods beginning in about 1980 in which a 90/10 or 80/20 portfolio using long-term bonds outperformed a 100% large cap stock portfolio.

But the odds aren't good: a 90/10 portfolio helped in only 15% of investment periods and by an average of only about 6bps during the WINNING periods. The 90/10 portfolio still averaged a CAGR that was 45 bps below that of the 100% stock portfolio even with the 15% chance of outperforming. Worse yet, the 80/20 portfolio using long-term bonds only helped in 7% of cases and reduced returns by 92 bps on average.

So, in conclusion, I'd say that the idea that holding bonds in a portfolio will improve RETURNS due to rebalancing is myth. If you are lucky enough to be born in the right year, lucky enough to choose the PERFECT bond duration, and lucky enough to choose the PERFECT bond allocation you STILL have roughly 10:1 odds of decreasing your returns.

Basically, holding bonds as an investor during your accumulation phase is a wager in which you have a 90% chance of losing 45 bps and a 10% chance of winning 6 bps. What rational person takes that bet?

Don't get me wrong, I'm not saying every investor should be 100% stock during accumulation. Bonds almost always reduce the volatility of a portfolio, and can often do so enough to improve risk-adjusted return. Almost everyone is risk-averse to some degree or other, so dampening volatility can prevent behavioral errors in many investors which lower returns by more than the bond allocation will.

For someone who is steadily adding money to a 401k or IRA, though, the savings themselves dampen the volatility of the account balance much more than a small bond allocation will. And by the time the investor reaches retirement age, their investment horizon and cash flow needs might very well dictate a much lower stock allocation.
well said.
“TE OCCIDERE POSSUNT SED TE EDERE NON POSSUNT NEFAS EST"

jalbert
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Re: Why not go 100% stocks?

Post by jalbert » Fri Jul 06, 2018 1:32 pm

Over the last 40 years, a portfolio of 90% total US stock and 10% long-term treasuries with rebalancing gave up only 11bp of CAGR to just being 100% total US stock while reducing volatility enough to improve risk-adjusted return easily:

https://www.portfoliovisualizer.com/bac ... asury3=100

Bond yields were higher 40 years ago, but stock valuations were depressed at the time as well. Falling inflation and faling interest rates were a tailwind for both.
Index fund investor since 1987.

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vineviz
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Re: Why not go 100% stocks?

Post by vineviz » Fri Jul 06, 2018 1:51 pm

jalbert wrote:
Fri Jul 06, 2018 1:32 pm
Over the last 40 years, a portfolio of 90% total US stock and 10% long-term treasuries with rebalancing gave up only 11bp of CAGR to just being 100% total US stock while reducing volatility enough to improve risk-adjusted return easily:

https://www.portfoliovisualizer.com/bac ... asury3=100

Bond yields were higher 40 years ago, but stock valuations were depressed at the time as well. Falling inflation and faling interest rates were a tailwind for both.
Two other things I noticed that I think are worth keeping in mind.

First, an investor in their accumulation phase is continually adding money to the portfolio which itself dampens volatility AND tends to keep the photo fairly balanced.

Second, backtests can sometimes be very sensitive to the assumptions we make. In this case, the frequency of rebalancing affects the relative returns of the portfolios and doesn't do so in a monotonic way. The 90/10 portfolio is inferior to 100/0 portfolio with monthly or semi-annual rebalancing, is roughly equivalent with quarterly rebalancing, and only has a slight performance edge with annual rebalancing. I haven't done a formal check, but I'm very sure the differences in these portfolios with small amount of bonds is not statistically significant and, as a result, random timing effects in the data are causing spurious results to appear.

I remain confident in saying that for investors, keeping ANY allocation to bonds during their accumulation phase is very likely to produce lower absolute returns than a 100% stock portfolio for periods of 30 to 40 years. The amount of drag throughout the last 100 years has pretty consistently been about 40 bps for each 10% of the portfolio in bonds.

As with any probabilistic event, I'm confident that sometimes holding bonds might help returns. This is a low probability outcome, though, with a low value when it occur. I wouldn't base an investment strategy around it.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

jalbert
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Re: Why not go 100% stocks?

Post by jalbert » Fri Jul 06, 2018 4:22 pm

I was not claiming that adding bonds should boost returns, just that 100% stocks are not guaranteed to maximize return over one’s lifetime. I think before WW2, the equity risk premium was larger for US stocks because they were riskier. I think the long-term premium of 100/0 over 90/10 is thus likely to be less than it was during the first half of the 20th century. And certainly it is not hard to find periods where 90/10 has superior risk-adjusted returns.

Lastly, we don’t have much data for how 90% stocks and 10% TIPS (or other ratios) would fare. It would be interesting to know how it would have fared in the period of 1967-1982 when neither US stocks nor nominal treasuries offered a positive real return.
Index fund investor since 1987.

masonstone
Posts: 136
Joined: Thu Feb 01, 2018 4:01 pm

Re: Why not go 100% stocks?

Post by masonstone » Wed Jul 11, 2018 9:07 am

I wonder if you look across a 40 year or so working career whether 100% stocks would always beat any other combination. IF you never sell during a down market.

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