Current allocation is 100% stocks- any good reason to change?

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Ed_Sandwich
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Current allocation is 100% stocks- any good reason to change?

Post by Ed_Sandwich »

Age 35, 2 kids, dual income family. Given that we are still 15+ years away from needing the money (hopefully), I feel like owning bonds would be surrendering yield for unnecessary short term stability. But I am always second guessing everything, and it's especially easy to second guess the past few weeks.

My risk tolerance is quite high but let me know if I have any blind spots.

I'm considering beginning to slowly increase bond allocation, by ~1% per year until retirement. Is that a sound/dumb strategy?
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Re: Current allocation is 100% stocks- any good reason to change?

Post by pkcrafter »

I'll ask, what is the maximum % you might lose in a very bad crash when holding 100% equity? How much gain would be required to get it back?


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Re: Current allocation is 100% stocks- any good reason to change?

Post by Godot »

How much gain would be required to get it back?

What a great question. Is there a formula for this?
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Re: Current allocation is 100% stocks- any good reason to change?

Post by asif408 »

Ed_Sandwich wrote: Thu Dec 20, 2018 2:43 pm Age 35, 2 kids, dual income family. Given that we are still 15+ years away from needing the money (hopefully), I feel like owning bonds would be surrendering yield for unnecessary short term stability. But I am always second guessing everything, and it's especially easy to second guess the past few weeks.

My risk tolerance is quite high but let me know if I have any blind spots.

I'm considering beginning to slowly increase bond allocation, by ~1% per year until retirement. Is that a sound/dumb strategy?
If a 15% or so drop like the current one bothers you, it sounds like your risk tolerance is not quite as high as you first thought. Otherwise, why add bonds except for short-term stability if you have a 15+ year time horizon?

I am also 100% stocks and have a 15+ year time horizon. I own mostly EM stocks (about 65% of my total portfolio) which are down over 25% since January, and some gold mining stocks which were down closer to 30% at one point this year. My reaction to these falls was to top up my EM and gold mining allocations a few months ago. That is the type of reaction you should have if your risk tolerance is appropriate. If I was considering buying bonds now or bailing out on EM and going into US stocks then I know I would have overestimated my risk tolerance.

I think if you want to do something like add bonds gradually that is reasonable, but I would suggest documenting it and not changing your strategy based on a few month's performance. For instance, if the S&P goes up 30% from here, would you still be buying bonds? If it drops 30% more would you be buying more stocks, or adding to your bond allocation more?
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Re: Current allocation is 100% stocks- any good reason to change?

Post by mhadden1 »

At age 35 I was 100% stocks, but that was because I was too ignorant to know anything different. I still don't think that is a crazy position, for retirement savings, for a risk-tolerant person who is multiple decades away from retirement. I took a quick look at the Fidelity target date 2040 and it is basically 90/10 - not that different from 100/0.

That said - sometimes bonds do better, sometimes for long periods. A glide path toward bonds makes perfect sense to me, and of course that is what target date funds usually do. A 1% glide that heads toward 70/30 at age 65 is a more aggressive than perhaps the average Boglehead, but maybe not by that much.
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Re: Current allocation is 100% stocks- any good reason to change?

Post by retiredjg »

Ed_Sandwich wrote: Thu Dec 20, 2018 2:43 pm My risk tolerance is quite high but let me know if I have any blind spots.
There are times, even decades, when bonds pay more than stocks. Such a thing last happened from 2000-ish to 2013-ish. if you are 100% stocks during a time like this, nothing in your portfolio will make any money for that entire time period. Does that sound desirable?

Will you know you are in such a time period and be able to fix it? No, you will not know until it is over. So no, you won't be able to fix it.

I'm considering beginning to slowly increase bond allocation, by ~1% per year until retirement. Is that a sound/dumb strategy?
1% a year will only take you to about 15% bonds at retirement. I think that would be dumb in most situations. However, if you put yourself into a reasonable number now, say 20 to 25% bonds, and increase by 1% or 2% a year, it could work out rather nicely.
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Ed_Sandwich
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Re: Current allocation is 100% stocks- any good reason to change?

Post by Ed_Sandwich »

pkcrafter wrote: Thu Dec 20, 2018 2:47 pm I'll ask, what is the maximum % you might lose in a very bad crash when holding 100% equity? How much gain would be required to get it back?
Well I guess if the markets drop by 50% ('08 was 38%, right?), it would take 10 years of ~5% returns to get it back, or 15 years of 3.5% returns. I would expect higher returns than that from the TSM
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Re: Current allocation is 100% stocks- any good reason to change?

Post by Cop51 »

I am also 100% equities but I have a public pension. If I didn’t I’d probably be 80/20. My pension is my stable value. This current 15-20% decline has not bothered me one bit. This is actually an excellent risk tolerance test for me and I’m passing. I’m looking forward to 1/1 to make my 2019 Roth contribution.
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Re: Current allocation is 100% stocks- any good reason to change?

Post by harvestbook »

I'm 90/10 at 56 but don't expect a conventional "retirement" since I have royalty-producing properties. That said, I'll simply let the coming apocalyptic crash reset my AA to what many consider a reasonable level! I'll probably be 80/20 by January at this rate...

(AKA I am changing nothing, buying as much as I can)
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Re: Current allocation is 100% stocks- any good reason to change?

Post by TomatoTomahto »

Ed_Sandwich wrote: Thu Dec 20, 2018 3:03 pm
pkcrafter wrote: Thu Dec 20, 2018 2:47 pm I'll ask, what is the maximum % you might lose in a very bad crash when holding 100% equity? How much gain would be required to get it back?
Well I guess if the markets drop by 50% ('08 was 38%, right?), it would take 10 years of ~5% returns to get it back, or 15 years of 3.5% returns. I would expect higher returns than that from the TSM
Let me see. My $100 becomes $50, so 5% up is $52.50, then another 5% is $55.125, then another . . . Dude, you’re not getting there.

You’d have to have 100% gain (excluding taxes and dividends) to get it back.
Okay, I get it; I won't be political or controversial. The Earth is flat.
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Re: Current allocation is 100% stocks- any good reason to change?

Post by capjak »

Ed_Sandwich wrote: Thu Dec 20, 2018 3:03 pm
pkcrafter wrote: Thu Dec 20, 2018 2:47 pm I'll ask, what is the maximum % you might lose in a very bad crash when holding 100% equity? How much gain would be required to get it back?
Well I guess if the markets drop by 50% ('08 was 38%, right?), it would take 10 years of ~5% returns to get it back, or 15 years of 3.5% returns. I would expect higher returns than that from the TSM
If market drops 50% it will take a lot more than 5% for 10 years.

$100 drops to $50. How much does $50 need to go up in the next year to get back to $100? Answer 100%.
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Re: Current allocation is 100% stocks- any good reason to change?

Post by WhiteMaxima »

100%? Em. No you shouldn't. 80/20 to be very risky to 60/40 to be fairly balanced. I would say 100-your age = equity %.
Carol88888
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Re: Current allocation is 100% stocks- any good reason to change?

Post by Carol88888 »

I think you should consider what per cent of the portfolio you will need to spend. I was listening to Bill Bernstein last night and he says if you spend only 2% of a portfolio it will most certainly survive - barring a complete apocalypse. At 3% spending, it will PROBABLY survive

So for me, getting to a large enough portfolio so that I could live simply off the dividends in retirement was an attractive goal.I got there by taking lots of risks when younger. I don't see how you can do that if you have a lot of bonds in your portfolio. ( I could be wrong, I could be wrong about many things - this is just how I see it.)

Think very hard about your true goals. How important is money really to you? Might you be just as happy & content knowing your portfolio is good enough for your dreams without a whole lot of white knuckle times?

As to putting 15% in bonds - it's pretty minimal. It probably won't hurt the returns too much but it's not enough to really save you if we have a bad decade .
And take a look at that great post at top about "Portfolio Jitters".
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Re: Current allocation is 100% stocks- any good reason to change?

Post by KlangFool »

Ed_Sandwich wrote: Thu Dec 20, 2018 2:43 pm Age 35, 2 kids, dual income family. Given that we are still 15+ years away from needing the money (hopefully), I feel like owning bonds would be surrendering yield for unnecessary short term stability. But I am always second guessing everything, and it's especially easy to second guess the past few weeks.

My risk tolerance is quite high but let me know if I have any blind spots.

I'm considering beginning to slowly increase bond allocation, by ~1% per year until retirement. Is that a sound/dumb strategy?
Ed_Sandwich,

How do you know that your ability to take the risk is high?

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Re: Current allocation is 100% stocks- any good reason to change?

Post by KlangFool »

Ed_Sandwich wrote: Thu Dec 20, 2018 3:03 pm
pkcrafter wrote: Thu Dec 20, 2018 2:47 pm I'll ask, what is the maximum % you might lose in a very bad crash when holding 100% equity? How much gain would be required to get it back?
Well I guess if the markets drop by 50% ('08 was 38%, right?), it would take 10 years of ~5% returns to get it back, or 15 years of 3.5% returns. I would expect higher returns than that from the TSM
Ed_Sandwich,

If one or both of you are unemployed at the same time, you may never recover.

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Re: Current allocation is 100% stocks- any good reason to change?

Post by pkcrafter »

Ed_Sandwich wrote: Thu Dec 20, 2018 3:03 pm
pkcrafter wrote: Thu Dec 20, 2018 2:47 pm I'll ask, what is the maximum % you might lose in a very bad crash when holding 100% equity? How much gain would be required to get it back?
Well I guess if the markets drop by 50% ('08 was 38%, right?), it would take 10 years of ~5% returns to get it back, or 15 years of 3.5% returns. I would expect higher returns than that from the TSM
Ed, I guess you are now aware that a 50% loss requires a 100% gain to get even again. You used a 50% loss, but that's not the worst the market has experienced, the DJIA had a loss close to 90% starting in 1929 and the NASDAQ lost about the same amount in the tech crash starting in 2000.

https://www.bogleheads.org/wiki/Percent ... n_and_loss

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Re: Current allocation is 100% stocks- any good reason to change?

Post by Northern Flicker »

Well I guess if the markets drop by 50% ('08 was 38%, right?)
The broad US market was down about 55% peak to trough in the 2008/2009 market turmoil. Year boundaries are irrelevant. The broad US market was also down about 50% peak to trough in the bear market of 2000-2002. If saying you are risk tolerant means that seeing your investment account balance cut in half in a short time will not be a big deal to you, then I would agree you are risk tolerant.
Last edited by Northern Flicker on Fri Dec 21, 2018 12:11 am, edited 1 time in total.
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Re: Current allocation is 100% stocks- any good reason to change?

Post by delamer »

TomatoTomahto wrote: Thu Dec 20, 2018 3:23 pm
Ed_Sandwich wrote: Thu Dec 20, 2018 3:03 pm
pkcrafter wrote: Thu Dec 20, 2018 2:47 pm I'll ask, what is the maximum % you might lose in a very bad crash when holding 100% equity? How much gain would be required to get it back?
Well I guess if the markets drop by 50% ('08 was 38%, right?), it would take 10 years of ~5% returns to get it back, or 15 years of 3.5% returns. I would expect higher returns than that from the TSM
Let me see. My $100 becomes $50, so 5% up is $52.50, then another 5% is $55.125, then another . . . Dude, you’re not getting there.

You’d have to have 100% gain (excluding taxes and dividends) to get it back.
Ed_Sandwich -

Please make sure you understand why the math above is correct and your initial statement was wrong.

If you don’t, you are putting yourself and your family at risk, because you will be making decisions while laboring under a basic misunderstanding.

You’d need an annual return of 7.5% for 10 years to recoup after a 50% loss (and that is nominal, not real, dollars).
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Re: Current allocation is 100% stocks- any good reason to change?

Post by retiredjg »

KlangFool wrote: Thu Dec 20, 2018 4:53 pm
Ed_Sandwich wrote: Thu Dec 20, 2018 2:43 pm Age 35, 2 kids, dual income family. Given that we are still 15+ years away from needing the money (hopefully), I feel like owning bonds would be surrendering yield for unnecessary short term stability. But I am always second guessing everything, and it's especially easy to second guess the past few weeks.

My risk tolerance is quite high but let me know if I have any blind spots.

I'm considering beginning to slowly increase bond allocation, by ~1% per year until retirement. Is that a sound/dumb strategy?
Ed_Sandwich,

How do you know that your ability to take the risk is high?

KlangFool
I'd have to agree with what KlangFool is saying. Based on your age, you may have little to nothing invested in the last unpleasantness.

It is possible that you think your risk tolerance is quite high....when it really isn't. This is one of those "you have to have been there to know" things.

It is also possible that your spouse's risk tolerance is not the same as yours.

When the bad times come, a very aggressive portfolio could become more intolerable to one or both of you in ways you do not expect now.

Keep this in mind. This is not about "what you can withstand" during the bad times. You don't want an asset allocation you have to "gut your way through".

Gutting it out through a long bear market is hard on a person, hard on a family, and hard on your work life. And it can go on month after month and even year after year. Why be miserable for that long? Why be miserable to live with for that long?

Instead, pick something that you are actually comfortable with during the bad times. Pick something that does not cause you to be worried or irritable. This will not be as aggressive as you may like during the good times you are so familiar with. But you will find it works out better in the long run.
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Re: Current allocation is 100% stocks- any good reason to change?

Post by whodidntante »

If you have a plan to ride through a job loss, short term disability, and a particularly nasty hangnail to go with your risk tolerance then I guess 100% stocks is OK. But I doubt your risk tolerance is what you think because you probably didn't have much in the market the last time it got cut in half.
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Re: Current allocation is 100% stocks- any good reason to change?

Post by nisiprius »

Ed_Sandwich wrote: Thu Dec 20, 2018 2:43 pm Age 35, 2 kids, dual income family. Given that we are still 15+ years away from needing the money (hopefully), I feel like owning bonds would be surrendering yield for unnecessary short term stability. But I am always second guessing everything, and it's especially easy to second guess the past few weeks.

My risk tolerance is quite high but let me know if I have any blind spots.

I'm considering beginning to slowly increase bond allocation, by ~1% per year until retirement. Is that a sound/dumb strategy?
Only you know your risk tolerance. The fact that you are asking strangers on the Internet about this suggests that your risk tolerance is not really all that high. If you are 35, then you were 25 in 2008-2009. Did you have serious retirement savings in stocks and a family during 2008-2009? How did you feel at that time? (Try to remember. Like the pain of childbirth, the pain of financial loss is difficult to remember!)

There is no reason to expect another 2008-2009, no reason not to expect one, and if one happens no reason why it couldn't be worse or last longer than than 2008-2009. The crash in 1929 was followed by recovery by the end of 1936, which was then immediately followed by another crash in 1937 which lasted another seven years. That second crash involved a -50% decline in the stock market. It was by almost every measure not only as bad as 2008-2009, but worse, and yet it is almost forgotten because 1929 was much worse.

Review what you know about the past behavior of the stock market, and review what you know about yourself and your own risk tolerance.

Yes, I personally think that increasing bond allocation gradually is a good idea. If you don't get started, you will be like people who have posted in the forum, who arrived at age 65 with 100% stocks, and were both afraid to stay at 100% stocks, and afraid to committing to the luck of a sudden large change in allocation at what might be a bad time. It is a lot easier to increase bond allocation gradually if you have a bond allocation.

I post this for what it is worth. It is simply an indication of a) what Morningstar chooses to label "conservative," "moderate," and "aggressive," which is also b) a good representation of the range of allocations which actual fund companies have chosen to implement in their target-date funds. That is, it is just a kind of consensus opinion. If you are outside the band bordered by the red and purple lines, you should look carefully at your own risk tolerance. Either you have an allocation that doesn't fit your risk tolerance, or you have an unusually low or unusually high risk tolerance.

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staythecourse
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Re: Current allocation is 100% stocks- any good reason to change?

Post by staythecourse »

Doesn't matter if the market is up, down, or sideways one should not consider 100% equity unless they can check of EACH box in the criteria below...

1. Long time horizon (10+ years)
2. No need for liquidity.
3. EF of AT LEAST 1 year
4. Recession proof job
5. Ability to stay the course.

In my opinion, no. 4 above precludes nearly everybody from being 100% equities. Most think it is no. 5, but data shows from studies (like Fidelity's) that most don't bail out when the time gets rough. Unfortunately folks who think they won't get fired figure out they are not immune and unfortunately as Murphy's law or common sense says usually happens when the economy tanks and getting a new job is not so easy. That leads to no. 2 being breached and so forth.

Notice NONE of the points above have anything to do with the valuation of the markets.

Good luck.
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Re: Current allocation is 100% stocks- any good reason to change?

Post by retiredjg »

staythecourse wrote: Thu Dec 20, 2018 5:57 pm 1. Long time horizon (10+ years)
2. No need for liquidity.
3. EF of AT LEAST 1 year
4. Recession proof job
5. Ability to stay the course.
I like your list except for one thing. "Ability to stay the course" can be interpreted as being able to persevere and get through it....even if that means you are miserable and make your family nuts with your terrible behavior month after month. That's not acceptable in my book. It is bad investing.

I would suggest that "ability to stay the course" needs to be understood to be without being worried or short tempered or irritable. That essentially means you have little to no emotional reaction to the drop in your treasured nest egg.

This is an entirely different construct. I think many people don't yet see that.

And yes, valuation of the markets is not really very important when it comes down to it.
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munemaker
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Re: Current allocation is 100% stocks- any good reason to change?

Post by munemaker »

If you don't see any issues with 100% stocks in this environment, then I guess it is working well for you.
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Re: Current allocation is 100% stocks- any good reason to change?

Post by munemaker »

staythecourse wrote: Thu Dec 20, 2018 5:57 pm
4. Recession proof job

In my opinion, no. 4 above precludes nearly everybody from being 100% equities.
Tenured teachers in PA would qualify under number 4. During the 2008 recession, everyone we knew was concerned about the economy and their jobs...except the teachers we know (and we know several). They were pretty much oblivious to the whole thing. Not worried about employment. Raises and benefits continued as usual. No concerns.
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burt
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Re: Current allocation is 100% stocks- any good reason to change?

Post by burt »

Older people of modest means have no business being anywhere near 100% equities.
Age in bonds is a good place to start for people of modest means.
No way will I jeopardize my Wednesday meatloaf dinner at the local diner.

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Re: Current allocation is 100% stocks- any good reason to change?

Post by staythecourse »

munemaker wrote: Thu Dec 20, 2018 6:51 pm
staythecourse wrote: Thu Dec 20, 2018 5:57 pm
4. Recession proof job

In my opinion, no. 4 above precludes nearly everybody from being 100% equities.
Tenured teachers in PA would qualify under number 4. During the 2008 recession, everyone we knew was concerned about the economy and their jobs...except the teachers we know (and we know several). They were pretty much oblivious to the whole thing. Not worried about employment. Raises and benefits continued as usual. No concerns.
Correct. If I was to generalize usually I put physician, some medical fields, tenured professor, tenured teacher, government/ public sector worker, etc... in that category. That is about it. The point being most don't fall in that category.

Good luck.
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Re: Current allocation is 100% stocks- any good reason to change?

Post by dreamjob9 »

retiredjg wrote: Thu Dec 20, 2018 6:08 pm
staythecourse wrote: Thu Dec 20, 2018 5:57 pm 1. Long time horizon (10+ years)
2. No need for liquidity.
3. EF of AT LEAST 1 year
4. Recession proof job
5. Ability to stay the course.
I like your list except for one thing. "Ability to stay the course" can be interpreted as being able to persevere and get through it....even if that means you are miserable and make your family nuts with your terrible behavior month after month. That's not acceptable in my book. It is bad investing.

I would suggest that "ability to stay the course" needs to be understood to be without being worried or short tempered or irritable. That essentially means you have little to no emotional reaction to the drop in your treasured nest egg.

This is an entirely different construct. I think many people don't yet see that.

And yes, valuation of the markets is not really very important when it comes down to it.
I am 100% equities including 25% in a single stock (Redfin). 75% in broad, U.S weighted index funds. I am 37 year old physician, single family earner w/ kids and a wife. 1 year EF with no debt except a reasonable mortgage at 3.3%. Portfolio is just a little above 7 figures.

I think I can stay the course & continue to add as this market is heading into a bear market w/ an impending recession. I do not plan to buy anymore Redfin, but I'm not selling it.

I hope this ends well!
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MikeWillRetire
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Re: Current allocation is 100% stocks- any good reason to change?

Post by MikeWillRetire »

burt wrote: Thu Dec 20, 2018 6:55 pm Older people of modest means have no business being anywhere near 100% equities.
Age in bonds is a good place to start for people of modest means.
No way will I jeopardize my Wednesday meatloaf dinner at the local diner.

burt
This I agree with.
staythecourse
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Re: Current allocation is 100% stocks- any good reason to change?

Post by staythecourse »

dreamjob9 wrote: Thu Dec 20, 2018 8:02 pm
retiredjg wrote: Thu Dec 20, 2018 6:08 pm
staythecourse wrote: Thu Dec 20, 2018 5:57 pm 1. Long time horizon (10+ years)
2. No need for liquidity.
3. EF of AT LEAST 1 year
4. Recession proof job
5. Ability to stay the course.
I like your list except for one thing. "Ability to stay the course" can be interpreted as being able to persevere and get through it....even if that means you are miserable and make your family nuts with your terrible behavior month after month. That's not acceptable in my book. It is bad investing.

I would suggest that "ability to stay the course" needs to be understood to be without being worried or short tempered or irritable. That essentially means you have little to no emotional reaction to the drop in your treasured nest egg.

This is an entirely different construct. I think many people don't yet see that.

And yes, valuation of the markets is not really very important when it comes down to it.
I am 100% equities including 25% in a single stock (Redfin). 75% in broad, U.S weighted index funds. I am 37 year old physician, single family earner w/ kids and a wife. 1 year EF with no debt except a reasonable mortgage at 3.3%. Portfolio is just a little above 7 figures.

I think I can stay the course & continue to add as this market is heading into a bear market w/ an impending recession. I do not plan to buy anymore Redfin, but I'm not selling it.

I hope this ends well!
Wow a quarter of your portfolio in a single stock? Also it being so highly correlated to 75% of your other stocks? Don't think that is a great idea, but am sure you know that already? I would look at it as 100% of your portfolio as U.S. equities and 25% of all your money in "play money".

As for being 100% equities I would think you are good to go as long as you stick to the plan in the 75% that is in 100% broad market index funds. The 25% in your lottery ticket is likely to decrease your long term returns due to under performance, but that is a bet hopefully that works out.

Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle
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Re: Current allocation is 100% stocks- any good reason to change?

Post by Max The Dog »

I'm far from an expert, but I think of bonds as money insurance. Hopefully you never need to use it. I don't mind "paying" the cost of possibly lower returns for the peace of mind. And, if stocks take a real dive, you'll have some money to put into the stocks and not feel bad about the market going down. How much insurance do you need?
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smarcus3
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Re: Current allocation is 100% stocks- any good reason to change?

Post by smarcus3 »

As none of us can tell the future, we can only assume in average equities will return 10% per year on average. This means that after a large recession equities will have to rise more to keep this historical rate of return. I see no reason to assume that the world is going to end. Just the same as why the market will fall some after a long bull run. Stay the course and over the light haul I'm very comfortable assuming 7% real rate of return over the long haul. Who knows what that rate will be over the next 5 though.

There's no reason to panic that if you fall by 50% you have to then increase 100%. The same thing works after a long bull run. Stocks are 3 times higher. Even if they drop by 50% they've still grown by 150%
This is my personal opinion. I'm an engineer not a financial advisor.
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Re: Current allocation is 100% stocks- any good reason to change?

Post by Bongleur »

nisiprius wrote: Thu Dec 20, 2018 5:49 pm I post this for what it is worth. It is simply an indication of a) what Morningstar chooses to label "conservative," "moderate," and "aggressive," which is also b) a good representation of the range of allocations which actual fund companies have chosen to implement in their target-date funds. That is, it is just a kind of consensus opinion. If you are outside the band bordered by the red and purple lines, you should look carefully at your own risk tolerance. Either you have an allocation that doesn't fit your risk tolerance, or you have an unusually low or unusually high risk tolerance.

Image
NOTE: on this chart the "age in bonds" line represents the STOCK fraction.

So up until about age 50, even the conservative line has significantly more stocks that the "age in bonds" paradigm.
And after age 50, even the below-moderate line contains significantly more stocks than "age in bonds."

Even if you draw 10% high & low bands around the "age in bonds" line, more stocks.

Where exactly did the data in this chart come from? Why & when did this paradigm shift occur?
I have to wonder if the companies creating these funds have chosen a certain method of backtesting or forcasting that will allow them to claim a higher expected yield than the sort of analysis used in previous times.
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smarcus3
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Re: Current allocation is 100% stocks- any good reason to change?

Post by smarcus3 »

Not sure where this shift happened but not 'research' I see is that as retirees need more than 30 years worth of time horizon in retirement, having a higher % of equities is better than less equities. I.e. a 70-30 has a higher chance of success than 30-70 bonds over a time horizon greater than 30 years.
This is my personal opinion. I'm an engineer not a financial advisor.
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Re: Current allocation is 100% stocks- any good reason to change?

Post by Ed_Sandwich »

nisiprius wrote: Thu Dec 20, 2018 5:49 pm
Ed_Sandwich wrote: Thu Dec 20, 2018 2:43 pm Age 35, 2 kids, dual income family. Given that we are still 15+ years away from needing the money (hopefully), I feel like owning bonds would be surrendering yield for unnecessary short term stability. But I am always second guessing everything, and it's especially easy to second guess the past few weeks.

My risk tolerance is quite high but let me know if I have any blind spots.

I'm considering beginning to slowly increase bond allocation, by ~1% per year until retirement. Is that a sound/dumb strategy?
Only you know your risk tolerance. The fact that you are asking strangers on the Internet about this suggests that your risk tolerance is not really all that high. If you are 35, then you were 25 in 2008-2009. Did you have serious retirement savings in stocks and a family during 2008-2009? How did you feel at that time? (Try to remember. Like the pain of childbirth, the pain of financial loss is difficult to remember!)

There is no reason to expect another 2008-2009, no reason not to expect one, and if one happens no reason why it couldn't be worse or last longer than than 2008-2009. The crash in 1929 was followed by recovery by the end of 1936, which was then immediately followed by another crash in 1937 which lasted another seven years. That second crash involved a -50% decline in the stock market. It was by almost every measure not only as bad as 2008-2009, but worse, and yet it is almost forgotten because 1929 was much worse.

Review what you know about the past behavior of the stock market, and review what you know about yourself and your own risk tolerance.

Yes, I personally think that increasing bond allocation gradually is a good idea. If you don't get started, you will be like people who have posted in the forum, who arrived at age 65 with 100% stocks, and were both afraid to stay at 100% stocks, and afraid to committing to the luck of a sudden large change in allocation at what might be a bad time. It is a lot easier to increase bond allocation gradually if you have a bond allocation.

I post this for what it is worth. It is simply an indication of a) what Morningstar chooses to label "conservative," "moderate," and "aggressive," which is also b) a good representation of the range of allocations which actual fund companies have chosen to implement in their target-date funds. That is, it is just a kind of consensus opinion. If you are outside the band bordered by the red and purple lines, you should look carefully at your own risk tolerance. Either you have an allocation that doesn't fit your risk tolerance, or you have an unusually low or unusually high risk tolerance.

Image
Thanks, I appreciate the great post.
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Re: Current allocation is 100% stocks- any good reason to change?

Post by Ed_Sandwich »

staythecourse wrote: Thu Dec 20, 2018 5:57 pm Doesn't matter if the market is up, down, or sideways one should not consider 100% equity unless they can check of EACH box in the criteria below...

1. Long time horizon (10+ years)
2. No need for liquidity.
3. EF of AT LEAST 1 year
4. Recession proof job
5. Ability to stay the course.

In my opinion, no. 4 above precludes nearly everybody from being 100% equities. Most think it is no. 5, but data shows from studies (like Fidelity's) that most don't bail out when the time gets rough. Unfortunately folks who think they won't get fired figure out they are not immune and unfortunately as Murphy's law or common sense says usually happens when the economy tanks and getting a new job is not so easy. That leads to no. 2 being breached and so forth.

Notice NONE of the points above have anything to do with the valuation of the markets.

Good luck.
Thanks. I can only answer definitely yes to 1/2/5. Based on everyone's answers, I am going to begin a glide path toward bonds, ending at about 25% in several years.
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Re: Current allocation is 100% stocks- any good reason to change?

Post by dknightd »

I don't think I would ever feel comfortable 100% stocks. I don't think I've ever gone above 60%. That might have been a mistake. I don't think I'd ever go outside of 80/20 or 20/80. YMMV
Now is not the time to correct. Let it ride. Consider selling stocks, and moving toward your desired allocation, when the stock market next reaches new highs. I'm pretty sure that will happen at least once before you need the money, but I could be wrong . . .
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Re: Current allocation is 100% stocks- any good reason to change?

Post by Ed_Sandwich »

retiredjg wrote: Thu Dec 20, 2018 5:31 pm
KlangFool wrote: Thu Dec 20, 2018 4:53 pm
Ed_Sandwich wrote: Thu Dec 20, 2018 2:43 pm Age 35, 2 kids, dual income family. Given that we are still 15+ years away from needing the money (hopefully), I feel like owning bonds would be surrendering yield for unnecessary short term stability. But I am always second guessing everything, and it's especially easy to second guess the past few weeks.

My risk tolerance is quite high but let me know if I have any blind spots.

I'm considering beginning to slowly increase bond allocation, by ~1% per year until retirement. Is that a sound/dumb strategy?
Ed_Sandwich,

How do you know that your ability to take the risk is high?

KlangFool
I'd have to agree with what KlangFool is saying. Based on your age, you may have little to nothing invested in the last unpleasantness.

It is possible that you think your risk tolerance is quite high....when it really isn't. This is one of those "you have to have been there to know" things.

It is also possible that your spouse's risk tolerance is not the same as yours.

When the bad times come, a very aggressive portfolio could become more intolerable to one or both of you in ways you do not expect now.

Keep this in mind. This is not about "what you can withstand" during the bad times. You don't want an asset allocation you have to "gut your way through".

Gutting it out through a long bear market is hard on a person, hard on a family, and hard on your work life. And it can go on month after month and even year after year. Why be miserable for that long? Why be miserable to live with for that long?

Instead, pick something that you are actually comfortable with during the bad times. Pick something that does not cause you to be worried or irritable. This will not be as aggressive as you may like during the good times you are so familiar with. But you will find it works out better in the long run.
Understood, and agree. This is my concern. I had very little invested in 2008 and have ridden the last near-decade in equities, but I do realize that things will not be this rosy forever.
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Re: Current allocation is 100% stocks- any good reason to change?

Post by Ed_Sandwich »

smarcus3 wrote: Thu Dec 20, 2018 10:26 pm As none of us can tell the future, we can only assume in average equities will return 10% per year on average. This means that after a large recession equities will have to rise more to keep this historical rate of return. I see no reason to assume that the world is going to end. Just the same as why the market will fall some after a long bull run. Stay the course and over the light haul I'm very comfortable assuming 7% real rate of return over the long haul. Who knows what that rate will be over the next 5 though.

There's no reason to panic that if you fall by 50% you have to then increase 100%. The same thing works after a long bull run. Stocks are 3 times higher. Even if they drop by 50% they've still grown by 150%
Thanks. I also assume +10% nominal, +7% real for stocks. One thing I have been looking for, but unable to find, is a similar 'rule of thumb' for bonds. Does one exist?
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Re: Current allocation is 100% stocks- any good reason to change?

Post by nisiprius »

Bongleur wrote: Fri Dec 21, 2018 3:09 am...Where exactly did the data in this chart come from? Why & when did this paradigm shift occur?...
It was created by Morningstar in order to benchmark target-date funds. They describe their methodology here.

Morningstar itself, or maybe it was Ibbotson-acquired-by-Morningstar, is in the business of retirement consulting and developed their own glide slopes through some complex mathematical methodology which may or may not be reasonable but is typical of what is being done.

The paradigm shift probably occurred at about the time mutual fund companies began offering target-date funds for 401(k) plans, e.g. 1996 for Fidelity's Freedom Funds. I don't know the historical background of why that happened; perhaps regulations began to allow 401(k) plans to default or encourage their use?

Morningstar has a great chart showing how their curves compare with the actual glide slopes of over twenty actual funds, that the funds pretty well crayon in the space between their "conservative" and "aggressive" curves.

Image

So, right or wrong, I regard Morningstar's glide slope curves as good definitions of what the retirement investing industry means by conservative, moderate, and aggressive allocations. I personally think they are very reasonable, and the big take-home is just how wide the range is. (And also, just how aggressive "100% stocks" gets to be.)
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Re: Current allocation is 100% stocks- any good reason to change?

Post by staythecourse »

Ed_Sandwich wrote: Fri Dec 21, 2018 9:06 am
smarcus3 wrote: Thu Dec 20, 2018 10:26 pm As none of us can tell the future, we can only assume in average equities will return 10% per year on average. This means that after a large recession equities will have to rise more to keep this historical rate of return. I see no reason to assume that the world is going to end. Just the same as why the market will fall some after a long bull run. Stay the course and over the light haul I'm very comfortable assuming 7% real rate of return over the long haul. Who knows what that rate will be over the next 5 though.

There's no reason to panic that if you fall by 50% you have to then increase 100%. The same thing works after a long bull run. Stocks are 3 times higher. Even if they drop by 50% they've still grown by 150%
Thanks. I also assume +10% nominal, +7% real for stocks. One thing I have been looking for, but unable to find, is a similar 'rule of thumb' for bonds. Does one exist?
I believe bond returns are pretty accurate to forecast... The current yield, I believe, predicts closely to the future return of bonds. Hope someone will add/ correct me.

Good luck.
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Re: Current allocation is 100% stocks- any good reason to change?

Post by smarcus3 »

Bonds annualized return from 1929-2017 is 5.4%

https://personal.vanguard.com/us/insigh ... ns?lang=en

If rates keep increasing value of current bonds decreases.
This is my personal opinion. I'm an engineer not a financial advisor.
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Re: Current allocation is 100% stocks- any good reason to change?

Post by Bongleur »

smarcus3 wrote: Fri Dec 21, 2018 10:00 am Bonds annualized return from 1929-2017 is 5.4%

https://personal.vanguard.com/us/insigh ... ns?lang=en

If rates keep increasing value of current bonds decreases.
But how does that 5.4% correspond to a fund you can buy today? Which fund is mathematically the same as this historical mashup?
>
For U.S. bond market returns, we use
the S&P High Grade Corporate Index from 1926 through 1968;
the Citigroup High Grade Index from 1969 through 1972;
the Lehman Brothers U.S. Long Credit AA Index from 1973 through 1975;
the Bloomberg Barclays U.S. Aggregate Bond Index from 1976 through 2009; and
the Bloomberg Barclays U.S. Aggregate Float Adjusted Index thereafter.
>
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Re: Current allocation is 100% stocks- any good reason to change?

Post by smarcus3 »

Bnd follows the current index
This is my personal opinion. I'm an engineer not a financial advisor.
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Re: Current allocation is 100% stocks- any good reason to change?

Post by Bongleur »

Right. So how much error do you introduce by backtesting with the historical data?
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Re: Current allocation is 100% stocks- any good reason to change?

Post by DeadPoets »

I’m 35 and am 90/10 TSM & TBM.

I’d be ok with 85/15 or 80/20 too.
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Re: Current allocation is 100% stocks- any good reason to change?

Post by smectym »

Ed_Sandwich wrote: Thu Dec 20, 2018 2:43 pm Age 35, 2 kids, dual income family. Given that we are still 15+ years away from needing the money (hopefully), I feel like owning bonds would be surrendering yield for unnecessary short term stability. But I am always second guessing everything, and it's especially easy to second guess the past few weeks.

My risk tolerance is quite high but let me know if I have any blind spots.

I'm considering beginning to slowly increase bond allocation, by ~1% per year until retirement. Is that a sound/dumb strategy?
Your instincts are sound. Suggest you consider sticking to Treasury bonds for the time being. Consider overweighting the short end (2 year treasury relatively attractive). Look into Treasury Direct; While many brokerages now offer good deals on treasury buys, you still might do better with the Treasury Direct website where everything is free.

As to “your” risk tolerance, suggest you try to incorporate your spouse’s and your kids’ hypothetical risk tolerance into your investment equation even though they aren’t focused on anything concerning investments. If you are running the money and your loved ones haven’t a clue, perhaps consider their welfare, which includes their attributed risk tolerance, as you design the portfolio.

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Re: Current allocation is 100% stocks- any good reason to change?

Post by msk »

I suspect that typical BHs have a much longer horizon than is often publicly discussed. E.g. I cannot imagine an 80 year old BH with only 10 years worth of portfolio left. BHs all worry that we may live much longer than we actually do, and with possibly very costly last years. I am 74. So the OP, IMHO, has a MUCH longer investment horizon than his retirement date. His portfolio will be withdrawn from in tiny dribs and drabs from that date, and for a true BH he will drop dead at the "average" life expectancy but with a very healthy portfolio. A 100% stocks portfolio will withstand 5% withdrawal p.a. INDEFINITELY. The cash withdrawals will yo-yo up and down, but on average, will keep up with inflation forever, and the remaining portfolio will also keep up with inflation forever. I checked this with Shiller's monthly data from 1871! Basically, with enough nerves and patience there is little to worry about a 100% stocks portfolio. Piketty also found that "Trade and Industry" on average paid a percent or two above typical 4% real returns for productive land and RE investments over more than 300 years. I am 100% in stocks worldwide by market weight and if my heirs listen to my advice they ought to pass on each fraction inherited from my estate onto their heirs in real terms, provided they never withdraw more than 5% in any one year.

Inflation is a major worry. I have been retired for 18 years and inflation has been 46% since 2000. Worry about REAL returns and disbursements. When did bonds ever pay 5% real over a decade or more? If one insists on bonds, please do consider TIPS.
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Re: Current allocation is 100% stocks- any good reason to change?

Post by smarcus3 »

I feel stupid but what's p.a.? Assuming something portfolio adjusted.
This is my personal opinion. I'm an engineer not a financial advisor.
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Re: Current allocation is 100% stocks- any good reason to change?

Post by stemikger »

I didn't read the other replies yet, but adding 10% in bonds will not be a deal breaker and maybe help you sleep better. After 25 years of investing for retirement, it took me a long time to stop second guessing myself and pick an AA and stay with it. For what it's worth John Bogle has said never all in or all out of the market. So again, at your age having 100% or 90% in bonds is reasonable, but only you know how you react when we have extreme volatility or when the market is doing great and greed might set in. Good Luck!

I'm 53 turning 54 in June and I have been holding the Vanguard Balanced Index Fund and I finally found my sweet spot where I don't think about the market or look at my portfolio. I wish you the same!

P.S. The Vanguard Balanced Index fund holds 60% in stocks and 40% in bonds (all U.S.) and I plan to hold this for life!
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