Why does AA matter as long as I stick to it?

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delrinson
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Why does AA matter as long as I stick to it?

Post by delrinson » Mon Jun 24, 2019 10:37 am

My apologies in advance for a basic question for which there may be very obvious answers...

I am having difficulty understanding why one's basic AA in retirement matters (within reason, of course) as long as one sticks to it. For sake of simplicity, let's think simply in terms of stock/bond. Why should I care whether I'm 80/20 or 70/30 or 50/50 as long as I stick to it and as long as I have enough in fixed income to cover expenses? And if I shouldn't care, then why not hug a lower bond/stock ratio in the interests of higher returns over the long haul?

I'm about seven years away from retirement and am currently 80/20 which which I'm quite comfortable. When I retire, I will reassess and perhaps adjust AA. But even then, I think I'll question the value of having a significantly higher bond allocation. It seems that what will be most important is simply sticking to my (somewhat arbitrarily chosen) AA.

Thanks in advance for any insights and advice.
Last edited by delrinson on Mon Jun 24, 2019 1:12 pm, edited 2 times in total.

deltaneutral83
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Re: Why does AA matter as long as I stick to it?

Post by deltaneutral83 » Mon Jun 24, 2019 10:42 am

I anticipated after reading your first sentence that you would be asking to increase your AA more toward 100/0 from something like 60/40... I don't think many will recommend being anything under 30/70 even in retirement just as a matter to keep up with inflation. Even a 50/50 portfolio gives you tremendous protection in a 50% sell off of equities. Your portfolio would probably be down less than 20%. For retirees I often see posts between 40/60 and 60/40 which 50/50 puts you square in the middle, of course everyone is different for their needs/goals/ability and need to increase risk

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David Jay
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Re: Why does AA matter as long as I stick to it?

Post by David Jay » Mon Jun 24, 2019 10:45 am

It doesn’t matter as long as an individual, to use your words, can “stick with it”. That is the operative phrase.

For many the comfort level changes when their “human capital” goes away. One’s AA needs to fit their stage-of-life.
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Re: Why does AA matter as long as I stick to it?

Post by bloom2708 » Mon Jun 24, 2019 10:50 am

***20/80 = 20% bonds, 80% stocks.....invert all my advice 1/n. :oops:

The devil is in the details. If you are sitting at 50x or 100x your spending, then 20/80 or 0/100 will meet your needs.

20/80 would be at the low end of the recommendation for stocks in retirement. You have 7 years to go, so you are either very risk intolerant or you just don't need to take the risk of stocks.

What is interesting is many that don't take risks are the ones who can take the risks. If you have a pension that covers all spending, SS will be a bonus on top, then you both don't have to take any risk and yet can/could take the risk of 60/40 or 70/30.

When stocks are dropping like stones in a pond, it is hard to sell bonds and buy stocks. When stocks are running wild, many let them run. If you have 2, 3,4, 5% bands for re-balancing, then just stick to those and you will be fine.

Without understanding why you are 20/80 7 years before retirement, we are just guessing and reading into your post. Might be accurate or way off.
Last edited by bloom2708 on Mon Jun 24, 2019 11:28 am, edited 1 time in total.
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Re: Why does AA matter as long as I stick to it?

Post by remomnyc » Mon Jun 24, 2019 10:51 am

A lot of people who were comfortable with 100/0 or 80/20 ended up selling stocks in 2000 and 2008, just when they should have been selling bonds and buying more stocks. Often stock market crashes come with job losses. So, to answer your question, assuming you have enough bonds for expenses during a market downturn, the stick to it part is the problem. People think they can stick to it until their account loses 50% of its values.

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Re: Why does AA matter as long as I stick to it?

Post by H-Town » Mon Jun 24, 2019 10:52 am

David Jay wrote:
Mon Jun 24, 2019 10:45 am
It doesn’t matter as long as an individual, to use your words, can “stick with it”. That is the operative phrase.

For many the comfort level changes when their “human capital” goes away. One’s AA needs to fit their stage-of-life.
This. "Stick with it" is easier said than done.

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Re: Why does AA matter as long as I stick to it?

Post by wolf359 » Mon Jun 24, 2019 10:54 am

NOTE: His notation is stated as bonds/equity. Most people state it as equity/bonds.

So when OP is saying 20/80, he means what the some responders would call 80/20.

OP has an aggressive asset allocation, and is asking why not.

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Re: Why does AA matter as long as I stick to it?

Post by Taylor Larimore » Mon Jun 24, 2019 10:55 am

delrinson:

Your asset allocation (whether you stick to it or not) is your most important portfolio decision because it determines your expected return and your expected risk of loss. All expertly designed Target Funds increase their bond allocations as the retirement date approaches. Probably, you should too.

Your current allocation of 80% stocks means that in a bear market your portfolio could lose 40% or more of your life savings (1/2 your stock allocation). If you can afford this, fine. If not, you should increase your safe fixed/income allocation.

Personally, I put savings that I cannot afford to lose in Vanguard Total Bond Market Index Fund. The rest is in a broad stock market index fund.

Best wishes
Taylor
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Re: Why does AA matter as long as I stick to it?

Post by vineviz » Mon Jun 24, 2019 10:56 am

delrinson wrote:
Mon Jun 24, 2019 10:37 am
I am having difficulty understanding why one's basic AA in retirement matters (within reason, of course) as long as one sticks to it. For sake of simplicity, let's think simply in terms of bond/equity. Why should I care whether I'm 20/80 or 30/70 or 50/50 as long as I stick to it and as long as I have enough in fixed income to cover expenses? And if I shouldn't care, then why not hug a lower bond/stock ratio in the interests of higher returns over the long haul?
Most people have two general preferences:

1) For a given amount of expected return, they generally prefer investments with lower expected volatility over higher volatility.

2) For a given amount of expected volatility, they generally prefer investments with higher expected returns over lower returns.

Sticking to your investment plan is, as you observe, VERY important but not the ONLY important thing. Your asset allocation is a primary decision in balancing expected return and expected volatility.

If your utility function is similar to the typical person, as described above, your asset allocation should expose you to as much volatility (aka risk) as you can comfortably bear: no more, and no less.

If a 50/50 asset allocation NEITHER materially lowers your chances of obtaining your investment goals as opposed to, say, a 30/70 allocation NOR triggers a risk-aversive emotional response when the volatility shows up, it seems to me it would be illogical to reduce the portfolio volatility any further than that.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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delrinson
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Re: Why does AA matter as long as I stick to it?

Post by delrinson » Mon Jun 24, 2019 10:59 am

bloom2708 wrote:
Mon Jun 24, 2019 10:50 am
The devil is in the details. If you are sitting at 50x or 100x your spending, then 20/80 or 0/100 will meet your needs.

20/80 would be at the low end of the recommendation for stocks in retirement. You have 7 years to go, so you are either very risk intolerant or you just don't need to take the risk of stocks.

What is interesting is many that don't take risks are the ones who can take the risks. If you have a pension that covers all spending, SS will be a bonus on top, then you both don't have to take any risk and yet can/could take the risk of 60/40 or 70/30.

When stocks are dropping like stones in a pond, it is hard to sell bonds and buy stocks. When stocks are running wild, many let them run. If you have 2, 3,4, 5% bands for re-balancing, then just stick to those and you will be fine.

Without understanding why you are 20/80 7 years before retirement, we are just guessing and reading into your post. Might be accurate or way off.
I am 20% fixed income and 80% stock.

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delrinson
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Re: Why does AA matter as long as I stick to it?

Post by delrinson » Mon Jun 24, 2019 10:59 am

bloom2708 wrote:
Mon Jun 24, 2019 10:50 am
The devil is in the details. If you are sitting at 50x or 100x your spending, then 20/80 or 0/100 will meet your needs.

20/80 would be at the low end of the recommendation for stocks in retirement. You have 7 years to go, so you are either very risk intolerant or you just don't need to take the risk of stocks.

What is interesting is many that don't take risks are the ones who can take the risks. If you have a pension that covers all spending, SS will be a bonus on top, then you both don't have to take any risk and yet can/could take the risk of 60/40 or 70/30.

When stocks are dropping like stones in a pond, it is hard to sell bonds and buy stocks. When stocks are running wild, many let them run. If you have 2, 3,4, 5% bands for re-balancing, then just stick to those and you will be fine.

Without understanding why you are 20/80 7 years before retirement, we are just guessing and reading into your post. Might be accurate or way off.
I am 20% fixed income and 80% stock.

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Re: Why does AA matter as long as I stick to it?

Post by dbr » Mon Jun 24, 2019 11:02 am

It depends on how much your AA affects your ability to meet your goals. Just as examples, if you are retired and are wealthy enough compared to what you want to spend, AA does not matter. If you are retired and not so wealthy that it doesn't matter, asset allocation has a weak effect on retirement success unless you make the mistake of trying to withdraw too much from an allocation that has too low a return. If you are working and have aspirations to accumulate some amount of savings for retirement then asset allocation matters a great deal, alongside other factors.

The analysis to do is an understanding of how asset allocation affects the distribution of possible future returns. Then you have to decide on how much you care about the consequences of that.

PS Having enough in fixed income to "cover" expenses doesn't matter either.

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Re: Why does AA matter as long as I stick to it?

Post by goingup » Mon Jun 24, 2019 12:07 pm

delrinson wrote:
Mon Jun 24, 2019 10:59 am
I am 20% fixed income and 80% stock.
You might want to edit your first post. It's confusing when you stated you're 20/80. That's not the common nomenclature.

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Re: Why does AA matter as long as I stick to it?

Post by Nowizard » Mon Jun 24, 2019 1:37 pm

My concern would be more for the assets in which you are invested than the ratio of stock/bond. Generally, however, once you have an allocation that has been logically and carefully constructed, you may still discover errors in your choice of funds or ratios. You don't have to be correct, just willing to accept the consequences, whatever they may be. Asking whether you can accept the worst consequence of a decision often informs the ultimate choice.

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Re: Why does AA matter as long as I stick to it?

Post by aristotelian » Mon Jun 24, 2019 2:08 pm

Your AA affects your exposure to sequence of returns risk as well as expected return. The higher your bond %, the less you are exposed to poor sequence of returns, but you have lower overall expected return and greater exposure to inflation risk. Higher stock % generally has better success for a given withdrawal rate, and better protection from inflation. However, you could be more vulnerable to a market crash. As you can see from ERN's charts, AA affects how much you can expect to withdraw from your portfolio as well as your risk of running out of money. https://earlyretirementnow.com/2016/12/ ... t-1-intro/

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Re: Why does AA matter as long as I stick to it?

Post by dbr » Mon Jun 24, 2019 2:33 pm

A comment on "stay the course" is that this is a meaningless and useless comment without some context around it. What that should mean is to not ignorantly and irrationally change investment plans frequently. It could mean to avoid trying to time the market. It does not mean that an asset allocation can't change over time. In fact the course could be just exactly to plan a change in asset allocation over time. It does mean not to change asset allocation just because things did not develop as expected. But it does not mean to never take into account changed circumstances and come up with a different asset allocation.

It gets to be a bit of a stuck record, but it is reasonable to constantly consider need, ability, and willingness to take risk. Even then there might be a caveat that neurotic inconsistency in both willingness and objectives should be tempered.

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Re: Why does AA matter as long as I stick to it?

Post by sf_tech_saver » Mon Jun 24, 2019 3:57 pm

If just a 20% bond portion of your portfolio can cover all of your needs you are at a wonderful point to weather fluctuations in equity pricing in return for the higher expected returns. Congrats -- once you can live forever off just your bonds the more VTI/equity the merrier I say!
VTI is a modern marvel

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Re: Why does AA matter as long as I stick to it?

Post by Fallible » Mon Jun 24, 2019 4:34 pm

delrinson wrote:
Mon Jun 24, 2019 10:37 am
... I am having difficulty understanding why one's basic AA in retirement matters (within reason, of course) as long as one sticks to it. ...
Your emphasis here is on sticking to it when it should be on the allocation you're sticking to. An AA first has to be one that's right for you, reflecting your ability, willingness, and need to take risk. Second comes the sticking to it.
John Bogle on his often bumpy road to low-cost indexing: "When a door closes, if you look long enough and hard enough, if you're strong enough, you'll find a window that opens."

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Re: Why does AA matter as long as I stick to it?

Post by quisp65 » Mon Jun 24, 2019 8:34 pm

Personally I have decided to go 75/25 Stocks/CDs and doing one way balance into CDs. I'm 2-4 years from retirement. I figure more index in buy & hold is better than rebalancing. I'm able to live 10 years on the CDs and the S&P historically has hit a high at least every seven years for some time. I trust stocks more than fixed income.

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Re: Why does AA matter as long as I stick to it?

Post by OffGridder » Mon Jun 24, 2019 10:03 pm

Taylor Larimore wrote:
Mon Jun 24, 2019 10:55 am

Personally, I put savings that I cannot afford to lose in Vanguard Total Bond Market Index Fund. The rest is in a broad stock market index fund.

Best wishes
Taylor
Taylor, I have seen a number of posts by you stating that your AA is based the above quote. I believe you have also advocated rebalancing. How do you rebalance into stocks when they are down, if you can't afford to lose what you have in TBM?

Thanks again for all you do.
Dave
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Re: Why does AA matter as long as I stick to it?

Post by Taylor Larimore » Tue Jun 25, 2019 9:43 am

OffGridder wrote:
Mon Jun 24, 2019 10:03 pm
Taylor Larimore wrote:
Mon Jun 24, 2019 10:55 am

Personally, I put savings that I cannot afford to lose in Vanguard Total Bond Market Index Fund. The rest is in a broad stock market index fund.

Best wishes
Taylor
Taylor, I have seen a number of posts by you stating that your AA is based the above quote. I believe you have also advocated rebalancing. How do you rebalance into stocks when they are down, if you can't afford to lose what you have in TBM?

Thanks again for all you do.
Dave
Dave:

You ask a good question.

With money I cannot afford to lose in Vanguard Total Bond Market Index Fund (VBTLX), I don't care if my stocks go up or down. Therefore, I have no need to rebalance and I don't any more.

My Vanguard Total Bond Market is up +7.94% during the past 12 months. If it were down (which is unlikely), I would probably exchange low-basis stocks in my taxable account for a municipal bond fund.

Lesson learned: Each of us should have our own personal asset-allocation plan and not copy someone else's portfolio.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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Re: Why does AA matter as long as I stick to it?

Post by Raybo » Tue Jun 25, 2019 10:08 am

To me, "sticking to it" means selling bonds and buying stocks when the market is crumbling to maintain your AA. This is not easy. I was able to do it in 2008-9 until the market bottom, which is when I realized my AA was a tad too aggressive at 60/40 and let it ride until it was at 50/50. I have left it there since.

What does "sticking to it" mean to you? Will you rebalance when stocks rise/fall? Or, do you mean not selling stocks when they are up/down and "sticking" to your current investments?
No matter how long the hill, if you keep pedaling you'll eventually get up to the top.

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Re: Why does AA matter as long as I stick to it?

Post by Dialectical Investor » Tue Jun 25, 2019 10:20 am

Raybo wrote:
Tue Jun 25, 2019 10:08 am

What does "sticking to it" mean to you?
To borrow from a comedic quip, to me it means having the same plan on Wednesday that one had on Monday no matter what happened on Tuesday. That could be wise or foolish, depending on context. Without context, it is foolish.

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Re: Why does AA matter as long as I stick to it?

Post by Phineas J. Whoopee » Tue Jun 25, 2019 7:18 pm

It does matter because it's the most important driver of return. Contrary to popular assertions it isn't simply a matter of psychology. Portfolio risk exists, whether or not one has an iron stomach.
PJW

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Re: Why does AA matter as long as I stick to it?

Post by qwertyjazz » Tue Jun 25, 2019 7:27 pm

OP,
You are probably correct that sticking to an AA is probably a larger driver of return than picking the individual AA. But as the responses indicate, if it is maintained, the AA choice is next in importance. If you panic sell and chase the market to buy, it does not matter what you are AA is other times.
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Re: Why does AA matter as long as I stick to it?

Post by Wiggums » Tue Jun 25, 2019 7:46 pm

Your asset allocation is one of your most important decisions and it does matter.

Most returns are “explained” by asset allocation, in investment parlance. That means it matters more how you divide up the pot into bonds, U.S. stocks, international stocks, etc., than it does whether you pick the best (or worst) funds in each of those asset classes.

Staying the course during a market downturn is another important key to your success.

When working, some people are willing to take additional risk. When you retire, most people are more conservative with the risk the are willing or need to take.

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Re: Why does AA matter as long as I stick to it?

Post by JoMoney » Tue Jun 25, 2019 9:06 pm

If someone was withdrawing 4% annually from their portfolio, having 40% in bonds effectively means you've got 10 years of withdrawals secured.
That might go a long with with helping you "stick to" the allocation if/when you see your stock allocation decimated.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

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