Holding bonds vs 100% equities

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minimalistmarc
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Re: Holding bonds vs 100% equities

Post by minimalistmarc » Sun Nov 10, 2019 4:03 pm

mathguy3021 wrote:
Sun Nov 10, 2019 3:46 pm
I wonder if the pro 100% stocks crowd would change their views if we have another great depression, with a 80% or more crash in the stock market, or a Japan like stock market that declines for many years. None of these outcomes seem likely due to the past 10 years of US stock performance.
Personally, I would love an 80% crash. I would even wish for it if it were not for the human suffering it would cause. 100% stocks folk tend to enjoy volatility, the more mass panic the better.

Naris
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Re: Holding bonds vs 100% equities

Post by Naris » Sun Nov 10, 2019 4:04 pm

KlangFool wrote:
Sun Nov 10, 2019 3:28 pm
1) You are only looking at "expected return".
Not entirely correct – I don't think it's the only criterion, but I do think expected returns are important. I buy investments because I expect them to produce returns, after all.
KlangFool wrote:
Sun Nov 10, 2019 3:28 pm
2) I am looking at the sequence of return risk and average annual return.
A. Prospective average annual return is the same thing as "expected return."
B. If you mean "average annual return" merely to refer to retrospective returns, then there's no difference here; I'm looking at (past) average annual returns to determine my anticipated (future) expected returns.
C. Sequence of returns risk has different implications for investors at different points in the accumulation and drawdown phases. For a lengthier treatment, I'll point to the excellent thread by 305pelusa: viewtopic.php?t=274390
- In my view, sequence of returns risk favors aggressive equity allocations when young. As an early stage accumulator, I'm more concerned about the market continuing its extended bull run for another 5-10 years, followed by a period of lower performance to bring the next X years down to the long-term average, since I'm relatively under-invested at this point (even at 100% equities).
- I'll certainly grant that the lifecycle investing arguments are more controversial, but I don't think you can just say "sequence of returns risk" here to justify early-stage accumulators avoiding 100/0 asset allocations.
KlangFool wrote:
Sun Nov 10, 2019 3:28 pm
3) You are assuming that the expected returns are independent of the time period. I do not care about expected returns. I care about the average annual return over a time period.
A. I'm not assuming that expected returns are independent of other factors. It seems like valuations may provide some guidance about expected returns, but I'm not taking a firm position here -- this is simply immaterial to the points I've been making.
B. I'm generally skeptical of attempts by people to create models providing fine-tuned expected returns by accounting for various factors. This is a complicated area and fraught with difficulty.
C. Again, "average annual return over a [future] time period" is the same thing as "expected returns" over that same time period. I think you'd benefit from reading the Investopedia article defining "expected return." The "expected" in "expected returns" simply reflects the fact that uncertainty exists about what those average annual returns will end up being, a fact which is true regardless of what asset allocation you choose.
KlangFool wrote:
Sun Nov 10, 2019 3:28 pm
4) With 10+ years of the bull market, if someone believes that the "expected return" is independent of the time period and the past, the show may go on.
This is classic market timing. If your argument is that 70/30 is superior to 100/0 right now in 2019 because of the excellent recent performance of stocks over the last ten years, then I disagree even more strongly than before. I don't think I'm smarter than the market, and I don't think you are either. I think Peter Lynch put it very nicely:
Peter Lynch wrote: Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.
KlangFool wrote:
Sun Nov 10, 2019 3:28 pm
5) Meanwhile, for someone that looks at the average annual return, the reversion to mean is about to happen.
See above. This is just classic market timing. I think investors in their twenties or early-thirties who choose 70/30 instead of 100/0 because they think the expected difference in performance is too little to warrant the increased volatility are probably making a mistake (assuming they have the psychological ability not to sell in drops; I'm sympathetic to that caveat).
On the other hand, I think investors in their twenties or early-thirties who choose 70/30 instead of 100/0 because they think the "reversion to [the] mean is about to happen" are making a catastrophic error in reasoning and would greatly benefit from adopting a more "Boglehead"-style of investment; i.e. not trying to time the market.
KlangFool wrote:
Sun Nov 10, 2019 3:28 pm
To each its own.
Indeed.

mathguy3021
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Re: Holding bonds vs 100% equities

Post by mathguy3021 » Sun Nov 10, 2019 4:42 pm

Naris wrote:
Sun Nov 10, 2019 4:04 pm
KlangFool wrote:
Sun Nov 10, 2019 3:28 pm
1) You are only looking at "expected return".
Not entirely correct – I don't think it's the only criterion, but I do think expected returns are important. I buy investments because I expect them to produce returns, after all.
KlangFool wrote:
Sun Nov 10, 2019 3:28 pm
2) I am looking at the sequence of return risk and average annual return.
A. Prospective average annual return is the same thing as "expected return."
B. If you mean "average annual return" merely to refer to retrospective returns, then there's no difference here; I'm looking at (past) average annual returns to determine my anticipated (future) expected returns.
C. Sequence of returns risk has different implications for investors at different points in the accumulation and drawdown phases. For a lengthier treatment, I'll point to the excellent thread by 305pelusa: viewtopic.php?t=274390
- In my view, sequence of returns risk favors aggressive equity allocations when young. As an early stage accumulator, I'm more concerned about the market continuing its extended bull run for another 5-10 years, followed by a period of lower performance to bring the next X years down to the long-term average, since I'm relatively under-invested at this point (even at 100% equities).
- I'll certainly grant that the lifecycle investing arguments are more controversial, but I don't think you can just say "sequence of returns risk" here to justify early-stage accumulators avoiding 100/0 asset allocations.
KlangFool wrote:
Sun Nov 10, 2019 3:28 pm
3) You are assuming that the expected returns are independent of the time period. I do not care about expected returns. I care about the average annual return over a time period.
A. I'm not assuming that expected returns are independent of other factors. It seems like valuations may provide some guidance about expected returns, but I'm not taking a firm position here -- this is simply immaterial to the points I've been making.
B. I'm generally skeptical of attempts by people to create models providing fine-tuned expected returns by accounting for various factors. This is a complicated area and fraught with difficulty.
C. Again, "average annual return over a [future] time period" is the same thing as "expected returns" over that same time period. I think you'd benefit from reading the Investopedia article defining "expected return." The "expected" in "expected returns" simply reflects the fact that uncertainty exists about what those average annual returns will end up being, a fact which is true regardless of what asset allocation you choose.
KlangFool wrote:
Sun Nov 10, 2019 3:28 pm
4) With 10+ years of the bull market, if someone believes that the "expected return" is independent of the time period and the past, the show may go on.
This is classic market timing. If your argument is that 70/30 is superior to 100/0 right now in 2019 because of the excellent recent performance of stocks over the last ten years, then I disagree even more strongly than before. I don't think I'm smarter than the market, and I don't think you are either. I think Peter Lynch put it very nicely:
Peter Lynch wrote: Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.
KlangFool wrote:
Sun Nov 10, 2019 3:28 pm
5) Meanwhile, for someone that looks at the average annual return, the reversion to mean is about to happen.
See above. This is just classic market timing. I think investors in their twenties or early-thirties who choose 70/30 instead of 100/0 because they think the expected difference in performance is too little to warrant the increased volatility are probably making a mistake (assuming they have the psychological ability not to sell in drops; I'm sympathetic to that caveat).
On the other hand, I think investors in their twenties or early-thirties who choose 70/30 instead of 100/0 because they think the "reversion to [the] mean is about to happen" are making a catastrophic error in reasoning and would greatly benefit from adopting a more "Boglehead"-style of investment; i.e. not trying to time the market.
KlangFool wrote:
Sun Nov 10, 2019 3:28 pm
To each its own.
Indeed.
It's not about timing the market. It's about long term historical returns from high stock valuations. There is a lot of research that shows low future returns from high stock valuations like we have today. Many experts are projecting LOW returns over the next ten years. Many of these same experts projected higher returns ten years ago.

Naris
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Re: Holding bonds vs 100% equities

Post by Naris » Sun Nov 10, 2019 5:16 pm

mathguy3021 wrote:
Sun Nov 10, 2019 4:42 pm
It's not about timing the market. It's about long term historical returns from high stock valuations. There is a lot of research that shows low future returns from high stock valuations like we have today. Many experts are projecting LOW returns over the next ten years. Many of these same experts projected higher returns ten years ago.
Merely being aware that current valuations suggest forward returns may be lower than average is not market timing, of course. Neither would deciding to increase one's savings rate to offset the anticipated lower returns over the next ~10years.

But I think changing your asset allocation on that basis is market timing. You're looking at current market conditions (i.e. valuations) and making a non-permanent change on that basis to your asset allocation. The critical issue is that if the real motivation for proposing a 70/30 allocation rather than a 100/0 allocation is because of current stock valuations, then you're indicating that you expect to move back toward a higher stock allocation at some future point if/when stock valuations come down. That may not be the most pernicious form of market timing, but that's still market timing.

None of this even gets into the issue that such analyses suggest that both stocks and bonds will have lower than typical returns in the near future, so it's not automatically obvious that lower expected returns are a justification to shift from stocks to bonds at this point (even assuming one takes valuation based arguments seriously).

The market has already priced in all of the information relating to valuation (and numerous other factors) that you can point to. That's why pointing to valuations, or other factors, as a rationale for temporary asset allocations is market timing in my view. You're betting that you can outsmart the market on this point. I'm betting that you can't, which is why I'm not making any adjustments to my asset allocation based on current stock valuations.

rascott
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Re: Holding bonds vs 100% equities

Post by rascott » Sun Nov 10, 2019 5:36 pm

mathguy3021 wrote:
Sun Nov 10, 2019 3:46 pm
I wonder if the pro 100% stocks crowd would change their views if we have another great depression, with a 80% or more crash in the stock market, or a Japan like stock market that declines for many years. None of these outcomes seem likely due to the past 10 years of US stock performance.

This is a hypothetical discussion about a young investor early in their accumulation period (first 15- 20 years) Arguably the best thing that could happen to such an investor is a major market crash.

rascott
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Re: Holding bonds vs 100% equities

Post by rascott » Sun Nov 10, 2019 5:40 pm

KlangFool wrote:
Sun Nov 10, 2019 3:28 pm
Naris wrote:
Sun Nov 10, 2019 2:26 pm
I hope this type of comment is allowed, but I want to make it as a parting note. I think KlangFool can sometimes add a valuable perspective of reminding people that things can go wrong unexpectedly. But the last few dozen posts are a perfect illustration of why I think it can be frustrating to engage with KlangFool in any type of detailed discussion of the actual relative risks.

For instance, KlangFool made a number of factual assertions:
KlangFool wrote:
Thu Nov 07, 2019 8:36 am
Historically, the minimal additional potential return is only possible with 20 or more years of no withdrawal. Long-run = 20+ years. 100/0 only win over 70/30 with 20+ years.
KlangFool wrote:
Sun Nov 10, 2019 10:52 am
Naris wrote:
Sun Nov 10, 2019 9:02 am
<<100/0 has a higher expected return than 70/30. This is true whether your time horizon is 1 year, 10 years, or 50 years. >>
That statement is false. The reason why you believe that 100/0 has a higher expected return is because of the historical record. So, you cannot use the historical record of higher expected return without stating how 100/0 achieving this higher expected return.
KlangFool wrote:
Sun Nov 10, 2019 10:52 am
The average return of 100/0 is 10.2%. But, we had a recession every 10 years or shorter period. The 100/0 usually suffer a big drop (50%) every 10 years or less.
KlangFool wrote:
Sun Nov 10, 2019 12:02 pm
rascott wrote:
Sun Nov 10, 2019 11:39 am

Expected return is an academic calculation. Stocks have a higher expected return than bonds..... this has nothing to do with backtesting anything over any past period, but is rather textbook finance.
rascott,

That may be your definition. But, my 10.2% annual average return is from historical data.

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

KlangFool
(I'll point out here that I literally excerpted Investopedia's definition of "expected return" above this. Words have specific meanings; you don't get to just make up your own. Even beyond that, the Vanguard page KlangFool linked to reflects that stocks historically had a higher "Average annual return" than bonds, so I have no idea why he thought this supported his point.)
Naris wrote:
Sun Nov 10, 2019 11:15 am
Do you know what the term "expected return" means? I'll quote Investopedia (https://www.investopedia.com/terms/e/expectedreturn.asp)
Investopedia wrote: The expected return is the profit or loss an investor anticipates on an investment that has known or anticipated rates of return (RoR). It is calculated by multiplying potential outcomes by the chances of them occurring and then totaling these results. For example, if an investment has a 50% chance of gaining 20% and a 50% chance of losing 10%, the expected return is 5% (50% x 20% + 50% x -10% = 5%).
None of these factual assertions are true.

Yet, trying to point out these inaccuracies just causes the conversation to be shifted, so we end up with back and forths about whether people who haven't experienced prolonged unemployment are "lucky" or not.

I'm not objecting to pointing out that it's possible for people to lose their jobs, especially in downturns. The likelihood of job loss, particularly prolonged job loss, is certainly relevant to asset allocation. But it bothers me that KlangFool never admits when he was factually wrong or made inaccurate hyperbolic claims to argue for his preferred risk-averse conclusion.

I'm not sure it's possible to have a productive conversation with KlangFool about whether some risks are worthwhile, and particularly about what the actual detailed positives and negatives are of potentially more risky strategies. I hope that these exchanges at least illustrate for anyone reading KlangFool's comments why there is another perspective, as well as why I'm losing interest in discussing the relative merits of different asset allocations with KlangFool.
Naris,

Thank you for summarizing my points.

1) You are only looking at "expected return".

2) I am looking at the sequence of return risk and average annual return.

3) You are assuming that the expected returns are independent of the time period. I do not care about expected returns. I care about the average annual return over a time period.

4) With 10+ years of the bull market, if someone believes that the "expected return" is independent of the time period and the past, the show may go on.

5) Meanwhile, for someone that looks at the average annual return, the reversion to mean is about to happen.

To each its own.

KlangFool

Sequence of returns risk is an issue for the older investor with a substantial sized portfolio, much closer to retirement. It is basically irrelevant for a 30 year old trying to determine their appropriate A/A.

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grabiner
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Re: Holding bonds vs 100% equities

Post by grabiner » Sun Nov 10, 2019 6:11 pm

mathguy3021 wrote:
Sun Nov 10, 2019 3:46 pm
I wonder if the pro 100% stocks crowd would change their views if we have another great depression, with a 80% or more crash in the stock market, or a Japan like stock market that declines for many years. None of these outcomes seem likely due to the past 10 years of US stock performance.
Search in the forum for posts between October 2008 and March 2009. An all-stock portfolio lost about 60% top to bottom from the 2007 peak. And a lot of posters did change their mind and pull out of the stock market, mostly to their detriment; others knew their actual risk tolerance and stayed the course.
Wiki David Grabiner

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Re: Holding bonds vs 100% equities

Post by KlangFool » Sun Nov 10, 2019 6:22 pm

rascott wrote:
Sun Nov 10, 2019 5:40 pm


Sequence of returns risk is an issue for the older investor with a substantial sized portfolio, much closer to retirement. It is basically irrelevant for a 30 year old trying to determine their appropriate A/A.
rascott,

It is only irrelevant for someone that can forecast their future and know that they would not be unemployed in the coming recession. And, no financial emergency may exhaust the emergency fund and require withdrawal.

Being 30 years old does not change this fact. It simply means that this person had not experienced a recession and he/she is assuming that they will be fine in the coming recession.

KlangFool

bgf
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Re: Holding bonds vs 100% equities

Post by bgf » Sun Nov 10, 2019 6:37 pm

grabiner wrote:
Sun Nov 10, 2019 6:11 pm
mathguy3021 wrote:
Sun Nov 10, 2019 3:46 pm
I wonder if the pro 100% stocks crowd would change their views if we have another great depression, with a 80% or more crash in the stock market, or a Japan like stock market that declines for many years. None of these outcomes seem likely due to the past 10 years of US stock performance.
Search in the forum for posts between October 2008 and March 2009. An all-stock portfolio lost about 60% top to bottom from the 2007 peak. And a lot of posters did change their mind and pull out of the stock market, mostly to their detriment; others knew their actual risk tolerance and stayed the course.
yes, some with 70/30 and 60/40 strayed from the course while others with 100/0 barely noticed what was going on.

ultimately, it is your money, you're on your own, and you'll either capitulate or you won't. nobody knows til they get there, and having experienced one in the past wont be the same because its highly unlikely your personal and financial situation will be the same.
“TE OCCIDERE POSSUNT SED TE EDERE NON POSSUNT NEFAS EST"

mathguy3021
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Re: Holding bonds vs 100% equities

Post by mathguy3021 » Sun Nov 10, 2019 6:46 pm

Naris wrote:
Sun Nov 10, 2019 5:16 pm
mathguy3021 wrote:
Sun Nov 10, 2019 4:42 pm
It's not about timing the market. It's about long term historical returns from high stock valuations. There is a lot of research that shows low future returns from high stock valuations like we have today. Many experts are projecting LOW returns over the next ten years. Many of these same experts projected higher returns ten years ago.
Merely being aware that current valuations suggest forward returns may be lower than average is not market timing, of course. Neither would deciding to increase one's savings rate to offset the anticipated lower returns over the next ~10years.

But I think changing your asset allocation on that basis is market timing. You're looking at current market conditions (i.e. valuations) and making a non-permanent change on that basis to your asset allocation. The critical issue is that if the real motivation for proposing a 70/30 allocation rather than a 100/0 allocation is because of current stock valuations, then you're indicating that you expect to move back toward a higher stock allocation at some future point if/when stock valuations come down. That may not be the most pernicious form of market timing, but that's still market timing.

None of this even gets into the issue that such analyses suggest that both stocks and bonds will have lower than typical returns in the near future, so it's not automatically obvious that lower expected returns are a justification to shift from stocks to bonds at this point (even assuming one takes valuation based arguments seriously).

The market has already priced in all of the information relating to valuation (and numerous other factors) that you can point to. That's why pointing to valuations, or other factors, as a rationale for temporary asset allocations is market timing in my view. You're betting that you can outsmart the market on this point. I'm betting that you can't, which is why I'm not making any adjustments to my asset allocation based on current stock valuations.
Your statements do not reflect my opinion at all. It's hard to believe that you came to these conclusions based on my statement about valuations. I am only responding to your statements about market timing in response to KlangFool's comments. I am not saying a young person should change his or her allocation between 100/0 and 70/30 based on market valuation. It is not market timing to use high stock valuations as one variable in determining a PERMANENT asset allocation.

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Re: Holding bonds vs 100% equities

Post by pkcrafter » Sun Nov 10, 2019 6:56 pm

The views of risk-takes and risk averse investors continues on in this thread with no agreement and each saying the other is wrong. It's only right or wrong for the individual investor, so it's a good idea to NOT TELL an investor you don't know that he should or should not be 100% stocks.

I like this definition of risk: not having the money for something important when you need it. Now if you are 100% stock and you need the money in 20 years, will you not be bothered by an 80% portfolio loss?

If an investor believes there is actually no risk if not needing the money for 20 years should the investor leverage his portfolio?

Here is Taylor Larimore's account of the great depression--

My personal history:
I was 8 years old in May 1932, when the Dow declined 89%. My Grandfather, Christopher Coombs, was a principal in the United Founders Corporation which was the largest investment trust (now called mutual fund company) in the United States. My father's restaurant business (Larimore's Diner in Foxboro, MA) folded and we moved into Grandfather's Miami home (1 of 3).

Stock and bond market history:

The following is from "Outperforming the Market" by John Merrill:
Assume you inherit $1,000,000 in September 1929. You understand diversification and invest your new wealth in a porfolio of 21% large-cap stocks, 23% mid-small cap stocks, 3% micro-cap stocks, 47% 5-year Treasury bonds and 6% cash.

You stay the course and rebalance your stock, bond and cash allocations at the end of each year. It certainly isn't easy; the gloom and doomers are out in force as usual, and voice of calm reason is scoffed at and even ridiculed. Yet you stick to your guns. This is your portfolio at the end of each year:

1929..$922,000
1930..$875,000
1931..$748,000
1932..$767,000
1933..$963,000
1934..$1,024,000 ($1,331,000 in real inflation-adjusted dollars)
My grandfather was nearly 100% invested in stocks purchased on margin. He lost nearly everything.

Investors holding a low-cost, diversified portfolio of stocks and bonds, and who stayed-the-course, survived intact.

Great Depression history

https://www.history.com/topics/great-de ... on-history

I think the bottom line is: Stocks Are Risky. Whether you, as an individual investor, can handle the risk is a personal decision based not only on your situation, but also your genetics.

Paul
Last edited by pkcrafter on Sun Nov 10, 2019 10:14 pm, edited 1 time in total.
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.

Naris
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Re: Holding bonds vs 100% equities

Post by Naris » Sun Nov 10, 2019 7:04 pm

mathguy3021 wrote:
Sun Nov 10, 2019 6:46 pm
Your statements do not reflect my opinion at all. It's hard to believe that you came to these conclusions based on my statement about valuations. I am only responding to your statements about market timing in response to KlangFool's comments. I am not saying a young person should change his or her allocation between 100/0 and 70/30 based on market valuation. It is not market timing to use high stock valuations as one variable in determining a PERMANENT asset allocation.
I certainly didn't mean to misrepresent your views, but I think this happened because you interjected into another conversation in a way that ignored the context. Here was my conversation with KlangFool:
Naris wrote:
Sun Nov 10, 2019 4:04 pm
KlangFool wrote:
Sun Nov 10, 2019 3:28 pm
4) With 10+ years of the bull market, if someone believes that the "expected return" is independent of the time period and the past, the show may go on.
This is classic market timing. If your argument is that 70/30 is superior to 100/0 right now in 2019 because of the excellent recent performance of stocks over the last ten years, then I disagree even more strongly than before. I don't think I'm smarter than the market, and I don't think you are either. I think Peter Lynch put it very nicely:
Peter Lynch wrote: Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.
KlangFool wrote:
Sun Nov 10, 2019 3:28 pm
5) Meanwhile, for someone that looks at the average annual return, the reversion to mean is about to happen.
See above. This is just classic market timing. I think investors in their twenties or early-thirties who choose 70/30 instead of 100/0 because they think the expected difference in performance is too little to warrant the increased volatility are probably making a mistake (assuming they have the psychological ability not to sell in drops; I'm sympathetic to that caveat).
On the other hand, I think investors in their twenties or early-thirties who choose 70/30 instead of 100/0 because they think the "reversion to [the] mean is about to happen" are making a catastrophic error in reasoning and would greatly benefit from adopting a more "Boglehead"-style of investment; i.e. not trying to time the market.
You may not have been thinking about making temporary changes to one's asset allocation, but KlangFool obviously was. My initial response was to KlangFool, not you. I don't think there's any other reasonable interpretation of language about "for someone that looks at the average annual return, the reversion to [the] mean is about to happen" (emphasis added).

If someone says "Do X because reversion to the mean is about to happen," and I point out that's market timing, it's silly for you to say that that argument isn't about market timing because someone could also advocate doing X for some other unrelated reason that no one in the conversation had mentioned. That other non-market timing reasons exist for doing X doesn't mean that I'm wrong that KlangFool was advocating market timing.

Do you have another interpretation of what it means to suggest that someone adopt a 70/30 allocation, rather than 100/0, because the "reversion to the mean is about to happen"? I.e. would you agree that that reasoning is "classic market timing"? If not, then I don't think I'm the one misrepresenting your views; I think you just missed the context of the exchange I was having with KlangFool when you made your comment, and my response was based on that fact.

mathguy3021
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Re: Holding bonds vs 100% equities

Post by mathguy3021 » Sun Nov 10, 2019 7:33 pm

Naris wrote:
Sun Nov 10, 2019 7:04 pm
mathguy3021 wrote:
Sun Nov 10, 2019 6:46 pm
Your statements do not reflect my opinion at all. It's hard to believe that you came to these conclusions based on my statement about valuations. I am only responding to your statements about market timing in response to KlangFool's comments. I am not saying a young person should change his or her allocation between 100/0 and 70/30 based on market valuation. It is not market timing to use high stock valuations as one variable in determining a PERMANENT asset allocation.
I certainly didn't mean to misrepresent your views, but I think this happened because you interjected into another conversation in a way that ignored the context. Here was my conversation with KlangFool:
Naris wrote:
Sun Nov 10, 2019 4:04 pm
KlangFool wrote:
Sun Nov 10, 2019 3:28 pm
4) With 10+ years of the bull market, if someone believes that the "expected return" is independent of the time period and the past, the show may go on.
This is classic market timing. If your argument is that 70/30 is superior to 100/0 right now in 2019 because of the excellent recent performance of stocks over the last ten years, then I disagree even more strongly than before. I don't think I'm smarter than the market, and I don't think you are either. I think Peter Lynch put it very nicely:
Peter Lynch wrote: Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.
KlangFool wrote:
Sun Nov 10, 2019 3:28 pm
5) Meanwhile, for someone that looks at the average annual return, the reversion to mean is about to happen.
See above. This is just classic market timing. I think investors in their twenties or early-thirties who choose 70/30 instead of 100/0 because they think the expected difference in performance is too little to warrant the increased volatility are probably making a mistake (assuming they have the psychological ability not to sell in drops; I'm sympathetic to that caveat).
On the other hand, I think investors in their twenties or early-thirties who choose 70/30 instead of 100/0 because they think the "reversion to [the] mean is about to happen" are making a catastrophic error in reasoning and would greatly benefit from adopting a more "Boglehead"-style of investment; i.e. not trying to time the market.
You may not have been thinking about making temporary changes to one's asset allocation, but KlangFool obviously was. My initial response was to KlangFool, not you. I don't think there's any other reasonable interpretation of language about "for someone that looks at the average annual return, the reversion to [the] mean is about to happen" (emphasis added).

If someone says "Do X because reversion to the mean is about to happen," and I point out that's market timing, it's silly for you to say that that argument isn't about market timing because someone could also advocate doing X for some other unrelated reason that no one in the conversation had mentioned. That other non-market timing reasons exist for doing X doesn't mean that I'm wrong that KlangFool was advocating market timing.

Do you have another interpretation of what it means to suggest that someone adopt a 70/30 allocation, rather than 100/0, because the "reversion to the mean is about to happen"? I.e. would you agree that that reasoning is "classic market timing"? If not, then I don't think I'm the one misrepresenting your views; I think you just missed the context of the exchange I was having with KlangFool when you made your comment, and my response was based on that fact.
Responding to your response of KlangFool's comment doesn't automatically mean that I share KlangFool's opinion. I am allowed to respond with a different opinion. I wasn't referring to the specific line you placed in bold. I was referring to the first statement about the last 10 years of stock market performance. 10 years ago, market valuations were low. Today, market valuations are high. This is an important variable in determining a young person's permanent allocation. It's not hard to conclude that I'm responding to the discussion about 10 year returns, when I clearly mention 10 year performance in my response. If I was responding to the particular line you bolded, I would have responded to that sentence and disagreed with you. But I didn't because I agree with you on that particular statement. Instead, I took the entire discussion because I disagreed with your overall opinion about market timing and 10 year past performance.
Last edited by mathguy3021 on Sun Nov 10, 2019 8:12 pm, edited 1 time in total.

Naris
Posts: 54
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Re: Holding bonds vs 100% equities

Post by Naris » Sun Nov 10, 2019 8:05 pm

mathguy3021 wrote:
Sun Nov 10, 2019 7:33 pm
Responding to your response of KlangFool's comment doesn't automatically mean that I share KlangFool's opinion. I am allowed to respond with a different opinion. I wasn't referring to the specific line you placed in bold. I was referring to the first statement about the last 10 years of stock market performance. 10 years ago, market valuations were lower. Today, market valuations are higher. This is an important variable in determining a young person's permanent allocation.
Sure, that's obviously true that you don't automatically share KlangFool's opinion by your reply. But I don't think it's unreasonable to infer that maybe there was some agreement. Seriously, look back at your post:
mathguy3021 wrote:
Sun Nov 10, 2019 4:42 pm
Naris wrote:
Sun Nov 10, 2019 4:04 pm
[Omitted]
KlangFool wrote:
Sun Nov 10, 2019 3:28 pm
4) With 10+ years of the bull market, if someone believes that the "expected return" is independent of the time period and the past, the show may go on.
This is classic market timing. If your argument is that 70/30 is superior to 100/0 right now in 2019 because of the excellent recent performance of stocks over the last ten years, then I disagree even more strongly than before. I don't think I'm smarter than the market, and I don't think you are either. I think Peter Lynch put it very nicely:
Peter Lynch wrote: Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.
KlangFool wrote:
Sun Nov 10, 2019 3:28 pm
5) Meanwhile, for someone that looks at the average annual return, the reversion to mean is about to happen.
See above. This is just classic market timing. I think investors in their twenties or early-thirties who choose 70/30 instead of 100/0 because they think the expected difference in performance is too little to warrant the increased volatility are probably making a mistake (assuming they have the psychological ability not to sell in drops; I'm sympathetic to that caveat).
On the other hand, I think investors in their twenties or early-thirties who choose 70/30 instead of 100/0 because they think the "reversion to [the] mean is about to happen" are making a catastrophic error in reasoning and would greatly benefit from adopting a more "Boglehead"-style of investment; i.e. not trying to time the market.

[Omitted]
It's not about timing the market. It's about long term historical returns from high stock valuations. There is a lot of research that shows low future returns from high stock valuations like we have today. Many experts are projecting LOW returns over the next ten years. Many of these same experts projected higher returns ten years ago.
I suppose the "it's" in "it's not about timing the market" is technically ambiguous as to what the referent is. But maybe you'll understand if I interpreted that to be referring to both of those portions of KlangFool's comment that I criticized as being "market timing" rather than, I don't know, the complete works of Tolstoy.

Substantively, even KlangFool's argument in point 4 was only relevant insofar as he was citing that as a reason to shift to a 70/30 asset allocation at this time, which again is why I criticized it as market timing. Also, there's not exactly some clear distinction between KlangFool's argument in #4 about expecting returns to be lower because there has been "10+ years of the bull market" and KlangFool's argument in #5 that "reversion to [the] mean is about to happen."

If you have some precise point you're trying to make, the burden is on you to express that fact. You literally quoted my criticism of KlangFool's "reversion to the mean" language as being market timing and then said "it's not market timing." I, at least, find it helpful to only quote those portions of a comment that I care about when writing replies.

In any case, if you want to argue that higher valuations should have various impacts on permanent asset allocations, have at it. That's unrelated to the point I was making (i.e. that KlangFool advocating temporary asset allocation changes based on current valuations is market timing), and I don't really care to dispute the point with you (although I'm not sure that I agree).
Last edited by Naris on Sun Nov 10, 2019 10:12 pm, edited 1 time in total.

mathguy3021
Posts: 192
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Re: Holding bonds vs 100% equities

Post by mathguy3021 » Sun Nov 10, 2019 8:19 pm

Naris wrote:
Sun Nov 10, 2019 8:05 pm
mathguy3021 wrote:
Sun Nov 10, 2019 7:33 pm
Responding to your response of KlangFool's comment doesn't automatically mean that I share KlangFool's opinion. I am allowed to respond with a different opinion. I wasn't referring to the specific line you placed in bold. I was referring to the first statement about the last 10 years of stock market performance. 10 years ago, market valuations were lower. Today, market valuations are higher. This is an important variable in determining a young person's permanent allocation.
Sure, that's obviously true that you don't automatically share KlangFool's opinion by your reply. But I don't think it's unreasonable to infer that maybe there was some agreement. Seriously, look back at your post:
mathguy3021 wrote:
Sun Nov 10, 2019 4:42 pm
Naris wrote:
Sun Nov 10, 2019 4:04 pm
[Omitted]
KlangFool wrote:
Sun Nov 10, 2019 3:28 pm
4) With 10+ years of the bull market, if someone believes that the "expected return" is independent of the time period and the past, the show may go on.
This is classic market timing. If your argument is that 70/30 is superior to 100/0 right now in 2019 because of the excellent recent performance of stocks over the last ten years, then I disagree even more strongly than before. I don't think I'm smarter than the market, and I don't think you are either. I think Peter Lynch put it very nicely:
Peter Lynch wrote: Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.
KlangFool wrote:
Sun Nov 10, 2019 3:28 pm
5) Meanwhile, for someone that looks at the average annual return, the reversion to mean is about to happen.
See above. This is just classic market timing. I think investors in their twenties or early-thirties who choose 70/30 instead of 100/0 because they think the expected difference in performance is too little to warrant the increased volatility are probably making a mistake (assuming they have the psychological ability not to sell in drops; I'm sympathetic to that caveat).
On the other hand, I think investors in their twenties or early-thirties who choose 70/30 instead of 100/0 because they think the "reversion to [the] mean is about to happen" are making a catastrophic error in reasoning and would greatly benefit from adopting a more "Boglehead"-style of investment; i.e. not trying to time the market.

[Omitted]
It's not about timing the market. It's about long term historical returns from high stock valuations. There is a lot of research that shows low future returns from high stock valuations like we have today. Many experts are projecting LOW returns over the next ten years. Many of these same experts projected higher returns ten years ago.
I suppose the "it's" in "it's not about timing the market" is technically ambiguous as to what the referent is. But maybe you'll understand if I interpreted that to be referring to both of those portions of KlangFool's comment that I criticized as being "market timing" rather, I don't know, the complete works of Tolstoy.

Substantively, even KlangFool's argument in point 4 was only relevant insofar as he was citing that as a reason to shift to a 70/30 asset allocation at this time, which again is why I criticized it as market timing. Also, there's not exactly some clear distinction between KlangFool's argument in #4 about expecting returns to be lower because there has been "10+ years of the bull market" and KlangFool's argument in #5 that "reversion to [the] mean is about to happen."

If you have some precise point you're trying to make, the burden is on you to express that fact. You literally quoted my criticism of KlangFool's "reversion to the mean" language as being market timing and then said "it's not market timing." I, at least, find it helpful to only quote those portions of a comment that I care about when writing replies.

In any case, if you want to argue that higher valuations should have various impacts on permanent asset allocations, have at it. That's unrelated to the point I was making (i.e. that KlangFool advocating temporary asset allocation changes based on current valuations is market timing), and I don't really care to dispute the point with you (although I'm not sure that I agree).
There's nothing ambiguous when I clearly mentioned 10 year returns in my first response to this discussion.

I never specifically referred to KlangFool's statement that you bolded.

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dogagility
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Re: Holding bonds vs 100% equities

Post by dogagility » Sun Nov 10, 2019 8:55 pm

pkcrafter wrote:
Sun Nov 10, 2019 6:56 pm
I think the bottom line is: Stocks Are Risky. Whether you, as an individual investor, can handle the risk is a personal decision based not only your situation, but also your genetics.
Couldn't have said it better. It is a personal decision. 100/0 and 70/30 (or some other allocation) are both reasonable.

However, the discussion in this thread is really centered upon this: there is at least one person on this forum that thinks nobody should ever hold more than 70% equity. Full stop.
Taking "risk" since 1995.

babystep
Posts: 44
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Re: Holding bonds vs 100% equities

Post by babystep » Sun Nov 10, 2019 8:57 pm

pkcrafter wrote:
Sun Nov 10, 2019 6:56 pm
The views of risk-takes and risk averse investors continues on in this thread with no agreement and each saying the other is wrong. It's only right or wrong for the individual investor, so it's a good idea to NOT TELL an investor you don't know that he should or should not be 100% stocks.
I think risk-takers are only saying that it is ok for some to be in 100/0 depending on your personal situation. risk averse are strongly suggesting that no one should be in 100/0.

BTW, look at target retirement funds allocation by big ones for 30 year.

Fidelity 2050, 93.8/6.2 https://fundresearch.fidelity.com/mutua ... /315792416
Shwab 2050, 90.2/8.5 https://www.schwabfunds.com/public/csim ... mbol=SWNRX
Vanguard 2050, 89.7/10.1 https://investor.vanguard.com/mutual-fu ... file/VFIFX
BlackRock 2050, 92/1.2/4.8. 4.8 is Real Estate. https://www.blackrock.com/us/individual ... st-cl-fund

Our founding fathers said Never bear too much or too little risk.. Sorry, I meant to say wiki :D

They didn't say who decides the risk level. You the person should decide what level of risk you can take.

If a 25 year old, who just started working, asks that I am buying these 2050 target date funds in my 401k then would the BH recommendation be to not buy these since it is too risky and they should be in 70/30 instead of 90/10 ?

Would you instead suggest the 25 year old to buy Vanguard Target Retirement 2030 Fund 70/30 ?
https://investor.vanguard.com/mutual-fu ... file/VTHRX

international001
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Re: Holding bonds vs 100% equities

Post by international001 » Sun Nov 10, 2019 9:19 pm

I think the great point of this discussion is adding an extra variable: the money you may have to use from your retirement portfolio at a random point (typically, if you are unemployed and your job is not stable; but could be for other reasons, imagine medical condition, you are suited, etc). It may or may not be coincidental to a recession, but one likely scenario is that it is (laid offs)

What this suggest is that there is a AA glide path we typically don't think about. On your first years of employment, you want to be low in stocks, later in life you may increase them again (perhaps you may reach 100/0 around 40), then decrease them as you go into retirement, and you may increase them again while in retirement (but this is part of another discussion https://www.kitces.com/blog/should-equi ... ly-better/)

I think it would be an interesting topic for research or to build a calculator is how this initial glide path should be (based on things like your annual expenses). My rule of thumb would be that if stock market goes down by 50%, you should still be able to keep in your portfolio at least twice your annual expenses (so, effectively, it would be as losing only half).

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grabiner
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Re: Holding bonds vs 100% equities

Post by grabiner » Sun Nov 10, 2019 9:36 pm

international001 wrote:
Sun Nov 10, 2019 9:19 pm
I think the great point of this discussion is adding an extra variable: the money you may have to use from your retirement portfolio at a random point (typically, if you are unemployed and your job is not stable; but could be for other reasons, imagine medical condition, you are suited, etc). It may or may not be coincidental to a recession, but one likely scenario is that it is (laid offs)

What this suggest is that there is a AA glide path we typically don't think about. On your first years of employment, you want to be low in stocks, later in life you may increase them again (perhaps you may reach 100/0 around 40), then decrease them as you go into retirement, and you may increase them again while in retirement (but this is part of another discussion https://www.kitces.com/blog/should-equi ... ly-better/)
This increasing glide path goes away if you have a large emergency fund that you don't count in your allocation. When you have only one year's living expenses, you might have half of that in an emergency fund, and the other half 100% stock, which would be 50% stock counting the emergency fund. When you have ten years' living expenses, you might still have six months' expenses in an emergency fund, and if the rest is 80% stock, you are 76% stock counting the emergency fund.

This emergency fund could be held in a Roth IRA so that it is liquid without penalty; cashing in a traditional IRA or 401(k) in an emergency is often costly (although many emergencies qualify as exceptions to the 10% penalty).
Wiki David Grabiner

KlangFool
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Re: Holding bonds vs 100% equities

Post by KlangFool » Sun Nov 10, 2019 9:42 pm

babystep wrote:
Sun Nov 10, 2019 8:57 pm

If a 25 year old, who just started working, asks that I am buying these 2050 target date funds in my 401k then would the BH recommendation be to not buy these since it is too risky and they should be in 70/30 instead of 90/10 ?

Would you instead suggest the 25 year old to buy Vanguard Target Retirement 2030 Fund 70/30 ?
https://investor.vanguard.com/mutual-fu ... file/VTHRX
babystep,

A person's age does not determine when the person will reach Financial Independence. It is the saving rate as a ratio of the annual expense. If the person saved 1 year of expense every year, the person could reach 25X annual expense in 17 or fewer years with 70/30. Why should the person be 100/0?

I did not learn and know that lesson 10+ years ago.

A) I was 100/0.

B) I believed that I had job security.

C) Then, Telecom bust happened and my industry laid off 1+ million workers across 6 to 8 years. Some of my peers are permanently unemployed and/or under-employed since then.

D) I capitulated and lost 50% of my life savings up to that movement.

E) I was in cash for many years before I slowly move back in.

The biggest tragedy was I have no need to take the risk. I could reach my goal in less than 10 years with 70/30. The problem with 100/0 is the person needs to shift the AA to something more conservative when the portfolio is big enough. But, usually, they get caught with the bull market and never make the change until it is too late.

KlangFool

babystep
Posts: 44
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Re: Holding bonds vs 100% equities

Post by babystep » Sun Nov 10, 2019 10:53 pm

grabiner wrote:
Sun Nov 10, 2019 9:36 pm
international001 wrote:
Sun Nov 10, 2019 9:19 pm
I think the great point of this discussion is adding an extra variable: the money you may have to use from your retirement portfolio at a random point (typically, if you are unemployed and your job is not stable; but could be for other reasons, imagine medical condition, you are suited, etc). It may or may not be coincidental to a recession, but one likely scenario is that it is (laid offs)

What this suggest is that there is a AA glide path we typically don't think about. On your first years of employment, you want to be low in stocks, later in life you may increase them again (perhaps you may reach 100/0 around 40), then decrease them as you go into retirement, and you may increase them again while in retirement (but this is part of another discussion https://www.kitces.com/blog/should-equi ... ly-better/)
This increasing glide path goes away if you have a large emergency fund that you don't count in your allocation. When you have only one year's living expenses, you might have half of that in an emergency fund, and the other half 100% stock, which would be 50% stock counting the emergency fund. When you have ten years' living expenses, you might still have six months' expenses in an emergency fund, and if the rest is 80% stock, you are 76% stock counting the emergency fund.

This emergency fund could be held in a Roth IRA so that it is liquid without penalty; cashing in a traditional IRA or 401(k) in an emergency is often costly (although many emergencies qualify as exceptions to the 10% penalty).
Thanks, it makes sense to me what you are saying but it will be better with an example. What would you advise ?
Say a single 25 year old with 100k per year income and resident of CA. Say 3% employer match.

Marginal State Tax Rate = 9.3%
Marginal Fed Tax Rate = 24%

As per tax calculator, total tax is about 22k if contributed 19k to 401k. Say expenses = 40k. After tax saving is 100-22-40-19=19k.

Since they save 33% on marginal tax rate, I assumed they should contribute 19k to 401k since it saves 33% marginal tax. Since even if the hard-ship comes and they withdraw from 401k then still they have decent tax saving as a buffer to come out ahead.

Taxable=13k per year contribution
Roth=6k per year contribution.

What would you advise for the actual funds assuming typical 3 fund approach for the 3 accounts in the very first year of employment ?

How would your recommendation change after 1 year of work when they have some savings and are eligible for $450 per week unemployment ?
Last edited by babystep on Sun Nov 10, 2019 11:23 pm, edited 2 times in total.

babystep
Posts: 44
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Re: Holding bonds vs 100% equities

Post by babystep » Sun Nov 10, 2019 10:59 pm

KlangFool wrote:
Sun Nov 10, 2019 9:42 pm
babystep wrote:
Sun Nov 10, 2019 8:57 pm

If a 25 year old, who just started working, asks that I am buying these 2050 target date funds in my 401k then would the BH recommendation be to not buy these since it is too risky and they should be in 70/30 instead of 90/10 ?

Would you instead suggest the 25 year old to buy Vanguard Target Retirement 2030 Fund 70/30 ?
https://investor.vanguard.com/mutual-fu ... file/VTHRX
babystep,

A person's age does not determine when the person will reach Financial Independence. It is the saving rate as a ratio of the annual expense. If the person saved 1 year of expense every year, the person could reach 25X annual expense in 17 or fewer years with 70/30. Why should the person be 100/0?

I did not learn and know that lesson 10+ years ago.

A) I was 100/0.

B) I believed that I had job security.

C) Then, Telecom bust happened and my industry laid off 1+ million workers across 6 to 8 years. Some of my peers are permanently unemployed and/or under-employed since then.

D) I capitulated and lost 50% of my life savings up to that movement.

E) I was in cash for many years before I slowly move back in.

The biggest tragedy was I have no need to take the risk. I could reach my goal in less than 10 years with 70/30. The problem with 100/0 is the person needs to shift the AA to something more conservative when the portfolio is big enough. But, usually, they get caught with the bull market and never make the change until it is too late.

KlangFool
So sorry to read about such a hardship. I could understand why you would use 70/30.

I agree that one needs to adjust the allocation with time.

BTW, have you calculated if you were in a 30 year target date gliding path fund from the day 1 of your work then what would have happened in your case ?

pharmermummles
Posts: 56
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Re: Holding bonds vs 100% equities

Post by pharmermummles » Mon Nov 11, 2019 3:12 am

This is a very interesting topic to me. I'm a young investor (28), so I feel perfectly comfortable being invested heavily in stocks, and I don't plan to own bonds for probably another decade. One of the things that gets missed I think is that one's investment horizon isn't the same as the number of years until FI / retirement. Your investment horizon is your life expectancy. So I while I would agree that being 100% in equities may not be a good idea for say a 15-year investment horizon, that is not the same as saying it isn't a perfectly reasonable allocation for someone 15 years from retirement, since your actual investment horizon is much longer than that (assuming good health). It's not like anyone here is planning to retire and promptly sell all of their assets.


Criticisms of this boil down to the risk of withdrawing from an equity-heavy portfolio at a sub-optimal time, after say a 50% drawdown. Klangfool mainly cites this risk with regard to unexpected job loss during a recession. The degree to which you want to protect against this says a lot about your personal risk tolerance, and is a personal choice, with lots of personal factors going into it (job stability, safety-net of friends and family, spousal income, etc.). I don't think there is anything wrong with having a hefty bond allocation if you want to hedge against this risk, it is just very important that you understand that there is a potentially high cost to this "insurance policy." It is admittedly riskier to be more heavily in equities should this happen to you, but with an adequate emergency fund and unemployment insurance, you can weather most storms without tapping your retirement funds. In the event that you need to, it is definitely possible that the extra weeks or months afforded by a 30% bond allocation could save your skin, but at that point you're likely ruining both portfolios with an exceptionally long unemployment few of us are likely to encounter, and you only get a benefit if you manage to find employment in those extra few weeks or months. Otherwise the endpoint is the same. Again, it's possible, but we don't have to insure against every possible calamity regardless of cost, otherwise we would all be advocating no larger than a 1% SWR, which is ridiculous.


As for concerns about sub-optimal withdrawals due to retirement and sequence-of-returns risk, I think there is plenty we can do to alleviate that. Not many here would recommend a 100% equity portfolio at retirement age when withdrawals begin. Naturally, a rising bond glidepath in the 5-10 years before retirement is reasonable. If a recession hits at that time, well, it's not like you're liquidating your entire portfolio. You're gradually buying bonds. Even with a significant 50% drawdown (which isn't a common event), the damage to your portfolio at that time is very likely to be less than the damage you would have incurred by being more heavily-invested in bonds for the previous decades. And if you come out behind due to poor equity returns or sequence-of-returns risk, so what? You were playing the odds, and if you had a plan and stuck to it (i.e. didn't panic sell in a way contrary to your IPS) it is unlikely to be ruinous, except in the case of an unprecedented drawdown that lasts a decade or more, in which case, there wasn't really any reasonable asset-allocation that would have saved you anyway.

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Vulcan
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Re: Holding bonds vs 100% equities

Post by Vulcan » Mon Nov 11, 2019 6:41 am

Nobody knows nuthin'.

"When measured in three-decade increments, bonds did better than stocks as recently as 2011"
Sometimes, It’s Bonds For the Long Run
Maybe investors should question the dogma of “stocks for the long run.” History shows that a portfolio of bonds has outperformed stocks surprisingly often and for shockingly long periods.
...
Many investors have put blind faith in stocks, confident that history will repeat itself. Someday it might—in a way that investors who have all their money in stocks should hedge against before it’s too late.
I was 100% stocks until approx my 40th birthday, but upon digesting a lot of these "100% stocks" threads I am ramping up towards 70/30 by (having first paid off the mortgage) mostly contributing to bonds with new money.
If you torture the data long enough, it will confess to anything. ~Ronald Coase

bgf
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Re: Holding bonds vs 100% equities

Post by bgf » Mon Nov 11, 2019 8:24 am

Vulcan wrote:
Mon Nov 11, 2019 6:41 am
Nobody knows nuthin'.

"When measured in three-decade increments, bonds did better than stocks as recently as 2011"
Sometimes, It’s Bonds For the Long Run
Maybe investors should question the dogma of “stocks for the long run.” History shows that a portfolio of bonds has outperformed stocks surprisingly often and for shockingly long periods.
...
Many investors have put blind faith in stocks, confident that history will repeat itself. Someday it might—in a way that investors who have all their money in stocks should hedge against before it’s too late.
I was 100% stocks until approx my 40th birthday, but upon digesting a lot of these "100% stocks" threads I am ramping up towards 70/30 by (having first paid off the mortgage) mostly contributing to bonds with new money.
i have a 15 year mortgage at 2.875%. i will more strongly consider bonds when that is paid off. i cannot stomach using tax benefited space to purchase bonds that pay less than my mortgage rate. i just can't get myself to negative arb myself like that.
“TE OCCIDERE POSSUNT SED TE EDERE NON POSSUNT NEFAS EST"

international001
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Re: Holding bonds vs 100% equities

Post by international001 » Mon Nov 11, 2019 8:25 am

grabiner wrote:
Sun Nov 10, 2019 9:36 pm
international001 wrote:
Sun Nov 10, 2019 9:19 pm
I think the great point of this discussion is adding an extra variable: the money you may have to use from your retirement portfolio at a random point (typically, if you are unemployed and your job is not stable; but could be for other reasons, imagine medical condition, you are suited, etc). It may or may not be coincidental to a recession, but one likely scenario is that it is (laid offs)

What this suggest is that there is a AA glide path we typically don't think about. On your first years of employment, you want to be low in stocks, later in life you may increase them again (perhaps you may reach 100/0 around 40), then decrease them as you go into retirement, and you may increase them again while in retirement (but this is part of another discussion https://www.kitces.com/blog/should-equi ... ly-better/)
This increasing glide path goes away if you have a large emergency fund that you don't count in your allocation. When you have only one year's living expenses, you might have half of that in an emergency fund, and the other half 100% stock, which would be 50% stock counting the emergency fund. When you have ten years' living expenses, you might still have six months' expenses in an emergency fund, and if the rest is 80% stock, you are 76% stock counting the emergency fund.

This emergency fund could be held in a Roth IRA so that it is liquid without penalty; cashing in a traditional IRA or 401(k) in an emergency is often costly (although many emergencies qualify as exceptions to the 10% penalty).
Sure.. but this is just a mental accounting trick

KlangFool
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Re: Holding bonds vs 100% equities

Post by KlangFool » Mon Nov 11, 2019 8:25 am

pharmermummles wrote:
Mon Nov 11, 2019 3:12 am
This is a very interesting topic to me. I'm a young investor (28), so I feel perfectly comfortable being invested heavily in stocks, and I don't plan to own bonds for probably another decade. One of the things that gets missed I think is that one's investment horizon isn't the same as the number of years until FI / retirement. Your investment horizon is your life expectancy. So I while I would agree that being 100% in equities may not be a good idea for say a 15-year investment horizon, that is not the same as saying it isn't a perfectly reasonable allocation for someone 15 years from retirement, since your actual investment horizon is much longer than that (assuming good health). It's not like anyone here is planning to retire and promptly sell all of their assets.


Criticisms of this boil down to the risk of withdrawing from an equity-heavy portfolio at a sub-optimal time, after say a 50% drawdown. Klangfool mainly cites this risk with regard to unexpected job loss during a recession. The degree to which you want to protect against this says a lot about your personal risk tolerance, and is a personal choice, with lots of personal factors going into it (job stability, safety-net of friends and family, spousal income, etc.). I don't think there is anything wrong with having a hefty bond allocation if you want to hedge against this risk, it is just very important that you understand that there is a potentially high cost to this "insurance policy." It is admittedly riskier to be more heavily in equities should this happen to you, but with an adequate emergency fund and unemployment insurance, you can weather most storms without tapping your retirement funds. In the event that you need to, it is definitely possible that the extra weeks or months afforded by a 30% bond allocation could save your skin, but at that point you're likely ruining both portfolios with an exceptionally long unemployment few of us are likely to encounter, and you only get a benefit if you manage to find employment in those extra few weeks or months. Otherwise the endpoint is the same. Again, it's possible, but we don't have to insure against every possible calamity regardless of cost, otherwise we would all be advocating no larger than a 1% SWR, which is ridiculous.


As for concerns about sub-optimal withdrawals due to retirement and sequence-of-returns risk, I think there is plenty we can do to alleviate that. Not many here would recommend a 100% equity portfolio at retirement age when withdrawals begin. Naturally, a rising bond glidepath in the 5-10 years before retirement is reasonable. If a recession hits at that time, well, it's not like you're liquidating your entire portfolio. You're gradually buying bonds. Even with a significant 50% drawdown (which isn't a common event), the damage to your portfolio at that time is very likely to be less than the damage you would have incurred by being more heavily-invested in bonds for the previous decades. And if you come out behind due to poor equity returns or sequence-of-returns risk, so what? You were playing the odds, and if you had a plan and stuck to it (i.e. didn't panic sell in a way contrary to your IPS) it is unlikely to be ruinous, except in the case of an unprecedented drawdown that lasts a decade or more, in which case, there wasn't really any reasonable asset-allocation that would have saved you anyway.
1) You had never experienced a recession.

2) please calculate how long you can survive in a recession with 100/0 with unemployment.

3) please calculate the cost of withdrawal with 100/0 in a recession.

4)please calculate the actual cost of 70/30.

5) I don't know whether emotionally you can handle 100/0. But. I would suggest you calculate all those numbers and make an calculated decision.

KlangFool

KlangFool
Posts: 14193
Joined: Sat Oct 11, 2008 12:35 pm

Re: Holding bonds vs 100% equities

Post by KlangFool » Mon Nov 11, 2019 8:45 am

babystep wrote:
Sun Nov 10, 2019 10:59 pm
KlangFool wrote:
Sun Nov 10, 2019 9:42 pm
babystep wrote:
Sun Nov 10, 2019 8:57 pm

If a 25 year old, who just started working, asks that I am buying these 2050 target date funds in my 401k then would the BH recommendation be to not buy these since it is too risky and they should be in 70/30 instead of 90/10 ?

Would you instead suggest the 25 year old to buy Vanguard Target Retirement 2030 Fund 70/30 ?
https://investor.vanguard.com/mutual-fu ... file/VTHRX
babystep,

A person's age does not determine when the person will reach Financial Independence. It is the saving rate as a ratio of the annual expense. If the person saved 1 year of expense every year, the person could reach 25X annual expense in 17 or fewer years with 70/30. Why should the person be 100/0?

I did not learn and know that lesson 10+ years ago.

A) I was 100/0.

B) I believed that I had job security.

C) Then, Telecom bust happened and my industry laid off 1+ million workers across 6 to 8 years. Some of my peers are permanently unemployed and/or under-employed since then.

D) I capitulated and lost 50% of my life savings up to that movement.

E) I was in cash for many years before I slowly move back in.

The biggest tragedy was I have no need to take the risk. I could reach my goal in less than 10 years with 70/30. The problem with 100/0 is the person needs to shift the AA to something more conservative when the portfolio is big enough. But, usually, they get caught with the bull market and never make the change until it is too late.

KlangFool
So sorry to read about such a hardship. I could understand why you would use 70/30.

I agree that one needs to adjust the allocation with time.

BTW, have you calculated if you were in a 30 year target date gliding path fund from the day 1 of your work then what would have happened in your case ?
babystep,

1) The target date fund did not exist at that time.

2) If I was in a life strategy Moderate Growth (60/40) Fund, I would be FI 5 to 10 years earlier. This mistake costs me 5 to 10 years of my life. My plan is to FI right when my kids go to college. And, I would have the money to make this happened.

3) I have no job security over the last 10+ years. There is a major difference between having FI Money and working without job security versus not having the money. With FI money, you can walk away any time. The stress would be gone.

KlangFool

pharmermummles
Posts: 56
Joined: Tue Mar 20, 2018 6:02 am

Re: Holding bonds vs 100% equities

Post by pharmermummles » Tue Nov 12, 2019 6:45 am

KlangFool wrote:
Mon Nov 11, 2019 8:25 am
pharmermummles wrote:
Mon Nov 11, 2019 3:12 am
This is a very interesting topic to me. I'm a young investor (28), so I feel perfectly comfortable being invested heavily in stocks, and I don't plan to own bonds for probably another decade. One of the things that gets missed I think is that one's investment horizon isn't the same as the number of years until FI / retirement. Your investment horizon is your life expectancy. So I while I would agree that being 100% in equities may not be a good idea for say a 15-year investment horizon, that is not the same as saying it isn't a perfectly reasonable allocation for someone 15 years from retirement, since your actual investment horizon is much longer than that (assuming good health). It's not like anyone here is planning to retire and promptly sell all of their assets.


Criticisms of this boil down to the risk of withdrawing from an equity-heavy portfolio at a sub-optimal time, after say a 50% drawdown. Klangfool mainly cites this risk with regard to unexpected job loss during a recession. The degree to which you want to protect against this says a lot about your personal risk tolerance, and is a personal choice, with lots of personal factors going into it (job stability, safety-net of friends and family, spousal income, etc.). I don't think there is anything wrong with having a hefty bond allocation if you want to hedge against this risk, it is just very important that you understand that there is a potentially high cost to this "insurance policy." It is admittedly riskier to be more heavily in equities should this happen to you, but with an adequate emergency fund and unemployment insurance, you can weather most storms without tapping your retirement funds. In the event that you need to, it is definitely possible that the extra weeks or months afforded by a 30% bond allocation could save your skin, but at that point you're likely ruining both portfolios with an exceptionally long unemployment few of us are likely to encounter, and you only get a benefit if you manage to find employment in those extra few weeks or months. Otherwise the endpoint is the same. Again, it's possible, but we don't have to insure against every possible calamity regardless of cost, otherwise we would all be advocating no larger than a 1% SWR, which is ridiculous.


As for concerns about sub-optimal withdrawals due to retirement and sequence-of-returns risk, I think there is plenty we can do to alleviate that. Not many here would recommend a 100% equity portfolio at retirement age when withdrawals begin. Naturally, a rising bond glidepath in the 5-10 years before retirement is reasonable. If a recession hits at that time, well, it's not like you're liquidating your entire portfolio. You're gradually buying bonds. Even with a significant 50% drawdown (which isn't a common event), the damage to your portfolio at that time is very likely to be less than the damage you would have incurred by being more heavily-invested in bonds for the previous decades. And if you come out behind due to poor equity returns or sequence-of-returns risk, so what? You were playing the odds, and if you had a plan and stuck to it (i.e. didn't panic sell in a way contrary to your IPS) it is unlikely to be ruinous, except in the case of an unprecedented drawdown that lasts a decade or more, in which case, there wasn't really any reasonable asset-allocation that would have saved you anyway.
1) You had never experienced a recession.

2) please calculate how long you can survive in a recession with 100/0 with unemployment.

3) please calculate the cost of withdrawal with 100/0 in a recession.

4)please calculate the actual cost of 70/30.

5) I don't know whether emotionally you can handle 100/0. But. I would suggest you calculate all those numbers and make an calculated decision.

KlangFool

1) + 5) I haven't had any money in the market during a significant drawdown. That's true. I suspect you are implying that I would sell in those circumstances. That's going to be your trump card to any of this, and it is completely unprovable by you or irrefutable by me. I like to think I know myself more than a stranger on the internet, but you're correct in pointing out that plenty of people overestimate their own courage when their portfolio is sinking rapidly. Until proven otherwise, let's just go with the assumption that I will stay the course. I would not recommend 100% equities to anyone who isn't capable of staying the course when expected volatility of the stock market shows up.

2) -4) This is going to vary widely depending on your starting balance, the timing of the recession, and your assumptions regarding market returns. It isn't ideal, but I like using historical data vs. forward-looking projections. This avoids issues like you have been accused of, specifically the double-counting of the downside volatility of equities. I can't just use average expected returns going forward and then add a crash on top of it, since that would presumably already be baked in. HUGE shout out to Big ERN over at earlyretirementnow.com for his spreadsheet with inflation-adjusted equity and bond returns going back to the 1870s. My data is pulled right from his numbers.

I made a number of assumptions here. First of all, with any sort of reasonable emergency fund, say 6 months, even a one-year unemployment is going to be completely covered by unemployment insurance (26 weeks) and the emergency fund. You would never touch your retirement assets at all until your unemployment lasted longer than a year, which is pretty unusual. So my solution is I will assume that this person has no emergency fund. At all. They are literally 100% equities. Every morning, they sell some stock to buy a cup of coffee.

Then I assume that this person is a pretty good saver. They spend $3K/month and save $2K/month while working (a 40% savings rate, which is probably pretty typical of many here). Again, this isn't advice for people with lots of poor spending habits who are overextended and not saving much for retirement, it is advice for bogleheads. Then I assume this person is completely rigid. They refuse to tighten their belt during a recession and job loss. So let's crunch some numbers.

Scenario 1:

Suppose you start your job and make your first paycheck and also your first retirement account contribution in October of 2006, one year before the market peak and subsequent crash of the great recession. Then, in October of 2007, you lose your job and apply for unemployment, absolutely terrible timing for you. By April of 2008, your unemployment benefits run out, and you begin to draw from your portfolio, which has taken a beating. You actually would survive until October of 2008 on your portfolio (remember, you only worked a year before starting it), and assuming your unemployment only lasts a year, your new job comes just in time. If not, you will have run out of money after about a year. If you were 70/30 this entire time, you would have made it another month. Your insurance policy only paid off if you got a job in the 13th month, not the 12th. After that, you're out of money either way. And at the end of it all, that would have been an expensive insurance policy. Not ruinous, but considering the low probability of it paying off, even in a worst-case scenario, I don't think it was worth it. By April 2019 (the last month Big ERN crunched numbers for on the copy of his spreadsheet I have), the 100% equities portfolio would have grown to $492,629 with that one-year job-loss vs. $425,333 if you were 70/30 that whole time. Again, not ruinous, but not insignificant. And given a more likely scenario where you didn't lose your job at the worst possible time (after all, most people didn't get fired, even in the recession), the difference grows to $592,566 vs. $514,514, over 15%. All of this gave you one month that it is very unlikely was helpful. If you like graphs, I made one. This shows the results of the two portfolios given a 1-year job loss at the market peak, with 100% equities in blue, 70/30 in red:

Image


Scenario 2:

But maybe the real difference shows up if you had at least somewhat of a portfolio to begin with. Additionally, that would be more applicable to most on the board whose portfolios are nonzero. So let's give you a modest starting balance of $100K in the same scenario. You again lose your job right at the market peak in October of 2007. And this time, the 26-week unemployment isn't all that helpful, since you have a much longer period of unemployment. How long would you last? If you were 100% in equities that whole time, you run out of cash in November of 2010. If you were 70/30, you make it until May of 2011. Congratulations, you now saved yourself six months. This ignores the fact that at 100% equities, you'd likely have started with a marginally larger portfolio, but I'll wave that one off. Six months seems significant, although at that point you will already have been unemployed for over three years. After the 37th month of unemployment, what are the chances that you would become gainfully employed during the 38th-43rd month? It might make it worth it to you, but there is no way I am going to go through life planning for a THREE YEAR unemployment at the worst possible time, especially assuming it is for any reason I wouldn't qualify for some form of disability. Assuming a still terrible, but far-more-likely one-year unemployment, as with the previous example, you damage both portfolios, but still come out well-ahead with 100% stocks (by 13% as of April of 2019), as shown here, again with 100% in blue, 70/30 in red:

Image


Scenario 3:

Let's break things. You start working in October of 2006 as in the first example, let's say at the age of 23. After a year, you lose your job at the market peak before the Global Financial Crisis. Again, you are unemployed for a full year before getting back into it. Then, in October 2013, 6 years after the GFC peak, with the recovery in full swing, we use a time machine to make it September of 1928, one year before the peak before the Great Depression. A year later, October of 2014 on our new timeline, you lose your job again at the market peak at the Great Depression hits. Again you are out of work for a year at the worst possible time. Then, things resume as normal, following historical data from the 30s and 40s, etc. Given the same number of months as the previous examples, the 70/30 portfolio is actually doing better at that point, shown here:

Image

But time goes on, and you have time on your side, after all, you're only 36 at this point. Based on your $3K/mo spending habits (remember this is all being adjusted for inflation), your "number" for FI would be $900K (based on 4% SWR). Miraculously (I promise I didn't plan this), you reach that number on the same month whether you were 70/30 or 100% equities, equivalent to July of 2032 on our new timeline, at age 51, despite some terrible luck. So even in this worst of all worst-case scenarios, you didn't reach FI any quicker being at 70/30. But let's say you plan to keep working past then, so that you may live more comfortably in retirement. Since you've hit your FI number, and you're in your early 50s, you decide to start transitioning towards 70/30 and eyeing retirement. Since the universe hates you in this example, we again enter out time machine and emerge in March of 2000, the peak before the Dot Com crash. You get to keep your job this time, but being a boglehead, you follow your IPS and begin selling stocks to purchase bonds as you had planned, at precisely the worst time. You do this gradually, at 0.5% per month over 5 years until you get to 70/30. Reliably selling those stocks at a loss and buying expensive bonds for most of it. What does the picture like like then? Again using all of the following data up until April of 2019, resulting in ANOTHER Global Financial Crisis, you hit a nice, comfortable $2M in your portfolio in June of 2047 if you had been at 70/30 the whole time, at age 64. Despite essentially the worst-case scenario several times over, your 100% stock counterpart, who de-risked at the worst time possible, but stayed the course, hit that same number 17 months later, in November of 2048, at age 65. By August of 2051 (at the end of the available 2019 data in the real timeline), 70/30 beat out worst-case-imaginable 100% stocks -> 70/30 at worst-possible time by <8%. This graph shows our rough investing life, with 100% in blue, 70/30 in red):

Image

This last example serves two purposes. It illustrates that, yes, there are scenarios where the lower-risk portfolio would have come out ahead, even over very long periods of time. Of course, I had to try REALLY hard to make that work, but it is conceivable. And in a scenario like this, the downside is still pretty muted. The upside is far more likely, and often of a much larger magnitude.

Obviously past data does not guarantee future results and all that, but I have a hard time believing the future could be any WORSE than that, let alone timed nearly as poorly. If I panic-sell, none of this applies, and that's an easy critique to make for which I have no possible defense except to say that I trust myself not to drift from my IPS. Any young investor who has rigid discipline to an IPS like this will likely do just fine with 100% equities.

pharmermummles
Posts: 56
Joined: Tue Mar 20, 2018 6:02 am

Re: Holding bonds vs 100% equities

Post by pharmermummles » Tue Nov 12, 2019 9:01 am

Actually, while I'm borrowing heavily from his resources, I would also point to Big ERN's Early Retirement Series in general. He talks a lot about how the riskier move is often having too high of a bond allocation, especially for young people who may be planning to retire early. This may not apply to everyone, but for those who are interested in FIRE, a heavy equity allocation, even if you cannot stomach 100%, is essential. Not just in terms of wanting more money, but also, again based on historical data - the only data we have, in terms of reducing the failure rates of various withdrawal rates. More bonds does NOT necessarily mean less risky. It means less volatile.

KlangFool
Posts: 14193
Joined: Sat Oct 11, 2008 12:35 pm

Re: Holding bonds vs 100% equities

Post by KlangFool » Tue Nov 12, 2019 9:02 am

pharmermummles wrote:
Tue Nov 12, 2019 6:45 am
KlangFool wrote:
Mon Nov 11, 2019 8:25 am
pharmermummles wrote:
Mon Nov 11, 2019 3:12 am
This is a very interesting topic to me. I'm a young investor (28), so I feel perfectly comfortable being invested heavily in stocks, and I don't plan to own bonds for probably another decade. One of the things that gets missed I think is that one's investment horizon isn't the same as the number of years until FI / retirement. Your investment horizon is your life expectancy. So I while I would agree that being 100% in equities may not be a good idea for say a 15-year investment horizon, that is not the same as saying it isn't a perfectly reasonable allocation for someone 15 years from retirement, since your actual investment horizon is much longer than that (assuming good health). It's not like anyone here is planning to retire and promptly sell all of their assets.


Criticisms of this boil down to the risk of withdrawing from an equity-heavy portfolio at a sub-optimal time, after say a 50% drawdown. Klangfool mainly cites this risk with regard to unexpected job loss during a recession. The degree to which you want to protect against this says a lot about your personal risk tolerance, and is a personal choice, with lots of personal factors going into it (job stability, safety-net of friends and family, spousal income, etc.). I don't think there is anything wrong with having a hefty bond allocation if you want to hedge against this risk, it is just very important that you understand that there is a potentially high cost to this "insurance policy." It is admittedly riskier to be more heavily in equities should this happen to you, but with an adequate emergency fund and unemployment insurance, you can weather most storms without tapping your retirement funds. In the event that you need to, it is definitely possible that the extra weeks or months afforded by a 30% bond allocation could save your skin, but at that point you're likely ruining both portfolios with an exceptionally long unemployment few of us are likely to encounter, and you only get a benefit if you manage to find employment in those extra few weeks or months. Otherwise the endpoint is the same. Again, it's possible, but we don't have to insure against every possible calamity regardless of cost, otherwise we would all be advocating no larger than a 1% SWR, which is ridiculous.


As for concerns about sub-optimal withdrawals due to retirement and sequence-of-returns risk, I think there is plenty we can do to alleviate that. Not many here would recommend a 100% equity portfolio at retirement age when withdrawals begin. Naturally, a rising bond glidepath in the 5-10 years before retirement is reasonable. If a recession hits at that time, well, it's not like you're liquidating your entire portfolio. You're gradually buying bonds. Even with a significant 50% drawdown (which isn't a common event), the damage to your portfolio at that time is very likely to be less than the damage you would have incurred by being more heavily-invested in bonds for the previous decades. And if you come out behind due to poor equity returns or sequence-of-returns risk, so what? You were playing the odds, and if you had a plan and stuck to it (i.e. didn't panic sell in a way contrary to your IPS) it is unlikely to be ruinous, except in the case of an unprecedented drawdown that lasts a decade or more, in which case, there wasn't really any reasonable asset-allocation that would have saved you anyway.
1) You had never experienced a recession.

2) please calculate how long you can survive in a recession with 100/0 with unemployment.

3) please calculate the cost of withdrawal with 100/0 in a recession.

4)please calculate the actual cost of 70/30.

5) I don't know whether emotionally you can handle 100/0. But. I would suggest you calculate all those numbers and make an calculated decision.

KlangFool

1) + 5) I haven't had any money in the market during a significant drawdown. That's true. I suspect you are implying that I would sell in those circumstances. That's going to be your trump card to any of this, and it is completely unprovable by you or irrefutable by me. I like to think I know myself more than a stranger on the internet, but you're correct in pointing out that plenty of people overestimate their own courage when their portfolio is sinking rapidly. Until proven otherwise, let's just go with the assumption that I will stay the course. I would not recommend 100% equities to anyone who isn't capable of staying the course when expected volatility of the stock market shows up.

2) -4) This is going to vary widely depending on your starting balance, the timing of the recession, and your assumptions regarding market returns. It isn't ideal, but I like using historical data vs. forward-looking projections. This avoids issues like you have been accused of, specifically the double-counting of the downside volatility of equities. I can't just use average expected returns going forward and then add a crash on top of it, since that would presumably already be baked in. HUGE shout out to Big ERN over at earlyretirementnow.com for his spreadsheet with inflation-adjusted equity and bond returns going back to the 1870s. My data is pulled right from his numbers.

I made a number of assumptions here. First of all, with any sort of reasonable emergency fund, say 6 months, even a one-year unemployment is going to be completely covered by unemployment insurance (26 weeks) and the emergency fund. You would never touch your retirement assets at all until your unemployment lasted longer than a year, which is pretty unusual. So my solution is I will assume that this person has no emergency fund. At all. They are literally 100% equities. Every morning, they sell some stock to buy a cup of coffee.

Then I assume that this person is a pretty good saver. They spend $3K/month and save $2K/month while working (a 40% savings rate, which is probably pretty typical of many here). Again, this isn't advice for people with lots of poor spending habits who are overextended and not saving much for retirement, it is advice for bogleheads. Then I assume this person is completely rigid. They refuse to tighten their belt during a recession and job loss. So let's crunch some numbers.

Scenario 1:

Suppose you start your job and make your first paycheck and also your first retirement account contribution in October of 2006, one year before the market peak and subsequent crash of the great recession. Then, in October of 2007, you lose your job and apply for unemployment, absolutely terrible timing for you. By April of 2008, your unemployment benefits run out, and you begin to draw from your portfolio, which has taken a beating. You actually would survive until October of 2008 on your portfolio (remember, you only worked a year before starting it), and assuming your unemployment only lasts a year, your new job comes just in time. If not, you will have run out of money after about a year. If you were 70/30 this entire time, you would have made it another month. Your insurance policy only paid off if you got a job in the 13th month, not the 12th. After that, you're out of money either way. And at the end of it all, that would have been an expensive insurance policy. Not ruinous, but considering the low probability of it paying off, even in a worst-case scenario, I don't think it was worth it. By April 2019 (the last month Big ERN crunched numbers for on the copy of his spreadsheet I have), the 100% equities portfolio would have grown to $492,629 with that one-year job-loss vs. $425,333 if you were 70/30 that whole time. Again, not ruinous, but not insignificant. And given a more likely scenario where you didn't lose your job at the worst possible time (after all, most people didn't get fired, even in the recession), the difference grows to $592,566 vs. $514,514, over 15%. All of this gave you one month that it is very unlikely was helpful. If you like graphs, I made one. This shows the results of the two portfolios given a 1-year job loss at the market peak, with 100% equities in blue, 70/30 in red:

Image


Scenario 2:

But maybe the real difference shows up if you had at least somewhat of a portfolio to begin with. Additionally, that would be more applicable to most on the board whose portfolios are nonzero. So let's give you a modest starting balance of $100K in the same scenario. You again lose your job right at the market peak in October of 2007. And this time, the 26-week unemployment isn't all that helpful, since you have a much longer period of unemployment. How long would you last? If you were 100% in equities that whole time, you run out of cash in November of 2010. If you were 70/30, you make it until May of 2011. Congratulations, you now saved yourself six months. This ignores the fact that at 100% equities, you'd likely have started with a marginally larger portfolio, but I'll wave that one off. Six months seems significant, although at that point you will already have been unemployed for over three years. After the 37th month of unemployment, what are the chances that you would become gainfully employed during the 38th-43rd month? It might make it worth it to you, but there is no way I am going to go through life planning for a THREE YEAR unemployment at the worst possible time, especially assuming it is for any reason I wouldn't qualify for some form of disability. Assuming a still terrible, but far-more-likely one-year unemployment, as with the previous example, you damage both portfolios, but still come out well-ahead with 100% stocks (by 13% as of April of 2019), as shown here, again with 100% in blue, 70/30 in red:

Image


Scenario 3:

Let's break things. You start working in October of 2006 as in the first example, let's say at the age of 23. After a year, you lose your job at the market peak before the Global Financial Crisis. Again, you are unemployed for a full year before getting back into it. Then, in October 2013, 6 years after the GFC peak, with the recovery in full swing, we use a time machine to make it September of 1928, one year before the peak before the Great Depression. A year later, October of 2014 on our new timeline, you lose your job again at the market peak at the Great Depression hits. Again you are out of work for a year at the worst possible time. Then, things resume as normal, following historical data from the 30s and 40s, etc. Given the same number of months as the previous examples, the 70/30 portfolio is actually doing better at that point, shown here:

Image

But time goes on, and you have time on your side, after all, you're only 36 at this point. Based on your $3K/mo spending habits (remember this is all being adjusted for inflation), your "number" for FI would be $900K (based on 4% SWR). Miraculously (I promise I didn't plan this), you reach that number on the same month whether you were 70/30 or 100% equities, equivalent to July of 2032 on our new timeline, at age 51, despite some terrible luck. So even in this worst of all worst-case scenarios, you didn't reach FI any quicker being at 70/30. But let's say you plan to keep working past then, so that you may live more comfortably in retirement. Since you've hit your FI number, and you're in your early 50s, you decide to start transitioning towards 70/30 and eyeing retirement. Since the universe hates you in this example, we again enter out time machine and emerge in March of 2000, the peak before the Dot Com crash. You get to keep your job this time, but being a boglehead, you follow your IPS and begin selling stocks to purchase bonds as you had planned, at precisely the worst time. You do this gradually, at 0.5% per month over 5 years until you get to 70/30. Reliably selling those stocks at a loss and buying expensive bonds for most of it. What does the picture like like then? Again using all of the following data up until April of 2019, resulting in ANOTHER Global Financial Crisis, you hit a nice, comfortable $2M in your portfolio in June of 2047 if you had been at 70/30 the whole time, at age 64. Despite essentially the worst-case scenario several times over, your 100% stock counterpart, who de-risked at the worst time possible, but stayed the course, hit that same number 17 months later, in November of 2048, at age 65. By August of 2051 (at the end of the available 2019 data in the real timeline), 70/30 beat out worst-case-imaginable 100% stocks -> 70/30 at worst-possible time by <8%. This graph shows our rough investing life, with 100% in blue, 70/30 in red):

Image

This last example serves two purposes. It illustrates that, yes, there are scenarios where the lower-risk portfolio would have come out ahead, even over very long periods of time. Of course, I had to try REALLY hard to make that work, but it is conceivable. And in a scenario like this, the downside is still pretty muted. The upside is far more likely, and often of a much larger magnitude.

Obviously past data does not guarantee future results and all that, but I have a hard time believing the future could be any WORSE than that, let alone timed nearly as poorly. If I panic-sell, none of this applies, and that's an easy critique to make for which I have no possible defense except to say that I trust myself not to drift from my IPS. Any young investor who has rigid discipline to an IPS like this will likely do just fine with 100% equities.
pharmermummles,

1) I do not know which state you live in. For my state, the maximum unemployment benefit across 26 weeks is around 10K. My annual expense is 60K. That only covers 2 months of expense.

2) For some of us, we have a recourse loan mortgage too. We will lose our houses and more.

3) Please explain how someone recovers from unemployment with no money? You have to survive in order to succeed.

4) My question is specific to you. You are the one that bears the risk of 100/0. So, you have to do the calculation and make sure that you know the risk. You do not have to post your answer.

KlangFool

KlangFool
Posts: 14193
Joined: Sat Oct 11, 2008 12:35 pm

Re: Holding bonds vs 100% equities

Post by KlangFool » Tue Nov 12, 2019 9:10 am

pharmermummles wrote:
Tue Nov 12, 2019 9:01 am
Actually, while I'm borrowing heavily from his resources, I would also point to Big ERN's Early Retirement Series in general. He talks a lot about how the riskier move is often having too high of a bond allocation, especially for young people who may be planning to retire early. This may not apply to everyone, but for those who are interested in FIRE, a heavy equity allocation, even if you cannot stomach 100%, is essential. Not just in terms of wanting more money, but also, again based on historical data - the only data we have, in terms of reducing the failure rates of various withdrawal rates. More bonds does NOT necessarily mean less risky. It means less volatile.
pharmermummles,

<<This may not apply to everyone, but for those who are interested in FIRE, a heavy equity allocation, even if you cannot stomach 100%, is essential.>>

This is obviously wrong. It is a simple math problem. Please do your own calculation.

A) I save 1 year of expense every year. I could reach FI in 17 years with 70/30.

B) We have a forum member that saves 3 to 4 years of expense every year. That person could probably FI with 30/70.

In order to FIRE, the person has to save 1 or more year of expense every year. So, at that saving rate, the return rate is insignificant as compared to the annual saving.

KlangFool

pharmermummles
Posts: 56
Joined: Tue Mar 20, 2018 6:02 am

Re: Holding bonds vs 100% equities

Post by pharmermummles » Tue Nov 12, 2019 9:23 am

KlangFool wrote:
Tue Nov 12, 2019 9:02 am
pharmermummles wrote:
Tue Nov 12, 2019 6:45 am
KlangFool wrote:
Mon Nov 11, 2019 8:25 am
pharmermummles wrote:
Mon Nov 11, 2019 3:12 am
This is a very interesting topic to me. I'm a young investor (28), so I feel perfectly comfortable being invested heavily in stocks, and I don't plan to own bonds for probably another decade. One of the things that gets missed I think is that one's investment horizon isn't the same as the number of years until FI / retirement. Your investment horizon is your life expectancy. So I while I would agree that being 100% in equities may not be a good idea for say a 15-year investment horizon, that is not the same as saying it isn't a perfectly reasonable allocation for someone 15 years from retirement, since your actual investment horizon is much longer than that (assuming good health). It's not like anyone here is planning to retire and promptly sell all of their assets.


Criticisms of this boil down to the risk of withdrawing from an equity-heavy portfolio at a sub-optimal time, after say a 50% drawdown. Klangfool mainly cites this risk with regard to unexpected job loss during a recession. The degree to which you want to protect against this says a lot about your personal risk tolerance, and is a personal choice, with lots of personal factors going into it (job stability, safety-net of friends and family, spousal income, etc.). I don't think there is anything wrong with having a hefty bond allocation if you want to hedge against this risk, it is just very important that you understand that there is a potentially high cost to this "insurance policy." It is admittedly riskier to be more heavily in equities should this happen to you, but with an adequate emergency fund and unemployment insurance, you can weather most storms without tapping your retirement funds. In the event that you need to, it is definitely possible that the extra weeks or months afforded by a 30% bond allocation could save your skin, but at that point you're likely ruining both portfolios with an exceptionally long unemployment few of us are likely to encounter, and you only get a benefit if you manage to find employment in those extra few weeks or months. Otherwise the endpoint is the same. Again, it's possible, but we don't have to insure against every possible calamity regardless of cost, otherwise we would all be advocating no larger than a 1% SWR, which is ridiculous.


As for concerns about sub-optimal withdrawals due to retirement and sequence-of-returns risk, I think there is plenty we can do to alleviate that. Not many here would recommend a 100% equity portfolio at retirement age when withdrawals begin. Naturally, a rising bond glidepath in the 5-10 years before retirement is reasonable. If a recession hits at that time, well, it's not like you're liquidating your entire portfolio. You're gradually buying bonds. Even with a significant 50% drawdown (which isn't a common event), the damage to your portfolio at that time is very likely to be less than the damage you would have incurred by being more heavily-invested in bonds for the previous decades. And if you come out behind due to poor equity returns or sequence-of-returns risk, so what? You were playing the odds, and if you had a plan and stuck to it (i.e. didn't panic sell in a way contrary to your IPS) it is unlikely to be ruinous, except in the case of an unprecedented drawdown that lasts a decade or more, in which case, there wasn't really any reasonable asset-allocation that would have saved you anyway.
1) You had never experienced a recession.

2) please calculate how long you can survive in a recession with 100/0 with unemployment.

3) please calculate the cost of withdrawal with 100/0 in a recession.

4)please calculate the actual cost of 70/30.

5) I don't know whether emotionally you can handle 100/0. But. I would suggest you calculate all those numbers and make an calculated decision.

KlangFool

1) + 5) I haven't had any money in the market during a significant drawdown. That's true. I suspect you are implying that I would sell in those circumstances. That's going to be your trump card to any of this, and it is completely unprovable by you or irrefutable by me. I like to think I know myself more than a stranger on the internet, but you're correct in pointing out that plenty of people overestimate their own courage when their portfolio is sinking rapidly. Until proven otherwise, let's just go with the assumption that I will stay the course. I would not recommend 100% equities to anyone who isn't capable of staying the course when expected volatility of the stock market shows up.

2) -4) This is going to vary widely depending on your starting balance, the timing of the recession, and your assumptions regarding market returns. It isn't ideal, but I like using historical data vs. forward-looking projections. This avoids issues like you have been accused of, specifically the double-counting of the downside volatility of equities. I can't just use average expected returns going forward and then add a crash on top of it, since that would presumably already be baked in. HUGE shout out to Big ERN over at earlyretirementnow.com for his spreadsheet with inflation-adjusted equity and bond returns going back to the 1870s. My data is pulled right from his numbers.

I made a number of assumptions here. First of all, with any sort of reasonable emergency fund, say 6 months, even a one-year unemployment is going to be completely covered by unemployment insurance (26 weeks) and the emergency fund. You would never touch your retirement assets at all until your unemployment lasted longer than a year, which is pretty unusual. So my solution is I will assume that this person has no emergency fund. At all. They are literally 100% equities. Every morning, they sell some stock to buy a cup of coffee.

Then I assume that this person is a pretty good saver. They spend $3K/month and save $2K/month while working (a 40% savings rate, which is probably pretty typical of many here). Again, this isn't advice for people with lots of poor spending habits who are overextended and not saving much for retirement, it is advice for bogleheads. Then I assume this person is completely rigid. They refuse to tighten their belt during a recession and job loss. So let's crunch some numbers.

Scenario 1:

Suppose you start your job and make your first paycheck and also your first retirement account contribution in October of 2006, one year before the market peak and subsequent crash of the great recession. Then, in October of 2007, you lose your job and apply for unemployment, absolutely terrible timing for you. By April of 2008, your unemployment benefits run out, and you begin to draw from your portfolio, which has taken a beating. You actually would survive until October of 2008 on your portfolio (remember, you only worked a year before starting it), and assuming your unemployment only lasts a year, your new job comes just in time. If not, you will have run out of money after about a year. If you were 70/30 this entire time, you would have made it another month. Your insurance policy only paid off if you got a job in the 13th month, not the 12th. After that, you're out of money either way. And at the end of it all, that would have been an expensive insurance policy. Not ruinous, but considering the low probability of it paying off, even in a worst-case scenario, I don't think it was worth it. By April 2019 (the last month Big ERN crunched numbers for on the copy of his spreadsheet I have), the 100% equities portfolio would have grown to $492,629 with that one-year job-loss vs. $425,333 if you were 70/30 that whole time. Again, not ruinous, but not insignificant. And given a more likely scenario where you didn't lose your job at the worst possible time (after all, most people didn't get fired, even in the recession), the difference grows to $592,566 vs. $514,514, over 15%. All of this gave you one month that it is very unlikely was helpful. If you like graphs, I made one. This shows the results of the two portfolios given a 1-year job loss at the market peak, with 100% equities in blue, 70/30 in red:

Image


Scenario 2:

But maybe the real difference shows up if you had at least somewhat of a portfolio to begin with. Additionally, that would be more applicable to most on the board whose portfolios are nonzero. So let's give you a modest starting balance of $100K in the same scenario. You again lose your job right at the market peak in October of 2007. And this time, the 26-week unemployment isn't all that helpful, since you have a much longer period of unemployment. How long would you last? If you were 100% in equities that whole time, you run out of cash in November of 2010. If you were 70/30, you make it until May of 2011. Congratulations, you now saved yourself six months. This ignores the fact that at 100% equities, you'd likely have started with a marginally larger portfolio, but I'll wave that one off. Six months seems significant, although at that point you will already have been unemployed for over three years. After the 37th month of unemployment, what are the chances that you would become gainfully employed during the 38th-43rd month? It might make it worth it to you, but there is no way I am going to go through life planning for a THREE YEAR unemployment at the worst possible time, especially assuming it is for any reason I wouldn't qualify for some form of disability. Assuming a still terrible, but far-more-likely one-year unemployment, as with the previous example, you damage both portfolios, but still come out well-ahead with 100% stocks (by 13% as of April of 2019), as shown here, again with 100% in blue, 70/30 in red:

Image


Scenario 3:

Let's break things. You start working in October of 2006 as in the first example, let's say at the age of 23. After a year, you lose your job at the market peak before the Global Financial Crisis. Again, you are unemployed for a full year before getting back into it. Then, in October 2013, 6 years after the GFC peak, with the recovery in full swing, we use a time machine to make it September of 1928, one year before the peak before the Great Depression. A year later, October of 2014 on our new timeline, you lose your job again at the market peak at the Great Depression hits. Again you are out of work for a year at the worst possible time. Then, things resume as normal, following historical data from the 30s and 40s, etc. Given the same number of months as the previous examples, the 70/30 portfolio is actually doing better at that point, shown here:

Image

But time goes on, and you have time on your side, after all, you're only 36 at this point. Based on your $3K/mo spending habits (remember this is all being adjusted for inflation), your "number" for FI would be $900K (based on 4% SWR). Miraculously (I promise I didn't plan this), you reach that number on the same month whether you were 70/30 or 100% equities, equivalent to July of 2032 on our new timeline, at age 51, despite some terrible luck. So even in this worst of all worst-case scenarios, you didn't reach FI any quicker being at 70/30. But let's say you plan to keep working past then, so that you may live more comfortably in retirement. Since you've hit your FI number, and you're in your early 50s, you decide to start transitioning towards 70/30 and eyeing retirement. Since the universe hates you in this example, we again enter out time machine and emerge in March of 2000, the peak before the Dot Com crash. You get to keep your job this time, but being a boglehead, you follow your IPS and begin selling stocks to purchase bonds as you had planned, at precisely the worst time. You do this gradually, at 0.5% per month over 5 years until you get to 70/30. Reliably selling those stocks at a loss and buying expensive bonds for most of it. What does the picture like like then? Again using all of the following data up until April of 2019, resulting in ANOTHER Global Financial Crisis, you hit a nice, comfortable $2M in your portfolio in June of 2047 if you had been at 70/30 the whole time, at age 64. Despite essentially the worst-case scenario several times over, your 100% stock counterpart, who de-risked at the worst time possible, but stayed the course, hit that same number 17 months later, in November of 2048, at age 65. By August of 2051 (at the end of the available 2019 data in the real timeline), 70/30 beat out worst-case-imaginable 100% stocks -> 70/30 at worst-possible time by <8%. This graph shows our rough investing life, with 100% in blue, 70/30 in red):

Image

This last example serves two purposes. It illustrates that, yes, there are scenarios where the lower-risk portfolio would have come out ahead, even over very long periods of time. Of course, I had to try REALLY hard to make that work, but it is conceivable. And in a scenario like this, the downside is still pretty muted. The upside is far more likely, and often of a much larger magnitude.

Obviously past data does not guarantee future results and all that, but I have a hard time believing the future could be any WORSE than that, let alone timed nearly as poorly. If I panic-sell, none of this applies, and that's an easy critique to make for which I have no possible defense except to say that I trust myself not to drift from my IPS. Any young investor who has rigid discipline to an IPS like this will likely do just fine with 100% equities.
pharmermummles,

1) I do not know which state you live in. For my state, the maximum unemployment benefit across 26 weeks is around 10K. My annual expense is 60K. That only covers 2 months of expense.

2) For some of us, we have a recourse loan mortgage too. We will lose our houses and more.

3) Please explain how someone recovers from unemployment with no money? You have to survive in order to succeed.

4) My question is specific to you. You are the one that bears the risk of 100/0. So, you have to do the calculation and make sure that you know the risk. You do not have to post your answer.

KlangFool
KlangFool,

1) I was actually unaware of the limitations of unemployment. Of course, we can ignore it altogether and assume the person in the example has a 6-month emergency fund instead, which I have and recommend for anyone with aggressive stock allocations. That way we get the same results and I don't have to re-calculate everything.

2) I understand that, and that's what I mean with my "failure" scenarios. Out of money is out of money. Likely bankruptcy. My point is not that the risk isn't there with 100% equities, but that the scenarios that cause it to fail generally also cause the failure of a 70/30 portfolio as well. Where they don't is a very small subset of situations (i.e. unemployed for 13 months, but not 14 months, after only saving for a year prior to losing your job and unemployment for 38-43 months, but not more, if starting from $100K). With a small portfolio, you have little to lose, and are likely to lose it all no matter what you allocation is should you be retired for a very long time. With a larger portfolio, the likelihood of running completely out of money before the market improves gets pretty low (even with only $100K it took over 3 years of unemployment).

3) Same answer. There are scenarios where you become unemployed and broke no matter what. I'm not convinced a 70/30 allocation does anything to reduce this risk in the vast majority of situations.

4) I agree that this is a very personal choice. Everyone has different risk tolerance. Everyone has different levels of discipline. Everyone has different safety nets, job security, etc. There is no one asset allocation that is going to be ideal for everyone. The right asset allocation is the one you can stick to through the times it performs poorly, and the one that allows you to sleep at night and do other things instead of worry about the money. For some people that is far more bond-heavy, and there's nothing wrong with that. I could live with a 70/30 allocation personally, but I personally would feel very uncomfortable with say a 40/60 allocation. I fear inflation (like really think about it a lot) a good deal more than market crashes. Again, all very personal.

Valuethinker
Posts: 39075
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Re: Holding bonds vs 100% equities

Post by Valuethinker » Tue Nov 12, 2019 9:28 am

grabiner wrote:
Sun Nov 10, 2019 6:11 pm
mathguy3021 wrote:
Sun Nov 10, 2019 3:46 pm
I wonder if the pro 100% stocks crowd would change their views if we have another great depression, with a 80% or more crash in the stock market, or a Japan like stock market that declines for many years. None of these outcomes seem likely due to the past 10 years of US stock performance.
Search in the forum for posts between October 2008 and March 2009. An all-stock portfolio lost about 60% top to bottom from the 2007 peak. And a lot of posters did change their mind and pull out of the stock market, mostly to their detriment; others knew their actual risk tolerance and stayed the course.
Hear you not, they will. Young Skywalker. A Jedi even, limitations has.

Lived experience the only teacher is. Market cycles you know. The Dark Side of the Markets, they must meet. Own soul to know. There, Walk alone, does each man and woman.

pharmermummles
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Re: Holding bonds vs 100% equities

Post by pharmermummles » Tue Nov 12, 2019 9:36 am

KlangFool wrote:
Tue Nov 12, 2019 9:10 am
pharmermummles wrote:
Tue Nov 12, 2019 9:01 am
Actually, while I'm borrowing heavily from his resources, I would also point to Big ERN's Early Retirement Series in general. He talks a lot about how the riskier move is often having too high of a bond allocation, especially for young people who may be planning to retire early. This may not apply to everyone, but for those who are interested in FIRE, a heavy equity allocation, even if you cannot stomach 100%, is essential. Not just in terms of wanting more money, but also, again based on historical data - the only data we have, in terms of reducing the failure rates of various withdrawal rates. More bonds does NOT necessarily mean less risky. It means less volatile.
pharmermummles,

<<This may not apply to everyone, but for those who are interested in FIRE, a heavy equity allocation, even if you cannot stomach 100%, is essential.>>

This is obviously wrong. It is a simple math problem. Please do your own calculation.

A) I save 1 year of expense every year. I could reach FI in 17 years with 70/30.

B) We have a forum member that saves 3 to 4 years of expense every year. That person could probably FI with 30/70.

In order to FIRE, the person has to save 1 or more year of expense every year. So, at that saving rate, the return rate is insignificant as compared to the annual saving.

KlangFool
Reaching FI isn't just about getting to a number. You also have to make that last if and when you retire. You can't just get to 25x expenses, pull the trigger, reitre early, and assume that a 4% SWR will work, especially for longer retirement periods. It all depends on your allocation, which is ERN's point in this intro. Just look at this table from the link I supplied:

Image

Instead of a 30/70 allocation as in your example, look at the 25% equity example he has in that table. Over a 30-year retirement, the "gold-standard" 4% SWR would have failed in 20% of historical cohorts. At 75% equity instead, it has only a 1% failure rate. 30/70 is fine if you want a 3% or even 3.5% SWR, but That means you now have to get to 28.5 - 33.3 x expenses. Which you are likely getting to much more slowly at 30/70. It can work, especially if you are able to save a lot more. But in that case you also probably worked several more years than you had to. If that's not a problem for you and you have no interest in retiring early, that's fine. If you want to retire early, it definitely helps to have more equities.

KlangFool
Posts: 14193
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Re: Holding bonds vs 100% equities

Post by KlangFool » Tue Nov 12, 2019 9:46 am

pharmermummles wrote:
Tue Nov 12, 2019 9:36 am
KlangFool wrote:
Tue Nov 12, 2019 9:10 am
pharmermummles wrote:
Tue Nov 12, 2019 9:01 am
Actually, while I'm borrowing heavily from his resources, I would also point to Big ERN's Early Retirement Series in general. He talks a lot about how the riskier move is often having too high of a bond allocation, especially for young people who may be planning to retire early. This may not apply to everyone, but for those who are interested in FIRE, a heavy equity allocation, even if you cannot stomach 100%, is essential. Not just in terms of wanting more money, but also, again based on historical data - the only data we have, in terms of reducing the failure rates of various withdrawal rates. More bonds does NOT necessarily mean less risky. It means less volatile.
pharmermummles,

<<This may not apply to everyone, but for those who are interested in FIRE, a heavy equity allocation, even if you cannot stomach 100%, is essential.>>

This is obviously wrong. It is a simple math problem. Please do your own calculation.

A) I save 1 year of expense every year. I could reach FI in 17 years with 70/30.

B) We have a forum member that saves 3 to 4 years of expense every year. That person could probably FI with 30/70.

In order to FIRE, the person has to save 1 or more year of expense every year. So, at that saving rate, the return rate is insignificant as compared to the annual saving.

KlangFool
Reaching FI isn't just about getting to a number. You also have to make that last if and when you retire. You can't just get to 25x expenses, pull the trigger, reitre early, and assume that a 4% SWR will work, especially for longer retirement periods. It all depends on your allocation, which is ERN's point in this intro. Just look at this table from the link I supplied:
pharmermummles,

Then, adjust the number to 33 times or 40 times the annual expense. You would still get the same answer. The difference is insignificant at a very high saving rate.

<<Instead of a 30/70 allocation as in your example, look at the 25% equity example he has in that table. Over a 30-year retirement, the "gold-standard" 4% SWR would have failed in 20% of historical cohorts. At 75% equity instead, it has only a 1% failure rate. 30/70 is fine if you want a 3% or even 3.5% SWR, but That means you now have to get to 28.5 - 33.3 x expenses. Which you are likely getting to much more slowly at 30/70. >>

You did not calculate how much slower that is. It is insignificant. If a person saves 3 years of expense every year, the person will reach 30X in 10 years with 0% real return.

Do your own calculations. Find out the exact number. Do not assume.

KlangFool

KlangFool
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Re: Holding bonds vs 100% equities

Post by KlangFool » Tue Nov 12, 2019 10:00 am

pharmermummles wrote:
Tue Nov 12, 2019 9:23 am

KlangFool,

1) I was actually unaware of the limitations of unemployment. Of course, we can ignore it altogether and assume the person in the example has a 6-month emergency fund instead, which I have and recommend for anyone with aggressive stock allocations. That way we get the same results and I don't have to re-calculate everything.

2) I understand that, and that's what I mean with my "failure" scenarios. Out of money is out of money. Likely bankruptcy. My point is not that the risk isn't there with 100% equities, but that the scenarios that cause it to fail generally also cause the failure of a 70/30 portfolio as well. Where they don't is a very small subset of situations (i.e. unemployed for 13 months, but not 14 months, after only saving for a year prior to losing your job and unemployment for 38-43 months, but not more, if starting from $100K). With a small portfolio, you have little to lose, and are likely to lose it all no matter what you allocation is should you be retired for a very long time. With a larger portfolio, the likelihood of running completely out of money before the market improves gets pretty low (even with only $100K it took over 3 years of unemployment).

3) Same answer. There are scenarios where you become unemployed and broke no matter what. I'm not convinced a 70/30 allocation does anything to reduce this risk in the vast majority of situations.

4) I agree that this is a very personal choice. Everyone has different risk tolerance. Everyone has different levels of discipline. Everyone has different safety nets, job security, etc. There is no one asset allocation that is going to be ideal for everyone. The right asset allocation is the one you can stick to through the times it performs poorly, and the one that allows you to sleep at night and do other things instead of worry about the money. For some people that is far more bond-heavy, and there's nothing wrong with that. I could live with a 70/30 allocation personally, but I personally would feel very uncomfortable with say a 40/60 allocation. I fear inflation (like really think about it a lot) a good deal more than market crashes. Again, all very personal.
pharmermummles,

1) We wear seat belts even if the likelihood of a car accident is low. We did it because if the car accident happened, the result would not be as disastrous with the seat belts.

<<I'm not convinced a 70/30 allocation does anything to reduce this risk in the vast majority of situations.>>

2) Just like the seat belts. The 70/30 protects when it really matters. In that situation, every additional week/month helps. For a young person, the safety margin is slim. It is even slimmer with 100/0.

You have to survive in order to succeed.

3) There is another major issue here. The 100/0 has to make the right market timing move to a conservative AA when the portfolio is big enough. Most people do not act on this until it is too late. After 10+ years of the bull market, there will be a fair amount of people in these categories.

This was the story for Telecom Bust, 2008/2009 recession and repeated itself in every recession.

"Bulls make money, bears make money, pigs get slaughtered"

<<There is no one asset allocation that is going to be ideal for everyone.>>

4) Take a balanced approach. Do not go extreme to either side: 100/0 or 0/100.

5) Do not put all your eggs into one basket.

KlangFool

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Wiggums
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Re: Holding bonds vs 100% equities

Post by Wiggums » Tue Nov 12, 2019 10:28 am

grabiner wrote:
Sun Nov 10, 2019 6:11 pm
mathguy3021 wrote:
Sun Nov 10, 2019 3:46 pm
I wonder if the pro 100% stocks crowd would change their views if we have another great depression, with a 80% or more crash in the stock market, or a Japan like stock market that declines for many years. None of these outcomes seem likely due to the past 10 years of US stock performance.
Search in the forum for posts between October 2008 and March 2009. An all-stock portfolio lost about 60% top to bottom from the 2007 peak. And a lot of posters did change their mind and pull out of the stock market, mostly to their detriment; others knew their actual risk tolerance and stayed the course.
+1

From PKCRAFTERs tagline, “When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.”

mbasherp
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Re: Holding bonds vs 100% equities

Post by mbasherp » Tue Nov 12, 2019 10:52 am

pharmermummles,

Great work. I agree with your findings and logic and also enjoy Big ERN's posts on the matter. You've done an admirable job responding to Klangfool as well, although you will not likely get anywhere. That's not to say KF is wrong; I do believe he knows his own risk tolerance. Likewise, if a 90-100% equity allocation is something you or I can stay the course with while young, I think it is the best use of our capital.

Catchphrases like "you have to survive in order to succeed" imply that personal finance decisions can lead to death, and really rile me up. I went from negative net worth to mid six digits in 5 years because I got rid of the fear and decided to embrace intelligent pragmatic optimism.

In my industry, there is NO job security. I run financial stress tests regularly and discount my investments to 1/4 of their current value. I make sure I'm comfortable with that and as such I'm confident I can stay the course with my plan. The risk is not death. The risk is simply not meeting my goals. But the most valuable lesson I've learned through significant trials in life is that I will survive - and if I keep using my head, I will ultimately succeed.

Olemiss540
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Re: Holding bonds vs 100% equities

Post by Olemiss540 » Tue Nov 12, 2019 12:02 pm

My asset allocation is whatever my Financial Advisor thinks it should be.

If I need to set my own asset allocation, worry about markets, guess and tilt and chose and research, then why the HECK am I paying Vanguard .14 of my wealth each and every YEAR to manage the day to day of a Vanguard retirement fund. Might as well do it all my self if I had to spend weekends sorting through pie charts like Klangfool.
I hold index funds because I do not overestimate my ability to pick stocks OR stock pickers.

KlangFool
Posts: 14193
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Re: Holding bonds vs 100% equities

Post by KlangFool » Tue Nov 12, 2019 12:09 pm

mbasherp wrote:
Tue Nov 12, 2019 10:52 am
pharmermummles,

Great work. I agree with your findings and logic and also enjoy Big ERN's posts on the matter. You've done an admirable job responding to Klangfool as well, although you will not likely get anywhere. That's not to say KF is wrong; I do believe he knows his own risk tolerance. Likewise, if a 90-100% equity allocation is something you or I can stay the course with while young, I think it is the best use of our capital.

Catchphrases like "you have to survive in order to succeed" imply that personal finance decisions can lead to death, and really rile me up. I went from negative net worth to mid six digits in 5 years because I got rid of the fear and decided to embrace intelligent pragmatic optimism.

In my industry, there is NO job security. I run financial stress tests regularly and discount my investments to 1/4 of their current value. I make sure I'm comfortable with that and as such I'm confident I can stay the course with my plan. The risk is not death. The risk is simply not meeting my goals. But the most valuable lesson I've learned through significant trials in life is that I will survive - and if I keep using my head, I will ultimately succeed.
mbasherp,

<< In my industry, there is NO job security. I run financial stress tests regularly and discount my investments to 1/4 of their current value. I make sure I'm comfortable with that and as such I'm confident I can stay the course with my plan. The risk is not death. >>

You did your calculation and you know your worst-case scenario. You took a calculated risk. That is fine for me. My issue is for those that assume they could handle the risk without doing the proper planning and calculation. They just assume that they will be lucky.

<<Catchphrases like "you have to survive in order to succeed" imply that personal finance decisions can lead to death, and really rile me up. >>

Why? Just because you are lucky enough not to face this kind of decision, it does not mean it is not true for others.

KlangFool

pharmermummles
Posts: 56
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Re: Holding bonds vs 100% equities

Post by pharmermummles » Tue Nov 12, 2019 12:26 pm

KlangFool wrote:
Tue Nov 12, 2019 9:46 am
pharmermummles wrote:
Tue Nov 12, 2019 9:36 am
KlangFool wrote:
Tue Nov 12, 2019 9:10 am
pharmermummles wrote:
Tue Nov 12, 2019 9:01 am
Actually, while I'm borrowing heavily from his resources, I would also point to Big ERN's Early Retirement Series in general. He talks a lot about how the riskier move is often having too high of a bond allocation, especially for young people who may be planning to retire early. This may not apply to everyone, but for those who are interested in FIRE, a heavy equity allocation, even if you cannot stomach 100%, is essential. Not just in terms of wanting more money, but also, again based on historical data - the only data we have, in terms of reducing the failure rates of various withdrawal rates. More bonds does NOT necessarily mean less risky. It means less volatile.
pharmermummles,

<<This may not apply to everyone, but for those who are interested in FIRE, a heavy equity allocation, even if you cannot stomach 100%, is essential.>>

This is obviously wrong. It is a simple math problem. Please do your own calculation.

A) I save 1 year of expense every year. I could reach FI in 17 years with 70/30.

B) We have a forum member that saves 3 to 4 years of expense every year. That person could probably FI with 30/70.

In order to FIRE, the person has to save 1 or more year of expense every year. So, at that saving rate, the return rate is insignificant as compared to the annual saving.

KlangFool
Reaching FI isn't just about getting to a number. You also have to make that last if and when you retire. You can't just get to 25x expenses, pull the trigger, reitre early, and assume that a 4% SWR will work, especially for longer retirement periods. It all depends on your allocation, which is ERN's point in this intro. Just look at this table from the link I supplied:
pharmermummles,

Then, adjust the number to 33 times or 40 times the annual expense. You would still get the same answer. The difference is insignificant at a very high saving rate.

<<Instead of a 30/70 allocation as in your example, look at the 25% equity example he has in that table. Over a 30-year retirement, the "gold-standard" 4% SWR would have failed in 20% of historical cohorts. At 75% equity instead, it has only a 1% failure rate. 30/70 is fine if you want a 3% or even 3.5% SWR, but That means you now have to get to 28.5 - 33.3 x expenses. Which you are likely getting to much more slowly at 30/70. >>

You did not calculate how much slower that is. It is insignificant. If a person saves 3 years of expense every year, the person will reach 30X in 10 years with 0% real return.

Do your own calculations. Find out the exact number. Do not assume.

KlangFool
The problem isn't only that you get there more slowly, but also that you have to get to a larger number to support a lower SWR. I did calculate the difference, and it is absolutely significant. Less so for a person saving 3x expenses annually, but that isn't me, and it isn't you either. At a 3x savings rate (75% SR), we're talking several months to around two years depending on the cohort I looked at (sorry about the terrible formatting):

Months Until FIRE (30Y 75% SR)
Year 100% 70/30 30/70
1970 92 92 131
1975 82 82 87
1980 59 59 62
1985 63 64 72
1990 59 60 74

That's assuming you want a SWR with at least a 95% historical success rate. For 100% and 70/30, 4% does fine. For 30/70, we needed a 3.5% SWR. That's for a 30-year retirement. It matters more if you are planning a longer retirement of course. The 100% equities and 70/30 SWR would shift down to 3.5%, and the 30/70 to an abysmal 2.75%. The difference is noticeable, even for a very high savings rate:


Months Until FIRE (60Y 75% SR)
Year 100% 70/30 30/70
1970 109 113 142
1975 85 85 108
1980 62 62 73
1985 70 72 90
1990 63 69 85

Maybe not a huge difference to you, but I might definitely care in some of those cohorts. The difference is much more if your savings rate isn't that high. My savings rate, as the person in my example, is about 40%. Yours is 50% as you have stated, so the numbers wouldn't look too different. These are the numbers that matter most to me:

Months Until FIRE (30Y 40% SR)
Year 100% 70/30 30/70
1970 195 200 248
1975 183 190 213
1980 174 177 199
1985 146 156 251
1990 253 251 268

And for longer retirement planning:

Months Until FIRE (60Y 40% SR)
Year 100% 70/30 30/70
1970 200 223 272
1975 192 204 251
1980 180 189 231
1985 156 171 307
1990 264 262 306

1985 may be an outlier, but 25.6 years to FI for 30/70 vs. only 13 years for 100/0 is ridiculous. The BEST case scenario for bonds relative to stocks, with the retirement of stock-heavy portfolios being pushed back by the 2000 and 2007/2008 crashes at the worst times when heavily invested, still loses out to 100/0 by 3.5 YEARS. That's significant, and it is generally worse than that. And for what? I have yet to hear a convincing argument for having such a heavy bond allocation. Crunching the numbers has convinced me that 70/30 and 100/0 aren't all that terribly different, even if 100/0 has a higher historical and expected performance. It has definitely reinforced my belief that I could never be comfortable holding 70% bonds.

In the context of 100/0 vs. 70/30, the difference is usually no more than a year or two, more often only a few months, and in rare cases 70/30 gets you there faster in the right conditions. I have no problem with either, but I stick to the 100/0 while young because I don't see much of a reason not to. You will never convince me that 30/70 is a good strategy for early retirement. If you like your job and FIRE isn't a goal of yours, and lower volatility helps you sleep, you're fine no matter what as long as you save and stay the course. If you want to retire early and can't afford a 3-4x savings rate, higher equity allocation makes too much sense to pass up.

pharmermummles
Posts: 56
Joined: Tue Mar 20, 2018 6:02 am

Re: Holding bonds vs 100% equities

Post by pharmermummles » Tue Nov 12, 2019 12:50 pm

KlangFool wrote:
Tue Nov 12, 2019 10:00 am
pharmermummles wrote:
Tue Nov 12, 2019 9:23 am

KlangFool,

1) I was actually unaware of the limitations of unemployment. Of course, we can ignore it altogether and assume the person in the example has a 6-month emergency fund instead, which I have and recommend for anyone with aggressive stock allocations. That way we get the same results and I don't have to re-calculate everything.

2) I understand that, and that's what I mean with my "failure" scenarios. Out of money is out of money. Likely bankruptcy. My point is not that the risk isn't there with 100% equities, but that the scenarios that cause it to fail generally also cause the failure of a 70/30 portfolio as well. Where they don't is a very small subset of situations (i.e. unemployed for 13 months, but not 14 months, after only saving for a year prior to losing your job and unemployment for 38-43 months, but not more, if starting from $100K). With a small portfolio, you have little to lose, and are likely to lose it all no matter what you allocation is should you be retired for a very long time. With a larger portfolio, the likelihood of running completely out of money before the market improves gets pretty low (even with only $100K it took over 3 years of unemployment).

3) Same answer. There are scenarios where you become unemployed and broke no matter what. I'm not convinced a 70/30 allocation does anything to reduce this risk in the vast majority of situations.

4) I agree that this is a very personal choice. Everyone has different risk tolerance. Everyone has different levels of discipline. Everyone has different safety nets, job security, etc. There is no one asset allocation that is going to be ideal for everyone. The right asset allocation is the one you can stick to through the times it performs poorly, and the one that allows you to sleep at night and do other things instead of worry about the money. For some people that is far more bond-heavy, and there's nothing wrong with that. I could live with a 70/30 allocation personally, but I personally would feel very uncomfortable with say a 40/60 allocation. I fear inflation (like really think about it a lot) a good deal more than market crashes. Again, all very personal.
pharmermummles,

1) We wear seat belts even if the likelihood of a car accident is low. We did it because if the car accident happened, the result would not be as disastrous with the seat belts.

<<I'm not convinced a 70/30 allocation does anything to reduce this risk in the vast majority of situations.>>

2) Just like the seat belts. The 70/30 protects when it really matters. In that situation, every additional week/month helps. For a young person, the safety margin is slim. It is even slimmer with 100/0.

You have to survive in order to succeed.

3) There is another major issue here. The 100/0 has to make the right market timing move to a conservative AA when the portfolio is big enough. Most people do not act on this until it is too late. After 10+ years of the bull market, there will be a fair amount of people in these categories.

This was the story for Telecom Bust, 2008/2009 recession and repeated itself in every recession.

"Bulls make money, bears make money, pigs get slaughtered"

<<There is no one asset allocation that is going to be ideal for everyone.>>

4) Take a balanced approach. Do not go extreme to either side: 100/0 or 0/100.

5) Do not put all your eggs into one basket.

KlangFool
1) + 2) But car accidents are fairly common. Seat belts significantly reduce harm when in one. Losing a job for precisely 13 months, but not 14 months is not that common, and the benefit of the lower equity share is minimal, except in only the 13th month. It would be different if the benefit were similar to wearing a seat belt, but it is actually more like sitting in the driver's rear seat. It does tend to protect you in some very specific types of car crashes. Usually the benefit is small or absent, but if you experience one of those crashes, it was a great idea to sit there, and you'd be glad you did. Only nobody sits in the back seat behind the driver when you are the only passenger. You sit shotgun like a normal person. Marginally more risky? Sure. Is a massive crash going to take you out either way? Probably. In most cases, it makes more sense not to worry about it and just wear your seat belt. Wearing your seat belt is like listening to your IPS. That's the thing that protects you regardless of your position.

3) I literally built a case study for you running data as if I timed the market terribly while shifting into bonds before retirement. I gave myself the Dot Com crash. It didn't really ruin things. It probably had the single largest impact on final value of the portfolio, but that's basically the case with all sequence of return risk. Some times you come out behind. The general expectation is that you come out ahead, and if the worst case I could come out to had me losing by like 8% (after giving myself two major recession job losses to boot), compared to a much more common outcome of winning by 15%, I will take those odds every single time.

4) I am going to disagree that just being closer to parity is less extreme. I consider 70% bonds to be way more extreme than 100% equities. 70% equities is fine. I like 100% while young, and I've explained why in detail.

5) I don't. I hold thousands of publicly traded companies at precisely their market weight. If they all go kaput, and stay kaput for 40 years, we all have much larger problems than money.

KlangFool
Posts: 14193
Joined: Sat Oct 11, 2008 12:35 pm

Re: Holding bonds vs 100% equities

Post by KlangFool » Tue Nov 12, 2019 12:59 pm

pharmermummles wrote:
Tue Nov 12, 2019 12:50 pm


5) I don't. I hold thousands of publicly traded companies at precisely their market weight. If they all go kaput, and stay kaput for 40 years, we all have much larger problems than money.
pharmermummles,

I am just going to ask you a simple question.

If we go into a recession tomorrow, you are unemployed and the stock market drop 50% and the bond stays even.

A) How long will you last with 100/0?

B) How long will you last with 70/30?

Did you do the calculation? I do not need to know the answer. As long as you calculated the number and you can sleep with that answer. I am fine with that.

KlangFool

pharmermummles
Posts: 56
Joined: Tue Mar 20, 2018 6:02 am

Re: Holding bonds vs 100% equities

Post by pharmermummles » Tue Nov 12, 2019 1:04 pm

KlangFool wrote:
Tue Nov 12, 2019 12:59 pm
pharmermummles wrote:
Tue Nov 12, 2019 12:50 pm


5) I don't. I hold thousands of publicly traded companies at precisely their market weight. If they all go kaput, and stay kaput for 40 years, we all have much larger problems than money.
pharmermummles,

I am just going to ask you a simple question.

If we go into a recession tomorrow, you are unemployed and the stock market drop 50% and the bond stays even.

A) How long will you last with 100/0?

B) How long will you last with 70/30?

Did you do the calculation? I do not need to know the answer. As long as you calculated the number and you can sleep with that answer. I am fine with that.

KlangFool
Excellent!

esteen
Posts: 102
Joined: Thu May 23, 2019 12:31 am

Re: Holding bonds vs 100% equities

Post by esteen » Tue Nov 12, 2019 1:21 pm

KlangFool wrote:
Sun Nov 10, 2019 9:42 pm
A person's age does not determine when the person will reach Financial Independence. It is the saving rate as a ratio of the annual expense. If the person saved 1 year of expense every year, the person could reach 25X annual expense in 17 or fewer years with 70/30. Why should the person be 100/0?

I did not learn and know that lesson 10+ years ago.

A) I was 100/0.

B) I believed that I had job security.

C) Then, Telecom bust happened and my industry laid off 1+ million workers across 6 to 8 years. Some of my peers are permanently unemployed and/or under-employed since then.

D) I capitulated and lost 50% of my life savings up to that movement.

E) I was in cash for many years before I slowly move back in.

The biggest tragedy was I have no need to take the risk. I could reach my goal in less than 10 years with 70/30. The problem with 100/0 is the person needs to shift the AA to something more conservative when the portfolio is big enough. But, usually, they get caught with the bull market and never make the change until it is too late.

KlangFool
To me, when I read the above a light went off when as to why KlangFool is so adamant about 70/30. You misjudged your risk tolerance and financial resilience to catastrophe, and therefore sold off at the trough and screwed your future earnings potential. You feel you may not have done that if you were more conservative (i.e. 70/30) from the get-go.

As for me, I was 100/0 for everything but my emergency fund when the '08 crash occurred. I did not capitulate, if anything I bemoaned that I did not have more excess cash to buy into the then-destroyed equities market. I kept my 100/0 position, used my emergency fund and cut back my expenses when riding through the tough job market, and rode the recovery all the way back up, as intended.

This is less about whether everyone should be 100/0 or 70/30 at a certain age, and it's more about knowing oneself. Which is not easy by any means; though I happened to have my investment risk tolerance dialed in during 2008-2009, I have in many other instances of my life done something regrettable because I did not know myself well enough!

"Know thyself" is a lifelong mission. I will never get there completely, and sometimes I realize I have taken a step backward, but each little bit of progress is a win that helps both in and outside my financial life. The worst is when we think we know ourselves, and something happens (like a market crash) and we find out we didn't. I think that is one thing KlangFool is ensuring younger forumgoers to protect against, and that is an admirable piece of advice.

KlangFool
Posts: 14193
Joined: Sat Oct 11, 2008 12:35 pm

Re: Holding bonds vs 100% equities

Post by KlangFool » Tue Nov 12, 2019 1:36 pm

esteen wrote:
Tue Nov 12, 2019 1:21 pm
KlangFool wrote:
Sun Nov 10, 2019 9:42 pm
A person's age does not determine when the person will reach Financial Independence. It is the saving rate as a ratio of the annual expense. If the person saved 1 year of expense every year, the person could reach 25X annual expense in 17 or fewer years with 70/30. Why should the person be 100/0?

I did not learn and know that lesson 10+ years ago.

A) I was 100/0.

B) I believed that I had job security.

C) Then, Telecom bust happened and my industry laid off 1+ million workers across 6 to 8 years. Some of my peers are permanently unemployed and/or under-employed since then.

D) I capitulated and lost 50% of my life savings up to that movement.

E) I was in cash for many years before I slowly move back in.

The biggest tragedy was I have no need to take the risk. I could reach my goal in less than 10 years with 70/30. The problem with 100/0 is the person needs to shift the AA to something more conservative when the portfolio is big enough. But, usually, they get caught with the bull market and never make the change until it is too late.

KlangFool
To me, when I read the above a light went off when as to why KlangFool is so adamant about 70/30. You misjudged your risk tolerance and financial resilience to catastrophe, and therefore sold off at the trough and screwed your future earnings potential. You feel you may not have done that if you were more conservative (i.e. 70/30) from the get-go.

As for me, I was 100/0 for everything but my emergency fund when the '08 crash occurred. I did not capitulate, if anything I bemoaned that I did not have more excess cash to buy into the then-destroyed equities market. I kept my 100/0 position, used my emergency fund and cut back my expenses when riding through the tough job market, and rode the recovery all the way back up, as intended.

This is less about whether everyone should be 100/0 or 70/30 at a certain age, and it's more about knowing oneself. Which is not easy by any means; though I happened to have my investment risk tolerance dialed in during 2008-2009, I have in many other instances of my life done something regrettable because I did not know myself well enough!

"Know thyself" is a lifelong mission. I will never get there completely, and sometimes I realize I have taken a step backward, but each little bit of progress is a win that helps both in and outside my financial life. The worst is when we think we know ourselves, and something happens (like a market crash) and we find out we didn't. I think that is one thing KlangFool is ensuring younger forumgoers to protect against, and that is an admirable piece of advice.
esteen,

1) During 2008/2009, I was 70/30 with most of my portfolio in the Vanguard LifeStrategy Moderate Growth Fund (60/40) and the Wellington Fund (65/35) with 1 year of the emergency fund.

2) On 1/1/2009, my employer laid off 50% of its workers at my location. For my department, it was 80%. I was not laid off but spending most of my time trying to keep my job and keep on working. I had no time to think about investing. Imagine going to work every day with people crying all around you all the time. And, those are the lucky ones with a job for the moment,

3) My fund rebalanced itself automatically. I just need to contribute regularly.

4) I could survive a few years of unemployment even with the crash. I choose that AA of 70/30 with a crash and unemployment in mind. I was prepared.

KlangFool

mbasherp
Posts: 262
Joined: Mon Jun 26, 2017 8:48 am

Re: Holding bonds vs 100% equities

Post by mbasherp » Tue Nov 12, 2019 1:43 pm

KlangFool wrote:
Tue Nov 12, 2019 12:09 pm
<<Catchphrases like "you have to survive in order to succeed" imply that personal finance decisions can lead to death, and really rile me up. >>

Why? Just because you are lucky enough not to face this kind of decision, it does not mean it is not true for others.

KlangFool
Are you really suggesting that running out of money means death? The only situations where this could be true involve illegal activity.

Millions run out of money and go into debt, or declare bankruptcy. To imply that there is not survival in those scenarios is foolish. Life goes on.

randomguy
Posts: 8418
Joined: Wed Sep 17, 2014 9:00 am

Re: Holding bonds vs 100% equities

Post by randomguy » Tue Nov 12, 2019 1:58 pm

grabiner wrote:
Sun Nov 10, 2019 6:11 pm
mathguy3021 wrote:
Sun Nov 10, 2019 3:46 pm
I wonder if the pro 100% stocks crowd would change their views if we have another great depression, with a 80% or more crash in the stock market, or a Japan like stock market that declines for many years. None of these outcomes seem likely due to the past 10 years of US stock performance.
Search in the forum for posts between October 2008 and March 2009. An all-stock portfolio lost about 60% top to bottom from the 2007 peak. And a lot of posters did change their mind and pull out of the stock market, mostly to their detriment; others knew their actual risk tolerance and stayed the course.
And plenty stayed the course. It isn't clear that holding bonds would have helped you stay the course either if you were a person prone to capitulation. Not to pick on any one but go read Taylor Larimore's posts were despite only being 60% in stocks he was capitulating. And yes he is a bad example since we aren't talking about a 30-40 year old with a 40-50 year time horizon. But the mistake isn't in holding 100% stocks. It is holding stocks if you are a capitulator. Holding less just makes it a smaller mistake. Most people investing had already been through 2000-2 which while not as quick was on the order of 2008-9. You should have had a pretty good feel for your risk tolerance when 2008-9 started up.

I have a feeling it is hard for some people to understand that a lot of people don't lose sleep over market movements. They don't affect day to day life and you don't need to track them closely. Personally in 2008-9, I knew I had no clue what would be more valuable if the ecomonic system collapsed: A bunch of worthless stock, a bunch of worthless currency or gold bars. I did know that my ability to time the bottom and make money was nonexistent.

KlangFool
Posts: 14193
Joined: Sat Oct 11, 2008 12:35 pm

Re: Holding bonds vs 100% equities

Post by KlangFool » Tue Nov 12, 2019 2:01 pm

mbasherp wrote:
Tue Nov 12, 2019 1:43 pm
KlangFool wrote:
Tue Nov 12, 2019 12:09 pm
<<Catchphrases like "you have to survive in order to succeed" imply that personal finance decisions can lead to death, and really rile me up. >>

Why? Just because you are lucky enough not to face this kind of decision, it does not mean it is not true for others.

KlangFool
Are you really suggesting that running out of money means death? The only situations where this could be true involve illegal activity.

Millions run out of money and go into debt, or declare bankruptcy. To imply that there is not survival in those scenarios is foolish. Life goes on.
mbasherp,

You are a lucky person.

KlangFool

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