AA | 50/50 Or 30 bonds/70 stocks
AA | 50/50 Or 30 bonds/70 stocks
How do I decide?
Goal: Hi net worth number
Age: 40
Accounts: 401k Rollover Roth Taxable
Vanguard model portfolio allocations
50% bonds / 50% stocks
Historical Risk/Return (1926–2009)
Average annual return 8.2%
Best year (1933) 32.3%
Worst year (1931) –22.5%
Years with a loss 17
30% bonds / 70% stocks
Historical Risk/Return (1926–2009)
Average annual return 9.0%
Best year (1933) 41.1%
Worst year (1931) –30.7%
Years with a loss 22
https://personal.vanguard.com/us/insigh ... omain=true
Thanks.
Goal: Hi net worth number
Age: 40
Accounts: 401k Rollover Roth Taxable
Vanguard model portfolio allocations
50% bonds / 50% stocks
Historical Risk/Return (1926–2009)
Average annual return 8.2%
Best year (1933) 32.3%
Worst year (1931) –22.5%
Years with a loss 17
30% bonds / 70% stocks
Historical Risk/Return (1926–2009)
Average annual return 9.0%
Best year (1933) 41.1%
Worst year (1931) –30.7%
Years with a loss 22
https://personal.vanguard.com/us/insigh ... omain=true
Thanks.
If you are unsure, go with the more conservative portfolio until you know what your risk toldrance is. You will find out with the next severe down turn in the stock market how much risk you can handle. There are of course factors such as need to take risk and ability to take risk (aka losing money) as well as willingness to take risk. It is one thing to answer 5-10 questions regarding risk tolerance but the real thing is quite a different experience.
Good luck,
Jim
Good luck,
Jim
Re: AA | 50/50 Or 30 bonds/70 stocks
Goru,goru1 wrote:How do I decide?
Goal: Hi net worth number
Age: 40
Accounts: 401k Rollover Roth Taxable
Vanguard model portfolio allocations
50% bonds / 50% stocks....
30% bonds / 70% stocks....
Certainly, the AA shouldn't be based on prior returns. So, forget the stuff you posted - I didn't even include it in the quote above.
Mostly, the AA should be driven by ability and need for risk.
- If you can meet your goals with 30% Stocks (reasonable projected returns), then you don't need the added risk of 50% Stocks.
- If, however, you need 50% Stocks to meet your goals, but can only sleep holding 30% Stocks, then you need more savings - especially to get that high net worth number.
Landy |
Be yourself, everyone else is already taken -- Oscar Wilde
Ed 2 wrote:I am the same age as you are.
I would get the second option, my portfolio ruffly 30/70
Don't pay attention on past returns it's worthless.
Ed, what do you pay attention to if the past isn't a good measure?
Even educators need education. And some can be hard headed to the point of needing time out.
I think there are two ways to decide.
Part one is How Much Risk Do I Need? Look for a compound interest calculator online, plug in how much money you have now, how much you expect to contribute annually, how many years of growth, and an interest rate. Play around with the interest number and see what kind of final values you get. Remember that those values will have to be adjusted for inflation. An easy way to do this is to subtract 3% from your interest rate. (3% is a guess on future inflation rates) That will give you a rough estimate of your final value in "today" dollars. See which portfolio has the corresponding average return you want and go with that.*
Part two is How Much Risk Can I Stand? This is a very rough method, but take the amount of stocks in your portfolio and cut it in half, and that is an approximate "worst year". So for 70% equities, you could expect to lose 35% or so in a bad year like 2008. Take the amount of money you have - say $200,000 - then imagine losing 35% of it (down to $130,000). Imagine everyday there are doom stories in the news about the collapsing economy. How will that make you feel? Will you second-guess your strategy? Be honest with yourself. This part is more important than the first part.
If both parts lead you to a comfortable choice, then go with that. If they are at odds (i.e. you need to take more risk than you can stand) then either compromise or just go with as much as you can stand and try to save more. Part one is useless if you lose sleep or bail on your plan.
* note - it might be a good idea to subtract 1% from the historical returns of Vanguard's portfolio models. It's quite possible that U.S. returns in the 20th century were extraordinary and a lot of smart people predict somewhat muted returns going forward. They could be wrong, but it's better to be conservative IMO.
Part one is How Much Risk Do I Need? Look for a compound interest calculator online, plug in how much money you have now, how much you expect to contribute annually, how many years of growth, and an interest rate. Play around with the interest number and see what kind of final values you get. Remember that those values will have to be adjusted for inflation. An easy way to do this is to subtract 3% from your interest rate. (3% is a guess on future inflation rates) That will give you a rough estimate of your final value in "today" dollars. See which portfolio has the corresponding average return you want and go with that.*
Part two is How Much Risk Can I Stand? This is a very rough method, but take the amount of stocks in your portfolio and cut it in half, and that is an approximate "worst year". So for 70% equities, you could expect to lose 35% or so in a bad year like 2008. Take the amount of money you have - say $200,000 - then imagine losing 35% of it (down to $130,000). Imagine everyday there are doom stories in the news about the collapsing economy. How will that make you feel? Will you second-guess your strategy? Be honest with yourself. This part is more important than the first part.
If both parts lead you to a comfortable choice, then go with that. If they are at odds (i.e. you need to take more risk than you can stand) then either compromise or just go with as much as you can stand and try to save more. Part one is useless if you lose sleep or bail on your plan.
* note - it might be a good idea to subtract 1% from the historical returns of Vanguard's portfolio models. It's quite possible that U.S. returns in the 20th century were extraordinary and a lot of smart people predict somewhat muted returns going forward. They could be wrong, but it's better to be conservative IMO.
rcasement wrote:Ed 2 wrote:I am the same age as you are.
I would get the second option, my portfolio ruffly 30/70
Don't pay attention on past returns it's worthless.
Ed, what do you pay attention to if the past isn't a good measure?
You'll see in 20 years.
Everything has changed and investment approach is changing too.
If you haven't notice.
But what do I know, I just regular Ed from cyberspace.
"The fund industry doesn't have a lot of heroes, but he (Bogle) is one of them," Russ Kinnel