But why not 100% stock index fund?

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Heyolshan
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Re: But why not 100% stock index fund?

Post by Heyolshan » Tue Jul 15, 2014 8:33 am

Ha! Finally figured out how that quote thing works!

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Toons
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Re: But why not 100% stock index fund?

Post by Toons » Tue Jul 15, 2014 8:40 am

" it's retirement accounts that I can't touch for another 20 years"

If you are truly convinced and you even sign an investment contract with yourself that you will not sell ,but in fact continue buying during a long ,extended bear market then no doubt 100% equities.That is what I did at an earlier age,,almost 100,,no regrets. :happy
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee

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nisiprius
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Re: But why not 100% stock index fund?

Post by nisiprius » Tue Jul 15, 2014 9:12 am

Heyolshan wrote:...Then it goes about constructing a portfolio split between stocks and bonds. Why, exactly? If your point is to make a simple portfolio that matches the market, shouldn't it be to put all of it in an index fund (especially a retirement account) and ride the waves out?
This is a sort of a side issue that gets batted around from time to time, and I am personally completely unsure whether it makes sense or not. Having decided that you want to be in A market, it makes sense to invest in that market by using a total market index fund for that market. If I want to be in stocks, Total Stock. If bonds, Total Bond. If overseas real estate, Vanguard Global ex-U.S. Real Estate Index Fund. If frontier markets, iShares MSCI Frontier 100.

But it doesn't tell you which "markets" you should be in or why.

Well, it turns out that the U.S. bond market has about twice the capitalization of the U.S. stock market, and about the same globally. So, if you decide to be in stocks and bonds both, and if you think (and again I really don't know if this has any sense to it or not) that the "efficient frontier" is the cap-weighted mix of the entire combined stock and bond markets together, that would lead you to be 1/3 stocks, 2/3 bonds.

I am not pushing this idea. I don't know if it makes sense. All I am saying is that it is "A reason other than panic" that leads to a specific allocation that isn't 100% stocks.

The problem is: you can talk about risk-adjusted return--and stock-bond mixes have higher risk-adjusted return than 100% stock--but that does not tell you how much risk you should take personally. There is no objective answer to this, it is a personal choice. People who are risk-tolerant are not wrong, people who are risk-averse are not wrong. There's no objectively right answer any more than there's an objectively right answer to whether Beethoven's music is better than the Rolling Stones. You can't take emotion out of it. However, people who think they are more financially risk-tolerant than they are, are wrong.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

Matin
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Re: But why not 100% stock index fund?

Post by Matin » Tue Jul 15, 2014 9:22 am

John3754 wrote:
Matin wrote:Right now, my retirement money (not my emergency funds) is invested in 100% US stock index funds. During the down markets of 2000 and 2008, my retirement funds were invested in 100% US stock index funds. 40 years from now, my retirement money (not my emergency funds) will be invested in US stock index funds.
What happens if you're ready to retire and 50% or more of your retirement funds invested in 100% US stock index funds evaporates?
Nothing. Let's say Day 1 of retirement is on my 67th birthday 50% or more of my retirement money goes up in smoke. I could easily live another 20 years. I could live 30 years. God Forbid, I could live longer than that. Plenty of time to ride the roller coaster back up again. So let's say the day I die, I lose 50% of my net worth in the stock market. Why would I care? I'm dead.

Could I make more money by playing some sort of game? Can I be more clever than an active fund manager? Not likely. I'm not even going to try. I'm going to place my bet, let it ride, and pay as little as possible to the financial industry. Some years I've lost six figures. Some years I've made six figures. It just doesn't matter. Even if I play the market so far above my head that my nose bleeds for a week to ten days; even if God in Heaven above comes down and points his hand at my account; even if every man, woman, and child held hands together and prayed for us to win playing the market, it just wouldn't matter because all the really good looking girls would still go out with the guys who own hedge funds because they've got all the money!

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danwhite77
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Re: But why not 100% stock index fund?

Post by danwhite77 » Tue Jul 15, 2014 9:24 am

I'm 100% equities and I have been for about a decade now. My answer is that you don't know how you'll react until a big downturn happens. I always assumed that I could stomach the Great Recession bust in equities but I didn't know that for certain until it happened.

There seem to be a high number of "Why not 100% equities" posts lately. Having a 100% equities allocation for the last five years has been easy. During this historic rise, obviously, there's been no impetus to sell whatsoever. In fact, judging by these posts, it's the opposite - many people are asking why they shouldn't be 100% equities.

This is why anyone considering a 100% equities allocation should think real long and hard about such a move. Imagine you open your account one day and the balance is X. Imagine the next day the balance is 50% * X. Buffett said it best, as usual:
"There is no comparison between fear and greed. Fear is instant, pervasive and intense. Greed is slower. Fear hits."
You have to be honest with yourself about whether or not you can take that psychological hit. And don't kid yourself, when it happens, it hurts.
"While some mutual fund founders chose to make billions, he chose to make a difference." - Dedication to Jack Bogle in 'The Bogleheads' Guide to Investing'.

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Re: But why not 100% stock index fund?

Post by acegolfer » Tue Jul 15, 2014 10:18 am

Heyolshan wrote: So I read "Little Book of Common Sense Investing," and I was attracted to the simplistic nature of the principle. But one thing about the book bothered me--the gist of the entire book is that you probably can't consistently beat the market, so don't try; instead, match the market and keep fees low. Then it goes about constructing a portfolio split between stocks and bonds. Why, exactly? If your point is to make a simple portfolio that matches the market, shouldn't it be to put all of it in an index fund (especially a retirement account) and ride the waves out?
This may be one reason why.

I have read a BH saying that 80/20 stock/bond portfolio has a higher expected return than 100% stock. He also stated that by combining stocks and bonds, it is less risky but has higher performance (win-win). If one believes that's true (I disagree 100%), then that may explain why some investors combine stocks and bonds.

inbox788
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Re: But why not 100% stock index fund?

Post by inbox788 » Tue Jul 15, 2014 4:53 pm

Heyolshan wrote:I'm new to this forum, though I have been reading posts for a while. A member further down posted for advice regarding 100% stock allocation in his retirement accounts, and most of the replies advise against it. However, almost all the negative votes have included some type of "panic" factor in the event of a market downturn. So it seems to me the biggest purpose of keeping bonds in a long-term investment is because you don't trust yourself to stay the course in a bear market. You could actually allocate a few percent more to stocks and hold the remainder in cash, and accomplish the same thing; the cash would buffer a market downturn, and the stocks would return better in the long run.
Nothing wrong with 100% of anything in a specific account as long as overall AA and risk tolerance is taken into account. Is there a significant portion of the portfolio outside the retirement funds? The problem with holding lots of cash for long periods of time is that cash isn't productive. You have a number of options like gold, with inflation tilt, that might substitute for cash, but still not a productive asset and volatile. CDs and iBonds are popular in today's low interest environment as adequate substitutes for bonds.

A 65 year old renter with $2M net worth, investing it all in equities using 4% SWR is taking a chance, while another 65 year old (teacher/government worker) with $60k/year pension, owns home outright, and $100k in 403b all in equities isn't taking that big a chance. There's a lot of other factors that must be considered that changes the outlook.

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Re: But why not 100% stock index fund?

Post by spectec » Tue Jul 15, 2014 6:12 pm

I like the way you think, but right now it's all theoretical.
You still don't actually know whether or not you will panic until you find yourself in the middle of a rout.
But I'll be happy if the question remains unanswered.
Don't gamble; take all your savings and buy some good stock and hold it till it goes up, then sell it. If it don't go up, don't buy it. - Will Rogers

John3754
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Re: But why not 100% stock index fund?

Post by John3754 » Tue Jul 15, 2014 6:21 pm

Matin wrote:
John3754 wrote:
Matin wrote:Right now, my retirement money (not my emergency funds) is invested in 100% US stock index funds. During the down markets of 2000 and 2008, my retirement funds were invested in 100% US stock index funds. 40 years from now, my retirement money (not my emergency funds) will be invested in US stock index funds.
What happens if you're ready to retire and 50% or more of your retirement funds invested in 100% US stock index funds evaporates?
Nothing. Let's say Day 1 of retirement is on my 67th birthday 50% or more of my retirement money goes up in smoke. I could easily live another 20 years. I could live 30 years. God Forbid, I could live longer than that. Plenty of time to ride the roller coaster back up again. So let's say the day I die, I lose 50% of my net worth in the stock market. Why would I care? I'm dead.
So the value of your 100% stock portfolio plummets 50% right when you retire and "nothing" happens you say? How about the fact that you now have to draw down on shares that have lost 50% of their value? You say you have time to "ride the roller coaster back up" but if you're depending on these accounts for your living expenses then no you don't, you need to sell those shares right NOW at a deep discount in order to pay your bills.

Johno
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Re: But why not 100% stock index fund?

Post by Johno » Tue Jul 15, 2014 8:07 pm

inbox788 wrote:
Heyolshan wrote: A 65 year old renter with $2M net worth, investing it all in equities using 4% SWR is taking a chance, while another 65 year old (teacher/government worker) with $60k/year pension, owns home outright, and $100k in 403b all in equities isn't taking that big a chance. There's a lot of other factors that must be considered that changes the outlook.
Exactly. Some people on this forum, when speaking of their own situations, are careful to specify them in detail. But most don't (perhaps it's too private, which is fine), and so when they say 'I have X% stocks' it's hard to know what they actually mean. And by same token for younger people looking ahead to 65, they might expect to receive a pension or be at a spending level in retirement where Social Security is highly significant, and/or pay off a mortgage by then. In which case '100%' stocks is really not at all '100%'. *Literally* 100% stocks (plus Social Security for someone with upper middle class lifestyle in an expensive part of the country, ie where it covers a fairly small % of expenses) on reaching retirement is definitely riskier than such an allocation earlier in life. Because if the stock market gets knocked down and stays down for a number of years you'll have spent a significant portion of a highly discounted portfolio meeting expenses, or have had to sharply cut your standard of living to avoid that. And 2008-09 is not actually the worst case scenario by some cosmic law. The stock market could down more, and moreover could stay down a lot longer.

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Re: But why not 100% stock index fund?

Post by HenryPorter » Tue Jul 15, 2014 10:29 pm

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Last edited by HenryPorter on Tue Jul 22, 2014 11:12 pm, edited 1 time in total.

John3754
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Re: But why not 100% stock index fund?

Post by John3754 » Tue Jul 15, 2014 11:12 pm

HenryPorter wrote:I tell everyone young to go full blown into stock index funds. It is a win-win situation. If the market goes up, I look like a genius. If the market goes down, I have entry points to lower my cost basis with continuous DCA buying.
What if they take your advice, "go full blown into stocks", then the market tanks and they panic and sell...who wins then?

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Re: But why not 100% stock index fund?

Post by Jebediah » Wed Jul 16, 2014 12:01 am

HenryPorter wrote:The funny part now is I look at some of my index funds and see they have a 2% yield and I am partially comforted. At least some part of the stock portfolio can compete with a multi-year CD or plain vanilla bond fund w/o any heavy lifting.
Henry, stock dividends don't work that way.

AviN
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Re: But why not 100% stock index fund?

Post by AviN » Wed Jul 16, 2014 6:59 am

Japan, 1989:

http://www.bogleheads.org/forum/viewtop ... 10&t=23036

The US has had a lucky century of stock returns. That luck may not persist.
Heyolshan wrote: Anyway, yesterday someone posted about putting 100% of his retirement account in index stocks, and almost everyone disagreed with the thought, so I posted this thread to ask if anyone had a reason OTHER than panic to be in bonds. So even though I just posted the question, it has been brewing for six months now.

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Re: But why not 100% stock index fund?

Post by Matin » Wed Jul 16, 2014 8:43 am

John3754 wrote:So the value of your 100% stock portfolio plummets 50% right when you retire and "nothing" happens you say? How about the fact that you now have to draw down on shares that have lost 50% of their value? You say you have time to "ride the roller coaster back up" but if you're depending on these accounts for your living expenses then no you don't, you need to sell those shares right NOW at a deep discount in order to pay your bills.
Just as I've spent over 20 years (over 30 by the time I retire) putting money into my retirement accounts, there will be a long period of taking money out of the retirement accounts. The day after I retire, I won't need all my retirement funds immediately. Therefore, no need to panic because the stock market goes down 50%. I will withdraw my 4%. I will have to live on a bit less money that year. If necessary, I can live without my retirement funds. I'm afraid to type this next bit, however, you deserve an honest answer. Money isn't really that important to me. The important things in life are family, friends, doing good works, and being a good man. Although money is really useful, it is not really important to me.

Everyone does not have my situation. Everyone does not have my view that money is not important. Therefore, an asset allocation of a 100% US stock index funds will not be right for everyone. I do NOT recommend this asset allocation to anyone. I'm very careful to note that this type of asset allocation is risky and can back fire on you. You should always carefully assess your tolerance for risk before deciding on an asset allocation. Since money is not important to me, I can and have kept this asset allocation since I first put some money into a retirement fund.

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Re: But why not 100% stock index fund?

Post by Johno » Wed Jul 16, 2014 9:52 am

Matin wrote:
John3754 wrote:So the value of your 100% stock portfolio plummets 50% right when you retire and "nothing" happens you say? How about the fact that you now have to draw down on shares that have lost 50% of their value? You say you have time to "ride the roller coaster back up" but if you're depending on these accounts for your living expenses then no you don't, you need to sell those shares right NOW at a deep discount in order to pay your bills.
If necessary, I can live without my retirement funds. I'm afraid to type this next bit, however, you deserve an honest answer. Money isn't really that important to me. The important things in life are family, friends, doing good works, and being a good man. Although money is really useful, it is not really important to me.
The first sentence makes complete sense to me, assuming the reason one doesn't absolutely need the retirement funds is other very significant sources of income or assets that 'don't count' when stating a '100% stock' allocation. IOW it's not actually 100% stocks. I guess this is the typical case of people with very high stated stock allocations in the later part of their working careers (those who have thought things through at least).

The part after that though is a head scratcher, frankly. If one doesn't view money as important, what's the point of taking extra risk to make more money? That's what a high stock allocation does. There seems some element of contradiction there.

But obviously everyone is entitled to whatever allocation of assets they want in their retirement accounts, for whatever reasons they want. And I might be misreading the statement about money not being important, or it might be hard to express in words a more complicated view of money which would resolve the apparent contradiction.

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Re: But why not 100% stock index fund?

Post by pascalwager » Wed Jul 16, 2014 10:18 am

In a recent interview, John Bogle legitimizes the 100% stock portfolio, especially in an era of low bond returns.
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Re: But why not 100% stock index fund?

Post by WJW » Wed Jul 16, 2014 11:20 am

pascalwager wrote:In a recent interview, John Bogle legitimizes the 100% stock portfolio, especially in an era of low bond returns.
He talks about it here http://www.aaii.com/journal/article/ach ... ds?adv=yes

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Re: But why not 100% stock index fund?

Post by Matin » Wed Jul 16, 2014 1:22 pm

Johno wrote:[And I might be misreading the statement about money not being important, or it might be hard to express in words a more complicated view of money which would resolve the apparent contradiction.
John,

Your second idea is closer to the truth. I think I have a very complicated view of money. I also have back up plans and resources that do not go into my retirement funds. Note that I was very careful to say only my retirement funds have this asset allocation. However complicated my view of money, my asset allocation is pretty simple and very easy to maintain.

One thing a 100% stock allocation maintained over a long horizon removes is the behavioral component. Consider the behavior that drives people to have sub-par performance when compared to the benchmark. When times are good, people buy into the hype. When stock market crashes, people sell in despair. My behavior in both those cases does not change. I simply buy another slice of the market. The hardest thing to do sometimes is nothing. If you are going to go with a 100% US stock index asset allocation that is exactly what you have to do.

HenryPorter
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Re: But why not 100% stock index fund?

Post by HenryPorter » Wed Jul 16, 2014 2:00 pm

John3754 wrote:
HenryPorter wrote:I tell everyone young to go full blown into stock index funds. It is a win-win situation. If the market goes up, I look like a genius. If the market goes down, I have entry points to lower my cost basis with continuous DCA buying.
What if they take your advice, "go full blown into stocks", then the market tanks and they panic and sell...who wins then?

I was being partially sarcastic. I don't talk to many youths about stocks. They want to take their money and buy I-pods and other toys. They are deers in the headlights when you talk about "grown-up" things like stocks and IRAs. I was exactly like that when I was their age. We are in a phase where stocks can do no wrong but keep going up and up, at least the perception is getting that way. Better time to initiate a young adult's interest in investing versus the times when stocks are down and everyone is dismal about it. Most people react to sexy trends, and if stocks are trending up, they want in if they hear about friends and co-workers making money, but we know that is a temporary thing. Markets have corrections. Hence my verbal hedging here. The win-win is that I am in it for the long run and pullbacks are a time to buy as always. Youngsters have many decades to let their market holdings grow. They should be hoping for a major correction to pile money into the market with. But that is not how it works per psychology and general investment stimuli. Most people want to pile in when the market climbs higher and higher.

HenryPorter
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Re: But why not 100% stock index fund?

Post by HenryPorter » Wed Jul 16, 2014 2:14 pm

Jebediah wrote:
HenryPorter wrote:The funny part now is I look at some of my index funds and see they have a 2% yield and I am partially comforted. At least some part of the stock portfolio can compete with a multi-year CD or plain vanilla bond fund w/o any heavy lifting.
Henry, stock dividends don't work that way.
I'll throw out an index type stock fund, say the SPY exchange traded fund. It has a yield of 1.83%. VINIX has the same yield. FUSEX has a 1.70% yield. VTI has a 1.74% yield.

Not very difficult to find a low-cost stock fund that has a yield that matches most bond/cash equivalent positions. The volatility of stocks is the problem. The yield is nice, but the NAVs can vary +/- 30% , so I am aware that the yield is a band-aid if stocks drop. And the dividends can be cut too, so yeah, more caution is in order.

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Re: But why not 100% stock index fund?

Post by Crushtheturtle » Wed Jul 16, 2014 2:26 pm

HenryPorter wrote:
Jebediah wrote:
HenryPorter wrote:The funny part now is I look at some of my index funds and see they have a 2% yield and I am partially comforted. At least some part of the stock portfolio can compete with a multi-year CD or plain vanilla bond fund w/o any heavy lifting.
Henry, stock dividends don't work that way.
I'll throw out an index type stock fund, say the SPY exchange traded fund. It has a yield of 1.83%. VINIX has the same yield. FUSEX has a 1.70% yield. VTI has a 1.74% yield.

Not very difficult to find a low-cost stock fund that has a yield that matches most bond/cash equivalent positions. The volatility of stocks is the problem. The yield is nice, but the NAVs can vary +/- 30% , so I am aware that the yield is a band-aid if stocks drop. And the dividends can be cut too, so yeah, more caution is in order.
I believe that Jebediah is referring to the fact that stock dividends do not constitute "free money" (i.e. Bank CD interest) but rather a cash distribution that simultaneously reduces the stock share's price by an equivalent amount.

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Re: But why not 100% stock index fund?

Post by HenryPorter » Wed Jul 16, 2014 4:49 pm

Crushtheturtle wrote: I believe that Jebediah is referring to the fact that stock dividends do not constitute "free money" (i.e. Bank CD interest) but rather a cash distribution that simultaneously reduces the stock share's price by an equivalent amount.
I'll accept that.


In scheme of things, a ~2% ( via dividends) annual drag on a low-cost stock fund is not tantamount to a 30 year result that your stocks will be a 45% loss on NAV though. I understand there is no free lunch with the dividends, but OK, a bond or CD paying 2% annually is all you get. And in this very low interest rate market, any increase in rates in the ensuing years will reduce most bond fund NAVs. Stocks have been nimble ( and more) in keeping abreast of inflation. For a 20 year old investor, they do not know the other aspect of 'too bad youth is wasted on the youth' hidden advantages. They have plenty of time to ride out market downturns. They do not yet recognize, most of them, that inflation happens. I remember many things from my youth that have gone up five-fold or more over the decades.Mostly consumer staple stuff and FIRE related costs too, and the thing was when they were cheaper to buy nominally years ago, they were still expensive, sort of, to me. I can only wonder how much a car will cost 30 years from now at the rate things have been going.

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Re: But why not 100% stock index fund?

Post by david99 » Wed Jul 16, 2014 8:39 pm

I would wait for the next crash to go 100% stocks ---the first few months of 2009 would have been a great time to go 100% stocks.

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Re: But why not 100% stock index fund?

Post by pascalwager » Wed Jul 16, 2014 9:56 pm

The 100% stock portfolio was recently legitimized by John Bogle in an interview, especially in light of expected low bond returns. But the investor needs to have the necessary "grit" to make it work. Considering my thoughts/actions in 2000 and 2008, I gave myself an 89% grit rating, and that's my personal stock allocation.
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Re: But why not 100% stock index fund?

Post by denovo » Wed Jul 16, 2014 10:19 pm

david99 wrote:I would wait for the next crash to go 100% stocks ---the first few months of 2009 would have been a great time to go 100% stocks.
Because calling a bottom is so easy, right...
"Don't trust everything you read on the Internet"- Abraham Lincoln

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Re: But why not 100% stock index fund?

Post by DonCamillo » Wed Jul 16, 2014 10:35 pm

I was 100% in stocks in 1987. Not a big deal, I was young and did not have much money in my IRA. I saw that my numbers were smaller, and started thinking about more important things, like mowing the lawn or washing the car.

I was still 100% in stocks in 2000. Did not panic, did not sell anything, continued maxing out my 403b, kept buying 100% stock. But it was very uncomfortable watching my portfolio balance drop by $10,000 each month in 2000, and again in 2001, and again in 2002. It just kept dropping.

By 2008 I was diversified with bonds (about 25%) and TIAA Real Estate (about 5%, thankfully, because it also plunged, but after the equity markets started to recover a little). The pain was much more short lived. But the bonds did give me some peace of mind, and did allow me to rebalance, and that worked out well. So now I am up to 7% TIAA RE and about 35% bonds. I also have 1% cash.

I remember thinking; "Oh Lord, give me one more bubble--this time I promise I won't blow it." Now I think we are in an asset bubble caused by Quantitative Easing, but it has driven up the value of everything, so there is no choice about blowing it. There is just no place to put money that is both safe and inflation protected. Even the things that are down the most, like gold, are still wildly overvalued because there is so much money floating around looking for things to buy.

I have a little in TIPS and iBonds, but I don't believe they will do much. I remember the 5 cent Hershey bar, 29 cent gasoline, and $115 for full time tuition for a semester of college. I paid $1795 for my first brand new car, and $11,500 for my first, three bedroom house. My grandchildren will probably be billionaires, but by that time the minimum wage will be a million an hour and will just about pay for lunch.
Les vieillards aiment à donner de bons préceptes, pour se consoler de n'être plus en état de donner de mauvais exemples. | (François, duc de La Rochefoucauld, maxim 93)

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