Help Me Understand: Why Shouldn't AA Be 100% Stocks During Accumulation Phase?

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Help Me Understand: Why Shouldn't AA Be 100% Stocks During Accumulation Phase?

Post by Lieutenant.Columbo » Sun Jul 24, 2016 9:56 am

Let's assume one does not plan on selling any funds until retirement begins. Meaning, s/he is not going to sell at a loss during the accumulation phase. Nor is there a risk of having no assets when trying to cash out (because one will not cash out quite yet).

Until retirement s/he's only buying funds as much and often as possible.

In my view (and limited knowledge) it does not seem to matter whether the stock market dips during the accumulation phase (it actually seems beneficial).

So why have any bonds AT ALL during the accumulation phase since one does not need AT THAT TIME the safety Bonds provide?
Couldn't one switch some assets from 100% stocks to some of it in Bonds at (or close to) retirement age?

BHs: what am I missing?

thank you for your input
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Re: Help Me Understand: Why Shouldn't AA Be 100% Stocks During Accumulation Phase?

Post by TheTimeLord » Sun Jul 24, 2016 10:12 am

How many years before retirement do you believe the accumulation phase ends? Why can't you lose your job? Do you have any cash or emergency fund invested in safe assets or do you truly mean 100% equities?
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Re: Help Me Understand: Why Shouldn't AA Be 100% Stocks During Accumulation Phase?

Post by Kenkat » Sun Jul 24, 2016 10:16 am

Because 99 out of 100 people can't successfully pull that off. They see a big bear market hit, where your investments drop by 40, 50 or maybe 60%, and they bail out. What you suggest sounds easy but it is not. If you have substantial investments and a market drop hits, every bone in your body will be screaming sell. Stop this pain now. Even for the most disciplined investors.

In addition, there have historically been periods of 10 and even 20 years where bonds have outperformed stocks.

For me, I find bonds are helpful in sticking to my investment plan, which at 70% equities, is still plenty aggressive.

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Re: Help Me Understand: Why Shouldn't AA Be 100% Stocks During Accumulation Phase?

Post by Lieutenant.Columbo » Sun Jul 24, 2016 10:19 am

TheTimeLord wrote:How many years before retirement do you believe the accumulation phase ends? Why can't you lose your job? Do you have any cash or emergency fund invested in safe assets or do you truly mean 100% equities?
thank you

I do not know exactly when the accumulation phase ends. If I had to guess, it ends when you stop having income from work (not trying to be funny, that is seriously my understanding).

I was not trying to make this a thread about my own case, but was trying to understand the general principle. But since you ask, yes, I have an emergency fund that would last over 8 months if needed with no further income during those 8 months.

I was referring to being 100% equities with the moneys one puts in Vanguard (why not 100% in Vanguard equities rather than some in Vanguard equities and some in Bonds during accumulation phase?)

thank you
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Re: Help Me Understand: Why Shouldn't AA Be 100% Stocks During Accumulation Phase?

Post by Toons » Sun Jul 24, 2016 10:22 am

It should be,
If one could tolerate the dramatic,
Drops in the portfolio value along the way,
without fleeing in panic
:mrgreen:
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Re: Help Me Understand: Why Shouldn't AA Be 100% Stocks During Accumulation Phase?

Post by Lieutenant.Columbo » Sun Jul 24, 2016 10:26 am

kenschmidt wrote:Because 99 out of 100 people can't successfully pull that off. They see a big bear market hit, where your investments drop by 40, 50 or maybe 60%, and they bail out. What you suggest sounds easy but it is not. If you have substantial investments and a market drop hits, every bone in your body will be screaming sell. Stop this pain now. Even for the most disciplined investors.

In addition, there have historically been periods of 10 and even 20 years where bonds have outperformed stocks.

For me, I find bonds are helpful in sticking to my investment plan, which at 70% equities, is still plenty aggressive.
thank you

I do not think I would bail out in a bad bear market, but I'll not know until/unless it happens to me :shock:

at 46, I am about 4 yrs from partial retirement (during which we will live Only on the part time income) and between 9 and 14 yrs from full retirement.

our Vanguard funds are 85% equities and 15% Bonds right now

where do you suggest I learn more about How and When to improve the equities to bond ratio in prep for full retirement 9 to 14 yrs from now?

thank you
Last edited by Lieutenant.Columbo on Wed Sep 21, 2016 8:32 pm, edited 1 time in total.
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Re: Help Me Understand: Why Shouldn't AA Be 100% Stocks During Accumulation Phase?

Post by Lieutenant.Columbo » Sun Jul 24, 2016 10:28 am

Toons wrote:It should be,
If one could tolerate the dramatic,
Drops in the portfolio value along the way,
without fleeing in panic
:mrgreen:
thank you

any stats available on what knowledgeable and disciplined investors like the BHs have done during dramatic drops?

such info would help me predict how likely I'd be to sell if it drops bad :)
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Re: Help Me Understand: Why Shouldn't AA Be 100% Stocks During Accumulation Phase?

Post by TOJ » Sun Jul 24, 2016 10:30 am

People consider their retirement accounts as extensions of their emergency and college funds. E.g., no buckets, it's all the same money. If an emergency hits, they spend emergency funds and then spend retirement funds. Ergo, they are sensitive to volatility.

I don't agree with this, and do buckets. Retirement bucket is 100% stocks. Not adding bonds till I hit 40. College is stock heavy but will slide to bonds much quicker. It works for me. Essentially short, medium, and long term buckets. It increases simplicity and boringness for me, which I like.
Last edited by TOJ on Sun Jul 24, 2016 10:37 am, edited 1 time in total.

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Re: Help Me Understand: Why Shouldn't AA Be 100% Stocks During Accumulation Phase?

Post by BolderBoy » Sun Jul 24, 2016 10:30 am

JLMA wrote:So why have any bonds AT ALL during the accumulation phase since one does not need AT THAT TIME the safety Bonds provide?
Couldn't one switch some assets from 100% stocks to some of it in Bonds at (or close to) retirement age?
Because doing so is a form of market timing in itself.
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Re: Help Me Understand: Why Shouldn't AA Be 100% Stocks During Accumulation Phase?

Post by TheTimeLord » Sun Jul 24, 2016 10:31 am

JLMA wrote:
TheTimeLord wrote:How many years before retirement do you believe the accumulation phase ends? Why can't you lose your job? Do you have any cash or emergency fund invested in safe assets or do you truly mean 100% equities?
thank you

I do not know exactly when the accumulation phase ends. If I had to guess, it ends when you stop having income from work (not trying to be funny, that is seriously my understanding).

Which would be my definition so you run the risk of that being in the middle of a Bear Market and you are down 40% when you decide to retire. That is why I asked to see if you had some sort of glide path thought

I was not trying to make this a thread about my own case, but was trying to understand the general principle. But since you ask, yes, I have an emergency fund that would last over 8 months if needed with no further income during those 8 months.

Good, I count my emergency fund in my portfolio so to me you wouldn't be 100% equities.

I was referring to being 100% equities with the moneys one puts in Vanguard (why not 100% in Vanguard equities rather than some in Vanguard equities and some in Bonds during accumulation phase?)

I think that has already been noted we have just exited a period when bonds out performed stocks for at least 20 years. Not that I would bet on that again for the next 20 years but for most the smoothing effect of holding mixed assets is comforting. But the bottom line is that it is your money, your future and your decision and if you feel that is the course you want I wouldn't push you one way or the other because you will have to live with the consequences of the decision. All we can do is what you have asked supply some plus and minuses for you to consider.

thank you
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Re: Help Me Understand: Why Shouldn't AA Be 100% Stocks During Accumulation Phase?

Post by cherijoh » Sun Jul 24, 2016 10:36 am

JLMA wrote:Let's assume one does not plan on selling any funds until retirement begins. Meaning, s/he is not going to sell at a loss during the accumulation phase. Nor is there a risk of having no assets when trying to cash out (because one will not cash out quite yet).

Until retirement s/he's only buying funds as much and often as possible.

In my view (and limited knowledge) it does not seem to matter whether the stock market dips during the accumulation phase (it actually seems beneficial).

So why have any bonds AT ALL during the accumulation phase since one does not need AT THAT TIME the safety Bonds provide?
Couldn't one switch some assets from 100% stocks to some of it in Bonds at (or close to) retirement age?

BHs: what am I missing?

thank you for your input
Even if someone could hypothetically pull off the not panicking bit, you are missing that as your net worth increases, the amount you are putting in as new money becomes an increasingly small percentage of your portfolio. So if you are always at 100% stocks the amplitude of the market gyrations increases dramatically and you have no way to take advantage of the dips. If you have a more moderate AA - say 80/20 or 70/30 - not only have you dampened the volatility of your portfolio, you have kept some powder dry for rebalancing into stocks when they are down.

Then there is the sequence of return risk alluded to by Timelord. You are going to want to de-risk your portfolio before retiring. If the market plunges shortly before your retirement date you are left with a much smaller nest egg or a much later retirement than you planned - assuming you are given the opportunity to continue working. These days many older workers don't decide to retire voluntarily- they are forced into it when they lose their job and can't find another one paying anywhere near their current salary.

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Re: Help Me Understand: Why Shouldn't AA Be 100% Stocks During Accumulation Phase?

Post by DayOfChange » Sun Jul 24, 2016 10:47 am

. Because doing so is a form of market timing in itself.
How is adjusting your AA based on age market timing?

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Re: Help Me Understand: Why Shouldn't AA Be 100% Stocks During Accumulation Phase?

Post by Toons » Sun Jul 24, 2016 10:48 am

JLMA wrote:
Toons wrote:It should be,
If one could tolerate the dramatic,
Drops in the portfolio value along the way,
without fleeing in panic
:mrgreen:
thank you

any stats available on what knowledgeable and disciplined investors like the BHs have done during dramatic drops?

such info would help me predict how likely I'd be to sell if it drops bad :)

I can only speak as to what I have done.
I have always purchased consistently over decades ,
According to asset allocation.
Which for the most part ,since retirement about 6 years ago,
has been equity funds.
Both managed and index
Irregardless of where the market is or was.
Since 1980.
Bulls Bears,seen it all.
Ups ,Downs,Turmoil,Reasons not to invest ,,,etc,
The Dow and S&P are a lot higher now than 850 and 110 ,respectively, when when I started.
Bad=Good when declines occur.
At least it has worked out that way for me so far.
More share accumulation.


:idea:
"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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Re: Help Me Understand: Why Shouldn't AA Be 100% Stocks During Accumulation Phase?

Post by dbr » Sun Jul 24, 2016 11:00 am

A 100% stock allocation produces both upside and downside uncertainty on top of a generally positive rise in wealth that outruns a more conservative allocation. The question is when does uncertainty in the outcome become more of a problem than not getting so much growth.

An interesting way to see how this works out is to enter FireCalc with a retirement beginning 30 years in the future, spending of zero, and an annual contribution of $10,000. What FireCalc will generate is a growth of $10,000 chart in real dollars for 116 actual historical years. If the portfolio is 100% stocks the end result ranges from a low of $622,911 accumulated to a high of $9,375,821 and a mean of $2,462,545. If the portfolio is switched to 50% stocks and 50% 5-year Treasuries the results are $515,237, $4,957,821, and average $1,626,252. If you are counting on the average 100% stocks does not outrun 50% stocks by all that much. If you are counting on making the worst case, 100% stocks doesn't help hardly at all. But if you need $6,000,000 or more, you aren't going to get there with 50% bonds. Then again, you wouldn't get there with 100% stocks in 111 out of 116 of the trials. The investing start years that did generate that much money were 1967-1972.

The 90th percentile, meaning best 104 outcomes were $4,459,679 and $3,138,835. Already you can see the extreme benefits of 100% stocks really pile up only in a very small fraction of the outcomes.

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Re: Help Me Understand: Why Shouldn't AA Be 100% Stocks During Accumulation Phase?

Post by Kevin K » Sun Jul 24, 2016 11:07 am

To the OP I'd recommend setting aside a chunk of time to use the calculators (and read the articles) on this site:

https://portfoliocharts.com/calculators/

If you spend some time looking at the performance of the sample portfolios on the site (100% Total Stock and the classic Bogleheads 60:40 and Three Fund among them) you'll get as clear a sense as is possible without actually owning them of what it would have been like to actually own them through market crashes and downturns that often go on for YEARS.

Then have a look at the porfolios that have offered the best balance of risk:return over every market condition and that support the highest safe withdrawal rates in retirement. None of them are even close to 100% stocks.

If you find Portfolio Charts overwhelming another simpler way to get part of the way there is to look at how Vanguard's Target Retirement Date funds shift the equity:bond allocation over time and simply put all or part of your non-emergency cash stash into them. There's an enormous amount of research behind those allocations, and while all of them suffer from excessive volatility and subpar returns compared to the winning portfolios featured on the Portfolio Charts site they're still infinitely more likely to lead to long-term success and a happy retirement than 100% stocks.

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Re: Help Me Understand: Why Shouldn't AA Be 100% Stocks During Accumulation Phase?

Post by Dottie57 » Sun Jul 24, 2016 11:08 am

JLMA wrote:
I do not think I would bail out in a bad bear market, but I'll not know until/unless it happens to me :shock:
thank you
Yeah that is what I thought when i was younger. Until your loses are in 6 figures.

2008 was a real turning point for me , and I started understanding the real value of bonds.

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Re: Help Me Understand: Why Shouldn't AA Be 100% Stocks During Accumulation Phase?

Post by DayOfChange » Sun Jul 24, 2016 11:10 am

If you are counting on making the worst case, 100% stocks doesn't help hardly at all.
If my math is correct stocks did 20% better in the worse case scenario. How is that insignificant?

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Re: Help Me Understand: Why Shouldn't AA Be 100% Stocks During Accumulation Phase?

Post by nisiprius » Sun Jul 24, 2016 11:16 am

The magic of "100%" bothers me. People are constantly talking about that specific number.

The Vanguard Target Retirement Funds stay at 90% stocks from the beginning up until 25 years before retirement, i.e. up until age 40.
Image

For heaven's sake, isn't 90% enough? Why is it so important to be at 100%? Is the extra 10% going to matter all that much? Why?

I have to feel that some people believe they are in an emotional relationship with the stock market, and that the stock market will appreciate and reward them for their 100% commitment, their monogamy, and get angry with them if they two-time stocks with some other asset class.

There is simply no shortcut for making your own decision, based on your best personal understanding of stock market risk and your best personal understanding of your personal risk tolerance.

And yes, risk tolerance matters. It's a mistake to kid yourself that you are not like ordinary human beings and not subject to emotions. One of the interesting things to me, as I nibble my way through Benjamin Graham's The Intelligent Investor, is that he takes it as an axiom that we are emotional and need to take that into account in our investments... and that it is unwise to hold more than 75% stocks, or less than 25%.

But even if you have some evidence-based reason for thinking your risk tolerance is exceptionally high, that still doesn't excuse you from thinking about what your stock allocation should be. Why shouldn't you be using leverage? Why stop at 100%? Why not 110%? Why not 140%? Why not 200%?

If it's "highest expected return," if it's about the $$$, the more leverage, the higher the expected return. That's simple math. You do need to take account of the cost of borrowing but it still comes out to "more is better." In order to come up with something other than "the more leverage, the better" you need an argument that is based on something other than "highest expected return." (For example, the Kelly criterion is based on highest expected logarithm of return).

Two well-credentialed intelligent but unwise academics I prefer not to name wrote a book advocating that young people invest in stocks at 2X leverage, i.e. 200%.

I think that there is a line of reasoning based on the Kelly criterion for limiting ones' self to 140%.

So, you should answer the question for yourself, "Why shouldn't my own stock allocation be 200% stocks during the accumulation phase, like those guys recommend? Why shouldn't it be 140%?"

Then take your reasons why it shouldn't be 140% and see if they aren't also reasons why it shouldn't be 100%.
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Re: Help Me Understand: Why Shouldn't AA Be 100% Stocks During Accumulation Phase?

Post by qwertyjazz » Sun Jul 24, 2016 11:24 am

Let's accept the 14 years as exact for you - think through how life changes in a different argument - that is barely long enough for stocks to have in the past outperform bonds - now think about 7 years from now - half way - do you want to be 100% stocks with less than a decade to go?
One in spending mode if you are spending anyways for yourself and not heirs a combined stock bond portfolio outperforms stocks alone with drawdown
So IOW it is never 14 years to go - it is different amounts of time that can vary
If you had a sure 30 years and we're sure you would not draw down and we're sure you would not freak out ...
At least that is my read on the field

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Re: Help Me Understand: Why Shouldn't AA Be 100% Stocks During Accumulation Phase?

Post by dbr » Sun Jul 24, 2016 11:32 am

DayOfChange wrote:
If you are counting on making the worst case, 100% stocks doesn't help hardly at all.
If my math is correct stocks did 20% better in the worse case scenario. How is that insignificant?
I would be quite sure that comparison is well within the errors of estimation. I admit to failing to meet my own frequent complaint of not putting error bars around the numbers. One might note, however, that from the first value to the 10th percentile the end point wealth increases from $515,237 to $666,282 and from $622,911 to $837,273 which is a large spread in just the first 10% of the data points. The extremes are dealing with a very wide statistical tail.

If one wanted use the standard deviation as a measure of the error bar around the average then the result for 50% bonds would be 1.6 +/- 1.0 $million for 50% stocks and 2.5 +/- 1.8 $million for 100% stocks. The nominal +/- SD ranges are .6-2.6 and .7-4.3. That is a lot of overlap.

Whether one is dealing with the tails or the center of the distribution a statistician could argue that the two portfolios did not have a statistically different outcome. Exactly what tests to apply to hypothesis testing in this case I would leave to a professional in the field. The problem is not simple given that we do not know what distribution really should be assumed to fit the data.

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Re: Help Me Understand: Why Shouldn't AA Be 100% Stocks During Accumulation Phase?

Post by jhfenton » Sun Jul 24, 2016 12:55 pm

As a few others have said, I see no reason other than psychology why your AA shouldn't be 100% (excluding first-tier emergency funds) until 20 years or so before retirement. For us, we were 100% until last year, at age 45. We are currently 95/5 and gliding gradually at 2-3% per year into fixed income. Our kids won't be out of college for at least 9 and 10 years, so there's no chance we'd consider retiring before that and probably 2 or 3 years after. (We'll probably sit down when our younger child graduates and plan our transition to retirement.) That establishes our personal retirement timeline, say 13 years (age 59) to maybe 19 years (age 65). Yours will vary.

As for volatility goes, I don't see how a 90/10 portfolio would feel any different in a downturn than a 100/0 portfolio. Is someone really going to panic watching $1,000,000 turn into $500,000 but not panic watching it turn into $550,000?

2001-2 was a non-event for us. We actually made money in 2000, because we were heavily tilted to small value. And when the broader market finally followed large-cap growth down, we were still only looking at five-figure losses.

In 2008-9, we lost six figures quickly, AND I lost my job in December 2008. At that point, our retirement portfolio was the last thing on my mind. Other than rolling over my 401(k) into an IRA, I literally don't think I looked at it the entire 6 months that I was unemployed.

And between last May and this February, we lost six figures. And since February we've made six figures. I know from my history and my personality that I'm not going to panic and sell into a downturn. In fact, I have to fight my instinct to buy every time there's a (Really) Bad Day in the market rather than simply rebalancing as my long-term strategy dictates.

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Re: Help Me Understand: Why Shouldn't AA Be 100% Stocks During Accumulation Phase?

Post by Crushtheturtle » Sun Jul 24, 2016 1:14 pm

I will be 100% stocks through accumulation. Bonds are largely fear mitigation ("sleep well at night"). The Rebalancing/dry powder benefit is destroyed by the opportunity cost of holding underperforming assets during the majority of time when stocks go up.

I also plan to remain 100% stocks through retirement. I will rely on the safety margins of a work pension, the ability to cut back expenses, and generate more income if needed. By just focusing on the dividends of my total market index funds, the price volatility becomes irrelevant and my portfolio generates the maximum expected return.

I am not a financial adviser, your mileage may vary, etc.
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Re: Help Me Understand: Why Shouldn't AA Be 100% Stocks During Accumulation Phase?

Post by pkcrafter » Sun Jul 24, 2016 1:31 pm

Crushtheturtle wrote:I will be 100% stocks through accumulation. Bonds are largely fear mitigation ("sleep well at night"). The Rebalancing/dry powder benefit is destroyed by the opportunity cost of holding underperforming assets during the majority of time when stocks go up.

I also plan to remain 100% stocks through retirement. I will rely on the safety margins of a work pension, the ability to cut back expenses, and generate more income if needed. By just focusing on the dividends of my total market index funds, the price volatility becomes irrelevant and my portfolio generates the maximum expected return.

I am not a financial adviser, your mileage may vary, etc.
I guess you are saying stocks actually are not risky if held for long term. Good to know, but it really isn't volatility we need to worry about--it's the lack of volatility. If 30 years 'till retirement, when does the long term change to shorter term?

Paul
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Re: Help Me Understand: Why Shouldn't AA Be 100% Stocks During Accumulation Phase?

Post by lack_ey » Sun Jul 24, 2016 1:35 pm

nisiprius wrote:But even if you have some evidence-based reason for thinking your risk tolerance is exceptionally high, that still doesn't excuse you from thinking about what your stock allocation should be. Why shouldn't you be using leverage? Why stop at 100%? Why not 110%? Why not 140%? Why not 200%?

If it's "highest expected return," if it's about the $$$, the more leverage, the higher the expected return. That's simple math. You do need to take account of the cost of borrowing but it still comes out to "more is better." In order to come up with something other than "the more leverage, the better" you need an argument that is based on something other than "highest expected return." (For example, the Kelly criterion is based on highest expected logarithm of return).

Two well-credentialed intelligent but unwise academics I prefer not to name wrote a book advocating that young people invest in stocks at 2X leverage, i.e. 200%.

I think that there is a line of reasoning based on the Kelly criterion for limiting ones' self to 140%.

So, you should answer the question for yourself, "Why shouldn't my own stock allocation be 200% stocks during the accumulation phase, like those guys recommend? Why shouldn't it be 140%?"

Then take your reasons why it shouldn't be 140% and see if they aren't also reasons why it shouldn't be 100%.
Under reasonable leverage ratio rebalancing regimes (you can't just make a simplifying assumption that you're going to let it ride, because such things as margin calls do exist), even when stocks outperform the cost of borrowing over a given period, adding more leverage can reduce returns. The math isn't necessarily that obvious.

I think the calculations and stipulations behind the 140% were a bit misapplied (particularly because returns through time aren't independent), though it's been some time since I reviewed that. In the very least it depends on underlying assumptions about asset class returns. You may want to tweak the parameters for yourself.

I do see and support the argument of looking at 100% as arbitrary, though.


On a more practical level of implementation I would suggest also looking at concentrating in riskier, potentially higher return equities as an alternative to (or in addition to) using leverage or 100% stocks or whatever other allocation.

Also, personally I would not separate out emergency funds... it's all one pile of money and if you have any in a checking account that's not 100% stocks unless you're leveraged somewhere else. I think that's a more honest mental accounting and forces one to consider what emergencies might come up, when money might be needed before expected, etc. and integrate that into the overall savings plan with all the investments.

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Re: Help Me Understand: Why Shouldn't AA Be 100% Stocks During Accumulation Phase?

Post by dbr » Sun Jul 24, 2016 2:14 pm

pkcrafter wrote:
I guess you are saying stocks actually are not risky if held for long term. Good to know, but it really isn't volatility we need to worry about--it's the lack of volatility. If 30 years 'till retirement, when does the long term change to shorter term?

Paul
Well, actually never considering that a retirement lasts another thirty years and when one dies what is left goes to heirs who have another thirty years to go before passing on to their heirs. There is no short term unless there is a plan to liquidate on a certain date for some reason.

Also withdrawal studies cannot confirm that 100% stock allocations are risky within the uncertainties involved.

I think it is a reasonable argument that setting up the uncertainty inherent in 100% stocks is not necessary unless one has the objective of hoping for maximum wealth with a very uncertain expectation. Given that, why volunteer for it? Also, I think there is a very general diversification argument that goes to a "not all eggs in one basket" principle, though it is difficult to quantify exactly what the basket smashing scenario actually is. Personally I think diversification in the broadest sense is a persuasive concept, but it also extends to retirees being sure to diversify to annuitized income streams as much or more than stock/bond diversification.

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Re: Help Me Understand: Why Shouldn't AA Be 100% Stocks During Accumulation Phase?

Post by heyyou » Sun Jul 24, 2016 2:21 pm

In my thirties, I was 100% stocks thinking of my pension credits as fixed income retirement assets.
Historically, the optimal allocation was near 93/7 or 87/13 so 90/10 would work. The advantage is rebalancing more into stocks from the bonds during a stock crash. Can you really imagine doing that?

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Re: Help Me Understand: Why Shouldn't AA Be 100% Stocks During Accumulation Phase?

Post by NMJack » Sun Jul 24, 2016 2:46 pm

Crushtheturtle wrote:I will be 100% stocks through accumulation. Bonds are largely fear mitigation ("sleep well at night"). The Rebalancing/dry powder benefit is destroyed by the opportunity cost of holding underperforming assets during the majority of time when stocks go up.
+1 :sharebeer

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Re: Help Me Understand: Why Shouldn't AA Be 100% Stocks During Accumulation Phase?

Post by freyj6 » Sun Jul 24, 2016 2:52 pm

nisiprius wrote:The magic of "100%" bothers me. People are constantly talking about that specific number.

The Vanguard Target Retirement Funds stay at 90% stocks from the beginning up until 25 years before retirement, i.e. up until age 40.
Image

For heaven's sake, isn't 90% enough? Why is it so important to be at 100%? Is the extra 10% going to matter all that much? Why?

I have to feel that some people believe they are in an emotional relationship with the stock market, and that the stock market will appreciate and reward them for their 100% commitment, their monogamy, and get angry with them if they two-time stocks with some other asset class.

There is simply no shortcut for making your own decision, based on your best personal understanding of stock market risk and your best personal understanding of your personal risk tolerance.

And yes, risk tolerance matters. It's a mistake to kid yourself that you are not like ordinary human beings and not subject to emotions. One of the interesting things to me, as I nibble my way through Benjamin Graham's The Intelligent Investor, is that he takes it as an axiom that we are emotional and need to take that into account in our investments... and that it is unwise to hold more than 75% stocks, or less than 25%.

But even if you have some evidence-based reason for thinking your risk tolerance is exceptionally high, that still doesn't excuse you from thinking about what your stock allocation should be. Why shouldn't you be using leverage? Why stop at 100%? Why not 110%? Why not 140%? Why not 200%?

If it's "highest expected return," if it's about the $$$, the more leverage, the higher the expected return. That's simple math. You do need to take account of the cost of borrowing but it still comes out to "more is better." In order to come up with something other than "the more leverage, the better" you need an argument that is based on something other than "highest expected return." (For example, the Kelly criterion is based on highest expected logarithm of return).

Two well-credentialed intelligent but unwise academics I prefer not to name wrote a book advocating that young people invest in stocks at 2X leverage, i.e. 200%.

I think that there is a line of reasoning based on the Kelly criterion for limiting ones' self to 140%.

So, you should answer the question for yourself, "Why shouldn't my own stock allocation be 200% stocks during the accumulation phase, like those guys recommend? Why shouldn't it be 140%?"

Then take your reasons why it shouldn't be 140% and see if they aren't also reasons why it shouldn't be 100%.
Good points, but I think there are important distinctions here.

With the exception of the entire global economy permanently crashing, there is no "deep risk" in being 100% in stocks.

Leverage has deep risk.

You have margin calls other risks that aren't nearly as obvious as simple volatility risk.

There are also significant diminishing returns due to costs. Going from 70/30 to 100% stocks doesn't increase costs at all. Factor tilting doesn't really increase deep risk or costs either.

There are fundamental differences when you enter leverage territory.

Honestly if I could leverage with nothing but volatility risk, I'd be at least 200% right now.

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Re: Help Me Understand: Why Shouldn't AA Be 100% Stocks During Accumulation Phase?

Post by Dirghatamas » Sun Jul 24, 2016 3:19 pm

JLMA wrote:
So why have any bonds AT ALL during the accumulation phase since one does not need AT THAT TIME the safety Bonds provide?
Couldn't one switch some assets from 100% stocks to some of it in Bonds at (or close to) retirement age?

BHs: what am I missing?

thank you for your input
In my view you are not missing anything. I am similar age (I am 45) and have been investing for 23, now almost 24 years. I have always held the same portfolio, 100% stocks, always cap weighted, always world cap weights (no home country bias), 100% index funds, no slice/dice or factors. I have not sold a single share during this time other than to pay taxes and to do tax loss harvesting.

A large part of this I realize as I get older is one's brain and psychology, which are difficult to change. Ironically, the people who can handle a 100% stock portfolio through long bear markets are people who don't need that much money..so they didn't need to be 100% stocks in the first place...

The same paradox is true for saving rate/investing rate. Most models assume that your expenses are a set % of your income in accumulation and perhaps even in retirement. My own expenses are almost the same (inflation adjusted) as they were in grad school while income has gone up more than 100X. I see no contradiction but realize as I get older that is is not the norm. So, I need to do my own modeling for retirement/withdrawal rates etc. instead of relying on typical models.

So, in my view a lot of this financial stuff is really about our psychologies. There can be no set rules for saving rates, investing rates, % in stocks etc because people are not the same. You have to think this through for YOUR situation and for YOUR brain!

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Re: Help Me Understand: Why Shouldn't AA Be 100% Stocks During Accumulation Phase?

Post by soboggled » Sun Jul 24, 2016 3:36 pm

As others have pointed out, if you really think (1) the stock market is sure to outperform all other investments during your lifetime, (2) the stock market will never go down and stay down for very long periods of time and (3) unlike almost everybody else, you can psychologically withstand the many inevitable crises and crashes, then you should hock your house and borrow as much money as you can and put every penny in equities. 100% is for pikers. Why not 200%? 1000%?
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Re: Help Me Understand: Why Shouldn't AA Be 100% Stocks During Accumulation Phase?

Post by King's Gambit » Sun Jul 24, 2016 3:36 pm

JLMA wrote:I do not think I would bail out in a bad bear market, but I'll not know until/unless it happens to me :shock:
You were probably involved in the market around 2008, no? How did you handle that? Once you recall that answer, then keep in mind you are 16 years older/wiser and closer to retirement.
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Re: Help Me Understand: Why Shouldn't AA Be 100% Stocks During Accumulation Phase?

Post by Lieutenant.Columbo » Sun Jul 24, 2016 3:46 pm

King's Gambit wrote: You were probably involved in the market around 2008, no?
I wasn't. I entered the market at 45 yrs of age, only 10 months ago...
Lt. Columbo: Well, what do you know. Here I am talking with some of the smartest people in the world, and I didn't even notice!

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Re: Help Me Understand: Why Shouldn't AA Be 100% Stocks During Accumulation Phase?

Post by Dandy » Sun Jul 24, 2016 4:28 pm

At age 45 you are toward the end of the accumulation stage. Not many trusted investment guru's would recommend 100% that late in the accumulation stage. You also haven't experienced a significant equity market decline since you weren't in the equity market in 2008. Also, you are talking about going in 100% when the US equity markets are at an historic high and has been on a bull market run for a long time. I don't think 100% equities is the right move for you.

Age in bonds is a decent starting point for determining allocations for most people. For those without investment experience it might be close to a good starting equity allocation.

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Re: Help Me Understand: Why Shouldn't AA Be 100% Stocks During Accumulation Phase?

Post by TomCat96 » Sun Jul 24, 2016 4:59 pm

JLMA wrote:Let's assume one does not plan on selling any funds until retirement begins. Meaning, s/he is not going to sell at a loss during the accumulation phase. Nor is there a risk of having no assets when trying to cash out (because one will not cash out quite yet).

Until retirement s/he's only buying funds as much and often as possible.

In my view (and limited knowledge) it does not seem to matter whether the stock market dips during the accumulation phase (it actually seems beneficial).

So why have any bonds AT ALL during the accumulation phase since one does not need AT THAT TIME the safety Bonds provide?
Couldn't one switch some assets from 100% stocks to some of it in Bonds at (or close to) retirement age?

BHs: what am I missing?

thank you for your input

I'll be succinct.
-100% stocks outperforms an AA with any ratio of bonds over long periods.

-AA with bonds will outperform 100% stock portfolios in the immediate aftermath of a market crash.

-Even so, in the long-term, 100% stocks will yield a superior return to portfolios with bond allocations.

-100% stocks is seen as subjectively risky, not objectively. If you panic sell during a crash, you would have been better off staying the course with some bonds. Therefore, the advice here is to find your subjective risk tolerance & stay the course.

-100% stocks is more appropriate in 2 cases. 1. You are young. 2. Your portfolio is small. Case 3, where you have a high risk tolerance is knowable only to you.

-boglehead portfolios, or AA with bonds appear to achieve slightly less return for considerably less risk.
a) a bond mix reduces your losses should a stock crash occur.
b) the return on the bonds will mitigate both your stock losses and the amount of "catch up" it needs to do when times are good.
c) you will rebalance into cheaper stocks when crashes occur, magnifying your gains on a bounce.

-to the extent your perception of accumulation phase depends on knowing when stocks will rise, you are market timing.

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Re: Help Me Understand: Why Shouldn't AA Be 100% Stocks During Accumulation Phase?

Post by staythecourse » Sun Jul 24, 2016 5:28 pm

I've written on here certain criteria folks should be able to check off before going 100% equities. If you meet them and want to go for it and you should do better then a portfolio of mixing bonds.

The criteria:
1. Recession proof job.
2. Long time horizon (>10 yrs. Preferable greater then 20+ yrs.)
3. No need for liquidity before the end of time horizon
4. A EF of 1 yr. duration
5. Ability to stay the course through the MANY bad markets to come

Most folks fail at no. 1. Everyone thinks they are indenspensible at work until they are not and that usually happens in a down market. Unless you are tenured teacher, government worker, or doctor I don't think many jobs are recession proof. That is the rub to the plan. Your plan is looking great until recession hits and you lose your job, have to access the money to live off, and have to jump ship. That is failing 1, 2, 3, and 5. That is what dooms folks is when life hits. As Mike Tyson correctl said, "Everyone has a perfect plan until they get punched in the face".

Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle

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Re: Help Me Understand: Why Shouldn't AA Be 100% Stocks During Accumulation Phase?

Post by dbr » Sun Jul 24, 2016 5:40 pm

I think some circumspection should apply here. Two points come to mind.

1. Opting for a very uncertain outcome should be done only if one needs to do it. The question is what objective does one have that requires a 100% stock allocation rather than one that is more predictable but may not meet the most ambitious objective. As Larry Swedroe points out in resolving high ability and low need to take risk, marginal utility of wealth is a diminishing function and risk is often underestimated.

2. There is uncertainty in results which is noise within an envelope and there is secular uncertainty that the very shape of the envelope will not be the same. The problem is whether the stock market of the next fifty or sixty years will be like that of the last hundred years. Warren Buffett, for example, advises high stock allocations based on an unshakeable faith in the growth and vitality of the American economy, if not the world economy. Bogle and Bernstein (and probably our friends Taylor Larrimore and Larry Swedroe) would temper this by suggesting one not take risk if one does not need to, if one is winning the game, if one cannot afford to lose what one has etc.

As far as "accumulation" the process is continuous from the beginning through the end of life. There may be an extreme at the beginning of investing but things quickly become shades of the same balance of need and ability as time goes on.

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Re: Help Me Understand: Why Shouldn't AA Be 100% Stocks During Accumulation Phase?

Post by NMJack » Sun Jul 24, 2016 5:56 pm

Dandy wrote: trusted investment guru's
Oxymoron!!

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Re: Help Me Understand: Why Shouldn't AA Be 100% Stocks During Accumulation Phase?

Post by NMJack » Sun Jul 24, 2016 5:58 pm

King's Gambit wrote:
You were probably involved in the market around 2008, no? How did you handle that? Once you recall that answer, then keep in mind you are 16 years older/wiser and closer to retirement.
Math check?? :confused

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Re: Help Me Understand: Why Shouldn't AA Be 100% Stocks During Accumulation Phase?

Post by King's Gambit » Sun Jul 24, 2016 6:04 pm

NMJack wrote:
King's Gambit wrote:
You were probably involved in the market around 2008, no? How did you handle that? Once you recall that answer, then keep in mind you are 16 years older/wiser and closer to retirement.
Math check?? :confused
:oops: I am just gonna stop now lol
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Re: Help Me Understand: Why Shouldn't AA Be 100% Stocks During Accumulation Phase?

Post by tfb » Sun Jul 24, 2016 6:11 pm

JLMA wrote:So why have any bonds AT ALL during the accumulation phase since one does not need AT THAT TIME the safety Bonds provide?
Couldn't one switch some assets from 100% stocks to some of it in Bonds at (or close to) retirement age?

BHs: what am I missing?
You are not missing anything. Vanguard has it at 90% stocks in the first 20 years before shifting down. If we are arguing how 90% isn't 100% and what magic power that 10% in bonds possesses, we are deluding ourselves. There is no material difference between 90% in stocks and 100% in stocks. If people bail when they have 100% in stocks, they will also bail when they have 90%.
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Re: Help Me Understand: Why Shouldn't AA Be 100% Stocks During Accumulation Phase?

Post by jhfenton » Sun Jul 24, 2016 7:01 pm

Dandy wrote:At age 45 you are toward the end of the accumulation stage. Not many trusted investment guru's would recommend 100% that late in the accumulation stage. You also haven't experienced a significant equity market decline since you weren't in the equity market in 2008. Also, you are talking about going in 100% when the US equity markets are at an historic high and has been on a bull market run for a long time. I don't think 100% equities is the right move for you.

Age in bonds is a decent starting point for determining allocations for most people. For those without investment experience it might be close to a good starting equity allocation.
For most people, age 45 is nowhere near the end of the accumulation stage. Maybe for a few early retirees, but most people are in their highest earning and highest savings years. A typical 22-62 worker is just past halfway to retirement and has probably earned far less than half of his/her income.

We're 46, have a mid-to-high six figure portfolio saved, and plan to add as much in new savings in the next 10 years as we already have saved. We've been savings since our 20's, but I had student loans and we had lower incomes. We weren't saving anything like 40% of our current gross income.

There are enough age in bonds discussions that I don't want to specifically rehash that here. :sharebeer But since we're more like [(Age - 44) * 2.5%] in bonds, that tells you my feelings on the subject, at least for me.

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Re: Help Me Understand: Why Shouldn't AA Be 100% Stocks During Accumulation Phase?

Post by NMJack » Sun Jul 24, 2016 7:06 pm

deleted due to massive error :annoyed
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Re: Help Me Understand: Why Shouldn't AA Be 100% Stocks During Accumulation Phase?

Post by LarryAllen » Sun Jul 24, 2016 7:13 pm

I have a lot of very wealthy clients and most of them are diversified into all types of assets. I want to be rich some day so I do what they do. Stocks, bonds, real estate, a touch of alternatives, and a little cash.

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Re: Help Me Understand: Why Shouldn't AA Be 100% Stocks During Accumulation Phase?

Post by patrick013 » Sun Jul 24, 2016 7:22 pm

JLMA wrote:Let's assume one does not plan on selling any funds until retirement begins. Meaning, s/he is not going to sell at a loss during the accumulation phase. Nor is there a risk of having no assets when trying to cash out (because one will not cash out quite yet).

Until retirement s/he's only buying funds as much and often as possible.

In my view (and limited knowledge) it does not seem to matter whether the stock market dips during the accumulation phase (it actually seems beneficial).

So why have any bonds AT ALL during the accumulation phase since one does not need AT THAT TIME the safety Bonds provide?
Couldn't one switch some assets from 100% stocks to some of it in Bonds at (or close to) retirement age?

BHs: what am I missing?

thank you for your input
Where would the 500 be and all of our accounts if in
2008 a trillion dollars in bail-out money was not allocated.
Most would be glad an allocation in bonds was very allocated.

Next time......I don't think a bank bail out is really expected.

Also, sometimes bond returns are greater than stock returns
so a bond allocation is just for diversification anyway.
age in bonds, buy-and-hold, 10 year business cycle

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Re: Help Me Understand: Why Shouldn't AA Be 100% Stocks During Accumulation Phase?

Post by jhfenton » Sun Jul 24, 2016 8:09 pm

NMJack wrote:
jhfenton wrote: :sharebeer But since we're more like [(Age - 44) * 2.5%] in bonds, that tells you my feelings on the subject, at least for me.
Careful with that Friend. Somebody might read that as age (46) minus (44) times 2.5% in bonds. I'm guessing you mean 100% and not 5%. :sharebeer
100% in bonds? No. I mean 5% in bonds. As of Friday's close, we're at 94.93% stocks, 5.07% fixed income.

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Re: Help Me Understand: Why Shouldn't AA Be 100% Stocks During Accumulation Phase?

Post by NMJack » Sun Jul 24, 2016 8:28 pm

jhfenton wrote: 100% in bonds? No. I mean 5% in bonds. As of Friday's close, we're at 94.93% stocks, 5.07% fixed income.
Sorry, I mistook bonds for stocks. My bad... 8-)

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Re: Help Me Understand: Why Shouldn't AA Be 100% Stocks During Accumulation Phase?

Post by longinvest » Sun Jul 24, 2016 9:34 pm

JLMA wrote: BHs: what am I missing?
JLMA,

I don't know if you are missing anything. If I knew for sure what the future had in store, I could tell you, but I don't.

The reason I added bonds to my portfolio was, in part, to protect against myself being wrong in my assumptions. Yes, like almost all Bogleheads, I believe that stocks are likely to outperform bonds, specially over long horizons. But, who knows? Maybe I'm wrong!

Also, I've come to observe, within my portfolio, that stock markets (US, Developed Markets, Emerging Markets) mostly move together when there are big shocks. Somehow, all stocks are related.

It's not the same thing between stocks and bonds. The main reason I added bonds to my portfolio was to get some real diversification in it. And, it has been my experience, so far, that bonds really behave differently from stocks.

But, the thing is that diversification is mostly a risk management technique. As such, it is likely to limit the upside growth (as well as the downside) of a portfolio. If the objective was to shoot for the highest possible return, it would be better to concentrate the portfolio into a single asset class (stocks), and fewer securities within this class (many around this forum concentrate/tilt toward small cap value stocks). The problem is that concentration, while allowing for more upside, allows for more downside, too. It is riskier. Note that I'm not discussing volatility, here, but real risk like stocks going bankrupt. When you hold fewer securities, the impact of a single stock failure takes with it a bigger chunk of your portfolio.

I think that, to be diversified, a portfolio should contain at least 25% in stocks and at least 25% in bonds. A 25% allocation starts to be large enough to have a significant impact on the performance of a portfolio, which is what diversification should do.

It's your portfolio, and you get to decide whether adding some real diversification to it would be of any value to you.

Good luck!
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Re: Help Me Understand: Why Shouldn't AA Be 100% Stocks During Accumulation Phase?

Post by Engineer250 » Sun Jul 24, 2016 9:39 pm

There are a few people on here who are following a similar path to me. I plan to stay 100% roughly until aged 40. But then I'm going to hard swing to something like 20-30% bonds/TIPs.

I read an article many years ago that said the problem with the whole age-based formulas were they got you into bonds too early and got you out of stocks too late. Obviously if something wiggy happens with the stock market at aged 40 I might delay it by a few years, but i'll still have another several decades until retirement to start increasing my bonds and fixed income. The only thing I regret now about not having bonds is the lack of dry powder as many here put it. If there's another crash I'll do what I can to increase my contributions, which is what I did in 2007-2009, but I suspect like the last time buying more will be more for my mental benefit and not necessarily a big enough increase to have much of an effect more than psychological. But I've only been through one downturn, I suspect the next one won't be like the last.
Where the tides of fortune take us, no man can know.

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Re: Help Me Understand: Why Shouldn't AA Be 100% Stocks During Accumulation Phase?

Post by Phineas J. Whoopee » Sun Jul 24, 2016 10:00 pm

Engineer250 wrote:...
I read an article many years ago that said the problem with the whole age-based formulas were they got you into bonds too early and got you out of stocks too late. ...
Fortunately for all of us, except those paying attentiontheir money to the croupiers, they aren't formulas at all. They're rough starting places from which people can begin their thinking, if they have no more specific basis on which to start their deliberations.
PJW

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Re: Help Me Understand: Why Shouldn't AA Be 100% Stocks During Accumulation Phase?

Post by Engineer250 » Sun Jul 24, 2016 10:25 pm

Phineas J. Whoopee wrote:
Engineer250 wrote:...
I read an article many years ago that said the problem with the whole age-based formulas were they got you into bonds too early and got you out of stocks too late. ...
Fortunately for all of us, except those paying attentiontheir money to the croupiers, they aren't formulas at all. They're rough starting places from which people can begin their thinking, if they have no more specific basis on which to start their deliberations.
PJW
Right. I didn't mean to imply they were useless. I agree they serve an important place, and I love that things like Target Retirement accounts exist even though I'm not in one, because they provide a good starting point for someone who wants to do research and a good end point for someone who doesn't and just wants to simplify things.

I meant the author had issue with things like "age in bonds" or "age minus 10/20/30 in bonds". Not because they weren't good starting points, but because, like I stated above, it had young people too conservatively invested and older people too riskily invested. This was around one of the crises (can't remember which) and a bunch of older folks were too heavy into stocks and had just lost a bunch of their money. He felt a big part of this was because they were trying to hit a certain target savings amount that bond returns weren't going to achieve, that they had possibly not saved enough or not been invested in enough equities before, and now were too heavily invested in equities to compensate. I am not that author nor an expert, but I liked the concept of instead of going gradually from 20% bonds to 40% bonds over 40 years you stay at 100% for 20 years, and then jump to 20%, and maybe go from 20 to 40 or 50% over the next 15 years. I'm definitely not advocating specific numbers. I feel like AA is as personal as how much international you have etc. Set up your IPS and have logical reasons for sticking to it and know ahead of time when you will make exceptions so that you aren't making emotional or panicked decisions.
Where the tides of fortune take us, no man can know.

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