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

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

Post by KlangFool » Tue Jul 26, 2016 9:21 am

jjface wrote:
knpstr wrote:
KlangFool wrote:JLMA,

FYI. Year to date. Bond is doing better than stock. 5.52% versus 3.65%

https://finance.yahoo.com/quote/VBTLX?ltr=1

https://finance.yahoo.com/quote/VTSAX?ltr=1

Stock has higher EXPECTED return. But, in the real world, the EXPECTATION may not be true.

KlangFool



FWIW, YTD information is short enough to be considered nearly meaningless. Many consider 10 year as the shortest to display meaningful info.

Over the last 10 years
VTSAX: 72%
VBTLX: 11.5%


If I replace the bonds with intermediate treasuries then see the link comparing 100% stocks, 80:20 and 60:40 over 10 years. Note how they are all pretty much the same and in fact 80:20 performed the best. You cannot look at returns in isolation as many smarter people than me have said. But thenn 10 years is too short really and backtesting is meaningless.

https://www.portfoliovisualizer.com/bac ... tion2_3=40


jjface,

From your link.

Portfolio #1 = 100% stock. Portfolio #2 = 80/20. Portfolio #3 = 60/40. From 1996 to 2016 = 20 years.

# Initial Balance Final Balance CAGR Std.Dev. Best Year Worst Year
1 $10,000 $21,376 7.50% 15.64% 33.52% -36.99% -50.84%
2 $10,000 $21,652 7.63% 11.96% 25.88% -26.29% -39.50%
3 $10,000 $21,281 7.46% 8.65% 18.24% -15.60% -27.18%


I agree that 20 years is short term. And, past performance does not necessary reflects the future. But, look at the number. The difference between 100% and 60/40 is only (7.50 - 7.46) = 0.04% CAGR for the last 20 years. Is it worth taking the risk?

KlangFool

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

Post by Tyler9000 » Tue Jul 26, 2016 9:44 am

dbr wrote:Yes, a good point of view about the question of stocks buying greater expectations at the cost of more uncertainty, similar to that seen in the examples one can see in FireCalc that I mentioned.


I definitely enjoyed your Firecalc example. :beer Uncertainty is a difficult concept to understand sometimes, but it's important for managing proper expectations.

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

Post by Earl Lemongrab » Tue Jul 26, 2016 12:07 pm

HomerJ wrote:So what you are saying is that you don't have 500x expenses. Because you don't know what your expenses will be.

That's not what was said, so it doesn't make sense to refute something that wasn't said.

With assets now at ~500X my current yearly (very frugal) expenses (excluding taxes)

Nothing was said about future expenses. And since no one knows with any certainty what theirs will be, then considering scenarios makes sense.

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

Post by technovelist » Tue Jul 26, 2016 12:13 pm

longinvest wrote:
HomerJ wrote:You can control the maturity duration. Rising interest rates isn't really a problem. I welcome rising interest rates... I'd take the short-term hit, followed by years of higher yields. Inflation is the problem. But you can semi-control that too with short maturities duration, or inflation-adjusted bonds.

Homer,

Sorry for the corrections to your post (in blue), but I think that it is important for bond investors to think in terms of duration (which represents the weighted-average maturity of all individual coupons and principals).

Thanks for the reference to inflation-adjusted bonds. I find it amazing that most of the investors who are afraid that bonds could be crushed by inflation forget about TIPS (Treasury inflation protected securities).


I haven't forgotten about TIPS.

I just don't think it is a wise idea to buy fire insurance from an arsonist.
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Re: Help Me Understand: Why Shouldn't AA Be 100% Stocks During Accumulation Phase?

Post by pkcrafter » Tue Jul 26, 2016 12:41 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?
Is your assumption that in the long term stocks are safe? Do you have a guarantee that all your investments and earnings will be there if you simply hold until you are X number of years from retirement? Just how many years is that by the way?

Just asking a question about allocation always leads to a lengthy discussion about risk because every investor has a personal point of view and it cannot be changed by an internet discussion because it is in our genes. Some people even have a risk-taking gene and others don't. One thing is clear though, the 100%ers should not be suggesting an all equity portfolio to anyone else because that someone else is probably not a full-blown risk taker, and if the recommendation is taken, the someone will sell in a crisis.

100%ers seem optimistic without due reason to me, but what do I know, I'm somewhat risk averse and and therefore have respect for the potential outcomes that risk can dole out. I simply cannot understand the risk 100% are willing to take. Of course they argue there is no risk. :happy I'll never understand it and I don't even try any more. But what if something does occur that causes a major loss without recovery in your allotted time frame? Your only reaction will be, I didn't know (add what happened here)... I guess us risk averse folks simply believe it's not all mapped out, something we have not thought of could certainly happen. I don't see how 100%ers can argue with that.

I guess those investors who know that they are at least somewhat risk averse are aware that one can drown in a small lake with an average depth of 4 feet. We apply Pascal's reasoning regarding God to stock risk. Pascal's Wager - Blaise Pascal was a 17th century french philosopher, mathematician and physicist. This is his famous wager: the argument is that it is in one's own best interest to behave as if God exists, since the possibility of eternal punishment in hell outweighs any advantage of believing otherwise. OK, I know it's an extreme example, but I think it conveys the point. We moderate risk just in case...

Finally, there is no way to get all Bogleheads to agree what the right answer is when it comes to risk taking. Furthermore, new, untested investor are likely to misjudge their own risk limit until they are truly tested. On the other hand, it's likely that an investor with the risk-taking gene may come right out of the box with 100% equity and never be seriously bothered by volatility. But of course, the risk-aware will say volatility is not actually the problem you need to be concerned about.

Know your goals, and who you are, and then set your allocation accordingly. Be aware that when you ask for allocation recommendations, the answers will vary according to the respondent"s own personal view, which may not be in sync with yours.

Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.

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

Post by HomerJ » Tue Jul 26, 2016 12:46 pm

Earl Lemongrab wrote:
HomerJ wrote:So what you are saying is that you don't have 500x expenses. Because you don't know what your expenses will be.

That's not what was said, so it doesn't make sense to refute something that wasn't said.

With assets now at ~500X my current yearly (very frugal) expenses (excluding taxes)

Nothing was said about future expenses. And since no one knows with any certainty what theirs will be, then considering scenarios makes sense.

Earl


His numbers are ridiculous. His "scenarios" include 90% of his $10 million dollars (or whatever he has, but it has to be millions and millions) being spent on health care.

One can come up with better estimates than "somewhere between one dollar and 9 million dollars"

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

Post by HomerJ » Tue Jul 26, 2016 12:49 pm

technovelist wrote:
longinvest wrote:
HomerJ wrote:You can control the maturity duration. Rising interest rates isn't really a problem. I welcome rising interest rates... I'd take the short-term hit, followed by years of higher yields. Inflation is the problem. But you can semi-control that too with short maturities duration, or inflation-adjusted bonds.

Homer,

Sorry for the corrections to your post (in blue), but I think that it is important for bond investors to think in terms of duration (which represents the weighted-average maturity of all individual coupons and principals).

Thanks for the reference to inflation-adjusted bonds. I find it amazing that most of the investors who are afraid that bonds could be crushed by inflation forget about TIPS (Treasury inflation protected securities).


I haven't forgotten about TIPS.

I just don't think it is a wise idea to buy fire insurance from an arsonist.


But you ignore that YOU can control the duration (thanks longinvest!) of the bond funds you buy. Which means YOU can control how much interest rates and inflation affect your bond holdings.

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

Post by Earl Lemongrab » Tue Jul 26, 2016 12:50 pm

HomerJ wrote:His numbers are ridiculous. His "scenarios" include 90% of his $10 million dollars (or whatever he has, but it has to be millions and millions) being spent on health care.

One can come up with better estimates than "somewhere between one dollar and 9 million dollars"

And that's fine, but don't set up a strawman to make it easy to knock around.

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

Post by NMJack » Tue Jul 26, 2016 1:11 pm

pkcrafter wrote:

every investor has a personal point of view and it cannot be changed by an internet discussion because it is in our genes.

the 100%ers should not be suggesting an all equity portfolio to anyone else because that someone else is probably not a full-blown risk taker, and if the recommendation is taken, the someone will sell in a crisis.


These two statements appear to contradict each other.

pkcrafter wrote:
100%ers seem optimistic without due reason to me, but what do I know, I'm somewhat risk averse and and therefore have respect for the potential outcomes that risk can dole out. I simply cannot understand the risk 100% are willing to take.


Paul - I've spent most of my investing career as a "100%er." Perhaps I can provide you with some insights into at least one such beast's perspective. It is not optimism. A 100%er who is overly optimistic (the markets will go up forever!) are often the ones who fail most miserably. They don't see things as they really are and they sometimes believe the world has changed and history has no meaning (they share this trait, by the way, with the overly-conservative nervous types on the other end of the spectrum). These are the saddest of the bunch. They start with a balanced portfolio, but when something like the mid-eighties or late-nineties come along, they go "all in." Likely at the worst possible time. If/when the crash comes and they sell, then they are the only ones who truly lose that 50% we always talk about. I can think of at least three individuals that I have known who fit this description.

When a successful 100%er commits to this approach as a long term strategy (which really needs to happen in their 20s or 30s), it is a "calculated risk." They do it with a full appreciation for history, and what has happened in the past. They understand that in order to win the game, they need to plow money in day in and day out, feast or famine; it is just math. Emotion serves no useful purpose in math. If you get all worried and upset about tomorrow's differential equations final, you'll likely fail because the wrong side of your brain is steering. I met my first successful 100%er at work back in 1987. Everybody was worked up about the big 20% one day drop. I asked this guy, a well respected engineer, how he felt about the market now? His response was a simple "I just wish I had more money to put in today." That was probably my first introduction to a successful 100%er.

I firmly believe, based on facts and not emotion, that the US market will continue to outperform all other asset classes over the long term (i.e. decades). I choose to use this belief to guide my investment strategy (others do not). I am more worried about not having enough money to take care of the unexpected challenges that may face me or my family during my retirement years than I am about the failure of US capitalism. Therefore, I've made a choice based upon what I believe to be a rational assessment of the situation. Those who think they can predict every expense in retirement ought to go read the current thread on long term care insurance:

viewtopic.php?f=2&t=195817

That thing is scarier than Japan! :shock:
Last edited by NMJack on Tue Jul 26, 2016 4:25 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 HomerJ » Tue Jul 26, 2016 2:29 pm

Earl Lemongrab wrote:
HomerJ wrote:His numbers are ridiculous. His "scenarios" include 90% of his $10 million dollars (or whatever he has, but it has to be millions and millions) being spent on health care.

One can come up with better estimates than "somewhere between one dollar and 9 million dollars"

And that's fine, but don't set up a strawman to make it easy to knock around.

Earl


What strawman?

Let me explain my reasoning for my comment.

He says "I have 500x current expenses, but I don't know if I can retire."
We all say "What?"
He says "Oh, well, I'm not sure how much my retirement expenses will be".
I reply "oh, then you really can't say you have 500x your expenses, because you don't know what your expenses will be"

You are correct he said "current" expenses, but then he went on to talk about retirement. So the 500x number is meaningless for the discussion about retirement.

My apologies if I was unclear.

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

Post by technovelist » Tue Jul 26, 2016 2:41 pm

NMJack wrote:I firmly believe, based on facts and not emotion, that the US market will continue to outperform all other asset classes over the long term (i.e. decades).


Exactly what facts do you have about future events? Those are pretty hard to come by, in my experience.
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Re: Help Me Understand: Why Shouldn't AA Be 100% Stocks During Accumulation Phase?

Post by technovelist » Tue Jul 26, 2016 2:42 pm

HomerJ wrote:
technovelist wrote:
longinvest wrote:
HomerJ wrote:You can control the maturity duration. Rising interest rates isn't really a problem. I welcome rising interest rates... I'd take the short-term hit, followed by years of higher yields. Inflation is the problem. But you can semi-control that too with short maturities duration, or inflation-adjusted bonds.

Homer,

Sorry for the corrections to your post (in blue), but I think that it is important for bond investors to think in terms of duration (which represents the weighted-average maturity of all individual coupons and principals).

Thanks for the reference to inflation-adjusted bonds. I find it amazing that most of the investors who are afraid that bonds could be crushed by inflation forget about TIPS (Treasury inflation protected securities).


I haven't forgotten about TIPS.

I just don't think it is a wise idea to buy fire insurance from an arsonist.


But you ignore that YOU can control the duration (thanks longinvest!) of the bond funds you buy. Which means YOU can control how much interest rates and inflation affect your bond holdings.


Well, this really isn't about me, as I have no bonds or stocks in my portfolio. We were discussing the effect of interest rates on bonds, for those who do have them.
In theory, theory and practice are identical. In practice, they often differ.

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

Post by fblade007 » Tue Jul 26, 2016 2:55 pm

In stead of discussing 90 or 100% stocks, wouldn't it be more logic to not "time" the market but have a pre-defined logic to double down at a certain point in time?

For Example.

I was thinking to double down on stock the year after the S&P had a negative return.

Lets say you invest 50K a year but you are not comfortable putting all cash in just like that. You could make an investment plan where you still keep to invest that 50K no matter what but each negative year, the Y+1 you would invest 100K in stead of 50K. Lets not focus on the figures used because you could run out of cash fast but lets say that you can to a certain point do that?

Based on there returns for the last 25 years it looks like a winning strategy. (25 because thats my investment goal for retirement):

2015 1,30%
2014 13,81%
2013 32,43%
2012 15,88%
2011 2,07%
2010 14,87%
2009 27,11%
2008 -37,22%
2007 5,46%
2006 15,74%
2005 4,79%
2004 10,82%
2003 28,72%
2002 -22,27%
2001 -11,98%
2000 -9,11%
1999 21,11%
1998 28,73%
1997 33,67%
1996 23,06%
1995 38,02%
1994 1,19%
1993 10,17%
1992 7,60%
1991 30,95%

Now again the goal is not to time the market, its only to have a practise in place to have a higher ROI where you put more money in the market when the S&P is down but not touching your base investment plan. It seems to be an easy way to reach a higher ROI then the S&P average return ?

What am I mathematically missing?

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

Post by NMJack » Tue Jul 26, 2016 4:20 pm

technovelist wrote:
NMJack wrote:I firmly believe, based on facts and not emotion, that the US market will continue to outperform all other asset classes over the long term (i.e. decades).


Exactly what facts do you have about future events? Those are pretty hard to come by, in my experience.


Who said anything about "future facts?" :confused

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

Post by slayed » Tue Jul 26, 2016 4:29 pm

fblade007 wrote:In stead of discussing 90 or 100% stocks, wouldn't it be more logic to not "time" the market but have a pre-defined logic to double down at a certain point in time?

For Example.

I was thinking to double down on stock the year after the S&P had a negative return.

Lets say you invest 50K a year but you are not comfortable putting all cash in just like that. You could make an investment plan where you still keep to invest that 50K no matter what but each negative year, the Y+1 you would invest 100K in stead of 50K. Lets not focus on the figures used because you could run out of cash fast but lets say that you can to a certain point do that?

...

Now again the goal is not to time the market, its only to have a practise in place to have a higher ROI where you put more money in the market when the S&P is down but not touching your base investment plan. It seems to be an easy way to reach a higher ROI then the S&P average return ?

What am I mathematically missing?


Where is the extra 50k coming from and what is it invested in during a positive year? I think you are not factoring in the opportunity cost of that 50k not being in the market during positive years.

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

Post by Earl Lemongrab » Tue Jul 26, 2016 4:37 pm

HomerJ wrote:What strawman?

Well, the one you're going lay out in the rest of the message.

HomerJ wrote:Let me explain my reasoning for my comment.

He says "I have 500x current expenses, but I don't know if I can retire."
We all say "What?"
He says "Oh, well, I'm not sure how much my retirement expenses will be".
I reply "oh, then you really can't say you have 500x your expenses, because you don't know what your expenses will be"

You are correct he said "current" expenses, but then he went on to talk about retirement. So the 500x number is meaningless for the discussion about retirement.

Do you know anyone who does what their future expenses are? N X current is the one thing you can say for certain. Anything else is a projection. The future brings unknown expenses and unknown investment returns.

Quibbling with the 500X number is pointless. He said what he meant.

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

Post by TOJ » Tue Jul 26, 2016 4:40 pm

pkcrafter wrote: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?
Is your assumption that in the long term stocks are safe? Do you have a guarantee that all your investments and earnings will be there if you simply hold until you are X number of years from retirement? Just how many years is that by the way?

Just asking a question about allocation always leads to a lengthy discussion about risk because every investor has a personal point of view and it cannot be changed by an internet discussion because it is in our genes. Some people even have a risk-taking gene and others don't. One thing is clear though, the 100%ers should not be suggesting an all equity portfolio to anyone else because that someone else is probably not a full-blown risk taker, and if the recommendation is taken, the someone will sell in a crisis.

100%ers seem optimistic without due reason to me, but what do I know, I'm somewhat risk averse and and therefore have respect for the potential outcomes that risk can dole out. I simply cannot understand the risk 100% are willing to take. Of course they argue there is no risk. :happy I'll never understand it and I don't even try any more. But what if something does occur that causes a major loss without recovery in your allotted time frame? Your only reaction will be, I didn't know (add what happened here)... I guess us risk averse folks simply believe it's not all mapped out, something we have not thought of could certainly happen. I don't see how 100%ers can argue with that.

I guess those investors who know that they are at least somewhat risk averse are aware that one can drown in a small lake with an average depth of 4 feet. We apply Pascal's reasoning regarding God to stock risk. Pascal's Wager - Blaise Pascal was a 17th century french philosopher, mathematician and physicist. This is his famous wager: the argument is that it is in one's own best interest to behave as if God exists, since the possibility of eternal punishment in hell outweighs any advantage of believing otherwise. OK, I know it's an extreme example, but I think it conveys the point. We moderate risk just in case...

Finally, there is no way to get all Bogleheads to agree what the right answer is when it comes to risk taking. Furthermore, new, untested investor are likely to misjudge their own risk limit until they are truly tested. On the other hand, it's likely that an investor with the risk-taking gene may come right out of the box with 100% equity and never be seriously bothered by volatility. But of course, the risk-aware will say volatility is not actually the problem you need to be concerned about.

Know your goals, and who you are, and then set your allocation accordingly. Be aware that when you ask for allocation recommendations, the answers will vary according to the respondent"s own personal view, which may not be in sync with yours.

Paul


100%ers aren't 100% until retirement and they are buying into that same bear you're rebalancing into. It's just a later and faster slide.

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

Post by HomerJ » Tue Jul 26, 2016 4:41 pm

Earl Lemongrab wrote:
HomerJ wrote:What strawman?

Well, the one you're going lay out in the rest of the message.

HomerJ wrote:Let me explain my reasoning for my comment.

He says "I have 500x current expenses, but I don't know if I can retire."
We all say "What?"
He says "Oh, well, I'm not sure how much my retirement expenses will be".
I reply "oh, then you really can't say you have 500x your expenses, because you don't know what your expenses will be"

You are correct he said "current" expenses, but then he went on to talk about retirement. So the 500x number is meaningless for the discussion about retirement.

Do you know anyone who does what their future expenses are? N X current is the one thing you can say for certain. Anything else is a projection. The future brings unknown expenses and unknown investment returns.

Quibbling with the 500X number is pointless. He said what he meant.

Earl


I agree the 500x number was pointless. I will bow out now. Good day to you, sir.

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

Post by fblade007 » Tue Jul 26, 2016 4:57 pm

slayed wrote:Where is the extra 50k coming from and what is it invested in during a positive year? I think you are not factoring in the opportunity cost of that 50k not being in the market during positive years.


Well the additional 50K would come from savings of course. Lets say you can save 100K a year from which you invest half as per you base plan and cash the other half for the second leg of your investment plan.

The first leg if the investment plan - in the long run - would compound let's say for ease of argument at the 10,52% average of the S&P.

The ROI on the second leg investment, ie the additional 50K when the S&P was negative the year before would easily hit a higher compound rate. if we need to be contrarian to make money it would make perfect sense and It would make sense mathematically speaking If your money doubles every 7 years at 10% ROI, the second leg would double in less then 7. In fact you are just dollar cost averaging but putting more in the market after a down year...

One of the comments here was that a 100% portfolio guy "wished" he had more money when stocks were down 20% .. well only way to achieve that is to save for it .. no?

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

Post by Kevin K » Tue Jul 26, 2016 5:57 pm

To the OP:

Tyler over at Portfolio Charts wrote this article specifically in response to your original question. Portfolio Charts is an amazing tool and IMHO this answers your question in great depth and in the process shows just how unnecessary it is to take huge risks in the accumulation phase and then dial them down over time.

https://portfoliocharts.com/2016/07/25/thinking-beyond-stocks-can-fortify-your-accumulation-plan/

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

Post by Lieutenant.Columbo » Tue Jul 26, 2016 7:42 pm

longinvest wrote:I think that our philosophy has it right:

3 Never bear too much or too little risk

In other words, I must have both stocks and bonds, in my portfolio. I like Benjamin Graham's advice: "We have suggested as a fundamental guiding rule that the investor should never have less than 25% or more than 75% of his funds in common stocks, with a consequence inverse range of 75% to 25% in bonds. There is an implication here that the standard division should be an equal one, or 50-50, between the two major investment mediums."

5 Never try to time the market

In other words, I must ignore interest rates and valuations; I just have to choose an asset allocation (AA) that fits my personal circumstances, regardless of the current markets.

When I have money to invest, I simply invest it in the asset(s) below their target allocation.

When I need to withdraw money, I simply sell from the asset(s) above their target allocation.

10 Stay the course

I try, as much as possible, to ignore the noise. I stick to my AA and infrequently rebalance to it on a pre-set schedule. I don't let the market decide for me when I should rebalance (many of those who tried that, using rebalancing bands, failed to continue rebalancing their portfolio over and over, during the 2008 crisis).

Investing so as to achieve my financial objectives* is simple. I just need to follow our 10 principles.

* As opposed to maximizing wealth on the deathbed.


thank you for this refereeing reminder of the basics
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Re: Help Me Understand: Why Shouldn't AA Be 100% Stocks During Accumulation Phase?

Post by Lieutenant.Columbo » Tue Jul 26, 2016 7:43 pm

Kevin K wrote:To the OP:

Tyler over at Portfolio Charts wrote this article specifically in response to your original question. Portfolio Charts is an amazing tool and IMHO this answers your question in great depth and in the process shows just how unnecessary it is to take huge risks in the accumulation phase and then dial them down over time.

https://portfoliocharts.com/2016/07/25/thinking-beyond-stocks-can-fortify-your-accumulation-plan/


thank you for pointing Tyler's article; I just read it; its much over my head, but I will come back to it in a few days/weeks and I am sure I will be ready to take away much more then
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Re: Help Me Understand: Why Shouldn't AA Be 100% Stocks During Accumulation Phase?

Post by pkcrafter » Tue Jul 26, 2016 7:56 pm

Thanks for the reply, Jack. I'm not sure what information you see as conflicting. Do you mean suggesting to a newbie that he go 100% stock? You can influence a new investor because he probably does not know what allocation is best until he gains some experience, or more importantly, knowledge.

TOJ wrote:
100%ers aren't 100% until retirement and they are buying into that same bear you're rebalancing into. It's just a later and faster slide.

Are we referring to the same thing? I consider a 100%er as someone who is not retired, but invests 100% in stocks as long as he's working.

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

Post by NMJack » Tue Jul 26, 2016 9:02 pm

pkcrafter wrote:Thanks for the reply, Jack. I'm not sure what information you see as conflicting. Paul


I was just poking fun at the suggestion that "points of view can't be changed because it is in our genes" (i.e. hardwired), but that a 100%er should not advocate their approach because it might change somebody's point of view. 8-)

pkcrafter wrote:

every investor has a personal point of view and it cannot be changed by an internet discussion because it is in our genes.

the 100%ers should not be suggesting an all equity portfolio to anyone else because that someone else is probably not a full-blown risk taker, and if the recommendation is taken, the someone will sell in a crisis.


Your point is well taken. 100%ers, along with everybody else, should try our best not to steer anybody in the wrong direction on anything. We just can't agree on what "bad" direction is. :sharebeer

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

Post by Lieutenant.Columbo » Tue Jul 26, 2016 9:25 pm

NMJack wrote:100%ers, along with everybody else, should try our best not to steer anybody in the wrong direction on anything. We just can't agree on what "bad" direction is. :sharebeer


OP here

trying to make sense of this plethora of insightful replies

I have a few Qs for you:

1. would you mind sharing a little about your portfolio (or AA) currently, how you envision your portfolio (or AA) 10 yrs from now, and then, say 25 yrs from now?

2. are you professionally active? if so, how many yrs before retiring?

3. if you were (or maybe are) high earner AND if/when you decide to hold bonds, what Bond funds would you hold? and would you hold them in taxable or tax-advantaged accounts?

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

Post by siamond » Tue Jul 26, 2016 9:28 pm

Kevin K wrote:To the OP:

Tyler over at Portfolio Charts wrote this article specifically in response to your original question. Portfolio Charts is an amazing tool and IMHO this answers your question in great depth and in the process shows just how unnecessary it is to take huge risks in the accumulation phase and then dial them down over time.

https://portfoliocharts.com/2016/07/25/thinking-beyond-stocks-can-fortify-your-accumulation-plan/

This is indeed a great write-up, clearly illustrating the power of the various tools Tyler came up with. I have a stock-heavy Asset Allocation, and he planted some doubts in my mind, and made me (once again!) explore various alternatives with his various calculators... I'd love to see more discussion about this article, and more analysis about this cloud of possible portfolios that Tyler assembled.

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

Post by NMJack » Tue Jul 26, 2016 9:58 pm

JLMA wrote:
NMJack wrote:100%ers, along with everybody else, should try our best not to steer anybody in the wrong direction on anything. We just can't agree on what "bad" direction is. :sharebeer


OP here

trying to make sense of this plethora of insightful replies

I have a few Qs for you:



JLMA wrote: 1. would you mind sharing a little about your portfolio (or AA) currently, how you envision your portfolio (or AA) 10 yrs from now, and then, say 25 yrs from now?

2. are you professionally active? if so, how many yrs before retiring?


Let's just say that most/all of my career is behind me, and I've never bought a bond as an investment.

JLMA wrote: 3. if you were (or maybe are) high earner AND if/when you decide to hold bonds, what Bond funds would you hold? and would you hold them in taxable or tax-advantaged accounts?



High earner is a relative term. I would encourage folks to live well well below their means, save aggressively and invest heavily in stocks from as early as possible. Don't deprive your family of anything important (safe neighborhood, good schools, good health care), but don't teach them a habit of keeping up with the Jones' and do teach them that if they ever want money from mom/dad, just ask............for some work to do. I never turned down a willing household employee.

If/when I decide to hold bonds, it will likely be either TIPS (if they ever get out of the toilet) or short term treasuries. I don't see a bond as an investment. It is crappy, expensive insurance (ducking). Place me squarely in the Warren Buffet camp on this one. 8-) I would hold them in tax advantaged accounts, traditional first (slower growth mitigates RMD challenges).

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

Post by Lieutenant.Columbo » Tue Jul 26, 2016 10:12 pm

thank you for elaborating

a few more Questions:

1.
NMJack wrote:If/when I decide to hold bonds, it will likely be either TIPS

why TIPS?

2.
NMJack wrote: (if they ever get out of the toilet)

would this be timing the market? :?

3.
NMJack wrote: or short term treasuries

why short term?

4.
NMJack wrote:I would hold them in tax advantaged accounts, traditional first (slower growth mitigates RMD challenges).

what did ou mean with "traditional first"?

5. if you ever buy TIPS, what % of your AA would TIPS be?

6. did you ever do Tax Loss Harvesting? in my limited understanding, TLH appears to me like a very complex process that does not necessarily result in large savings

thank you very much!

NO more questions after these ones :happy
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Re: Help Me Understand: Why Shouldn't AA Be 100% Stocks During Accumulation Phase?

Post by young-ish » Tue Jul 26, 2016 10:37 pm

To those thinking of going 100% stocks here is a test:

Step 1 - Save up 2 years of living expenses in cash
Step 2 - Wait until the next 20% decline in the S&P 500 index
Step 3 - Deploy half of your cash savings into the stock market after the 20% drop

If you complete step 3 you can deploy the other half of your savings in stocks after another big drop in the S&P 500 (preferably at 52-week lows).

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

Post by NMJack » Tue Jul 26, 2016 10:53 pm

JLMA wrote:thank you for elaborating

a few more Questions:

1.
NMJack wrote:If/when I decide to hold bonds, it will likely be either TIPS

why TIPS?

2.
NMJack wrote: (if they ever get out of the toilet)

would this be timing the market? :?



TIPS are the only bonds that guarantee a known real return (assuming they are held to maturity). If I buy insurance that my buying power will be there in five years, I want dang good insurance! Since 5 year TIPS currently have a negative real return, then they don't provide the insurance I would be looking for. I'll be the first to admit that I know nothing about market timing because I have never done it or tried. 8-)

A 100%er isn't tempted to market time because they really can't (other then deciding to invest their Roth money on Jan 2 or "see how the market is doing" - I've always been Jan 2)

JLMA wrote:3.
NMJack wrote: or short term treasuries

why short term?


No term risk.

JLMA wrote:4.
NMJack wrote:I would hold them in tax advantaged accounts, traditional first (slower growth mitigates RMD challenges).

what did ou mean with "traditional first"?


Traditional IRA/401K first, Roth second.

JLMA wrote:5. if you ever buy TIPS, what % of your AA would TIPS be?


Probably 50% to 100% of my bond holdings, whatever I might decide I wanted that to be. I'm not at that point yet.

JLMA wrote:[6. did you ever do Tax Loss Harvesting? in my limited understanding, TLH appears to me like a very complex process that does not necessarily result in large savings


I have used TLH on one occasion. I would have done it more, but I failed to educate myself on it earlier. :annoyed I missed some opportunity on that one.

JLMA wrote:Thank you very much!

NO more questions after these ones :happy


You're welcome. Ask as many as you would like. I'm here all day/week/month. :sharebeer

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

Post by NMJack » Tue Jul 26, 2016 10:57 pm

young-ish wrote:To those thinking of going 100% stocks here is a test:

Step 1 - Save up 2 years of living expenses in cash
Step 2 - Wait until the next 20% decline in the S&P 500 index
Step 3 - Deploy half of your cash savings into the stock market after the 20% drop

If you complete step 3 you can deploy the other half of your savings in stocks after another big drop in the S&P 500 (preferably at 52-week lows).


Young-ish (if that is your real name :twisted: ). You've got this all wrong. The profit from 100% stock is earned *before* the market drops. Yeesh!!!

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

Post by technovelist » Tue Jul 26, 2016 11:00 pm

NMJack wrote:
technovelist wrote:
NMJack wrote:I firmly believe, based on facts and not emotion, that the US market will continue to outperform all other asset classes over the long term (i.e. decades).


Exactly what facts do you have about future events? Those are pretty hard to come by, in my experience.


Who said anything about "future facts?" :confused


Ok, you said "you believe", not "you know". It sounded like you were pretty certain, but you didn't claim knowledge, only opinion, so I retract my question.
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Re: Help Me Understand: Why Shouldn't AA Be 100% Stocks During Accumulation Phase?

Post by NMJack » Tue Jul 26, 2016 11:03 pm

technovelist wrote:
NMJack wrote:
technovelist wrote:
NMJack wrote:I firmly believe, based on facts and not emotion, that the US market will continue to outperform all other asset classes over the long term (i.e. decades).


Exactly what facts do you have about future events? Those are pretty hard to come by, in my experience.


Who said anything about "future facts?" :confused


Ok, you said "you believe", not "you know". It sounded like you were pretty certain, but you didn't claim knowledge, only opinion, so I retract my question.


Thanks technovelist! We'll get through this.... :sharebeer

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

Post by Ari » Wed Jul 27, 2016 12:23 am

fblade007 wrote:One of the comments here was that a 100% portfolio guy "wished" he had more money when stocks were down 20% .. well only way to achieve that is to save for it .. no?


Sure. But the problem remains. While you're waiting for the S&P to go negative, you're losing out on not having that money invested. Since the stock market on average goes up, on average you'll be worse off waiting for the drop. If you invest the money now, it'll most likely first grow and then contract in the drop, but chances are after the drop you'll still have more money than you started with.

This is the old "have some dry powder left in the keg" fallacy. It doesn't work. Time in the market, not timing the market, is the key.
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Re: Help Me Understand: Why Shouldn't AA Be 100% Stocks During Accumulation Phase?

Post by TonyDAntonio » Wed Jul 27, 2016 12:43 am

This is just false. While working for the phone company the vast majority of my friends who were invested in the company 401k were totally in stock funds. We didn't know any better. We thought our jobs would last until retirement (and for the most part they did). And we all just stuck it out through downturns. Heck, many times we didn't even know there was much of a downturn. We just kept plowing money into our 401ks. I just discussed finances with another (non-phone company guy) friend and he said he's never had any bonds. He owns stocks and real estate. He also owns a small appliance store which does not supply him with much income. He's 61. I think many people can deal without bonds. I know a lot of them and they are all doing just fine.

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.

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

Post by technovelist » Wed Jul 27, 2016 12:52 am

NMJack wrote:
technovelist wrote:
NMJack wrote:
technovelist wrote:
NMJack wrote:I firmly believe, based on facts and not emotion, that the US market will continue to outperform all other asset classes over the long term (i.e. decades).


Exactly what facts do you have about future events? Those are pretty hard to come by, in my experience.


Who said anything about "future facts?" :confused


Ok, you said "you believe", not "you know". It sounded like you were pretty certain, but you didn't claim knowledge, only opinion, so I retract my question.


Thanks technovelist! We'll get through this.... :sharebeer

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

Post by Lieutenant.Columbo » Wed Jul 27, 2016 6:59 am

NMJack wrote:Ask as many as you would like. I'm here all day/week/month. :sharebeer


ok, I do have more Qs... :?

1. how much in yearly expenses do you have in easy access $$ to live on if the stock market dips, so that you wouldn't have to sell low?

2. your portfolio, would you mind sharing which stock you own, and in which approximate % and whether on taxable or tax-advantaged account?

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

Post by NMJack » Wed Jul 27, 2016 8:57 am

JLMA wrote:
NMJack wrote:Ask as many as you would like. I'm here all day/week/month. :sharebeer


ok, I do have more Qs... :?

1. how much in yearly expenses do you have in easy access $$ to live on if the stock market dips, so that you wouldn't have to sell low?

2. your portfolio, would you mind sharing which stock you own, and in which approximate % and whether on taxable or tax-advantaged account?

thanks


Mutual funds are always easy access. I'm not worried about selling low. Even if the market drops 50%, with FIFO I would be selling stocks bought in the 1980s or 1990s, which would still be a strong gain. If/when I build a bond ladder, it will likely be a five year treasury ladder, so at that time I would be selling treasuries bought five years earlier. For those who are just getting started, I would encourage a cash emergency fund (or perhaps savings bonds, which I used earlier in my life).

For the past 25+ years, I've owned nothing but index funds (S&P 500, US Total Market, ACWI). I think there was a time when my employer forced us to take the 401k match in company stock, but I always exchanged that as soon as I could.
Last edited by NMJack on Wed Jul 27, 2016 2:07 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 Engineer250 » Wed Jul 27, 2016 10:46 am

young-ish wrote:To those thinking of going 100% stocks here is a test:

Step 1 - Save up 2 years of living expenses in cash
Step 2 - Wait until the next 20% decline in the S&P 500 index
Step 3 - Deploy half of your cash savings into the stock market after the 20% drop

If you complete step 3 you can deploy the other half of your savings in stocks after another big drop in the S&P 500 (preferably at 52-week lows).


Step 2 - nope.

Ari wrote:Sure. But the problem remains. While you're waiting for the S&P to go negative, you're losing out on not having that money invested. Since the stock market on average goes up, on average you'll be worse off waiting for the drop. If you invest the money now, it'll most likely first grow and then contract in the drop, but chances are after the drop you'll still have more money than you started with.

This is the old "have some dry powder left in the keg" fallacy. It doesn't work. Time in the market, not timing the market, is the key.


A 100% equity person should no more time the market than anyone else.
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Re: Help Me Understand: Why Shouldn't AA Be 100% Stocks During Accumulation Phase?

Post by young-ish » Wed Jul 27, 2016 2:14 pm

Engineer250 wrote:
young-ish wrote:To those thinking of going 100% stocks here is a test:

Step 1 - Save up 2 years of living expenses in cash
Step 2 - Wait until the next 20% decline in the S&P 500 index
Step 3 - Deploy half of your cash savings into the stock market after the 20% drop

If you complete step 3 you can deploy the other half of your savings in stocks after another big drop in the S&P 500 (preferably at 52-week lows).


Step 2 - nope.

A 100% equity person should no more time the market than anyone else.


This test is for someone who is asking about putting all their eggs in an extremely risky basket but hasn't yet lived through a bear market. By deploying their hard earned cash after a big market decline they will have passed the test and may be a candidate for a highly risky portfolio.

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

Post by KlangFool » Wed Jul 27, 2016 2:19 pm

NMJack wrote:Mutual funds are always easy access. I'm not worried about selling low. Even if the market drops 50%, with FIFO I would be selling stocks bought in the 1980s or 1990s, which would still be a strong gain. If/when I build a bond ladder, it will likely be a five year treasury ladder, so at that time I would be selling treasuries bought five years earlier. For those who are just getting started, I would encourage a cash emergency fund (or perhaps savings bonds, which I used earlier in my life).

For the past 25+ years, I've owned nothing but index funds (S&P 500, US Total Market, ACWI). I think there was a time when my employer forced us to take the 401k match in company stock, but I always exchanged that as soon as I could.


NMJack,

In summary, you are 100% stock with emergency fund. May I know what is the typical size of your emergency fund? 6 months of expense? 1 year of expense?

KlangFool

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

Post by NMJack » Wed Jul 27, 2016 2:54 pm

KlangFool wrote:
NMJack wrote:Mutual funds are always easy access. I'm not worried about selling low. Even if the market drops 50%, with FIFO I would be selling stocks bought in the 1980s or 1990s, which would still be a strong gain. If/when I build a bond ladder, it will likely be a five year treasury ladder, so at that time I would be selling treasuries bought five years earlier. For those who are just getting started, I would encourage a cash emergency fund (or perhaps savings bonds, which I used earlier in my life).

For the past 25+ years, I've owned nothing but index funds (S&P 500, US Total Market, ACWI). I think there was a time when my employer forced us to take the 401k match in company stock, but I always exchanged that as soon as I could.


NMJack,

In summary, you are 100% stock with emergency fund. May I know what is the typical size of your emergency fund? 6 months of expense? 1 year of expense?

KlangFool


Klang - I've probably shared as much personal info as I care to on the internet. In summary, I encourage young investors to consider 100% equities with a reasonable emergency fund based upon their personal responsibilities (i.e. single guy in an apartment may not need any, married guy with a kid and SAHM will need more). If they can commit to that path, I think they will likely benefit. I don't make similar recommendations to folks further along in their lives, as they likely have many more variables and a current investment situation that is more complicated than one grand in checking. I didn't learn that religion until I was around 30, but it has served me well. As always, YMMV.

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

Post by Engineer250 » Wed Jul 27, 2016 3:09 pm

young-ish wrote:This test is for someone who is asking about putting all their eggs in an extremely risky basket but hasn't yet lived through a bear market. By deploying their hard earned cash after a big market decline they will have passed the test and may be a candidate for a highly risky portfolio.


I'm saying even a 100% equities person knows that time spent waiting out the market is time wasted. If you can afford to contribute to your IRA $5500 on Jan 1 that's the best. If you don't have $5500 ready to go, it's best to invest as you have the money. Waiting out the market means you give up potential gains the whole time you are waiting.

Maybe the only test for a 100% equities person is to see what they do in the event of a downturn. Do they stick to their AA? Do they reduce or increase contributions?

"It is not the critic who counts; not the man who points out how the strong man stumbles, or where the doer of deeds could have done them better. The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood; who strives valiantly; who errs, who comes short again and again, because there is no effort without error and shortcoming; but who does actually strive to do the deeds; who knows great enthusiasms, the great devotions; who spends himself in a worthy cause; who at the best knows in the end the triumph of high achievement, and who at the worst, if he fails, at least fails while daring greatly, so that his place shall never be with those cold and timid souls who neither know victory nor defeat." -Teddy Roosevelt, 1910

We are all of us tested with the volatility of the stock market. Whether stocks are going screaming up and coming crashing down. Whether your allocation is 30/70, 50/50, 80/20, or 100/0. Someone who stands firm at 100/0 is no more brave than someone who stands firm at 50/50. Plenty of 80/20 folks have freaked out in downturns and increased their bond allocation. Many 100/0 folks have done nothing. 2008 is apparently not enough of a battle test for enough people, we'll see what the next downturn brings when we are all tested again. :beer
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Re: Help Me Understand: Why Shouldn't AA Be 100% Stocks During Accumulation Phase?

Post by young-ish » Wed Jul 27, 2016 3:21 pm

Engineer250 wrote:
young-ish wrote:This test is for someone who is asking about putting all their eggs in an extremely risky basket but hasn't yet lived through a bear market. By deploying their hard earned cash after a big market decline they will have passed the test and may be a candidate for a highly risky portfolio.


Maybe the only test for a 100% equities person is to see what they do in the event of a downturn. Do they stick to their AA? Do they reduce or increase contributions?



Yes, exactly. If after the downturn they stick with their 100% equity plan they are more likely to stick with it next time when an even bigger drawdown occurs.

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

Post by KlangFool » Wed Jul 27, 2016 3:28 pm

NMJack wrote:
Klang - I've probably shared as much personal info as I care to on the internet. In summary, I encourage young investors to consider 100% equities with a reasonable emergency fund based upon their personal responsibilities (i.e. single guy in an apartment may not need any, married guy with a kid and SAHM will need more). If they can commit to that path, I think they will likely benefit. I don't make similar recommendations to folks further along in their lives, as they likely have many more variables and a current investment situation that is more complicated than one grand in checking. I didn't learn that religion until I was around 30, but it has served me well. As always, YMMV.


NMJack,

No problem with whatever you choose to share. I just want to be clear that you are not one of those 100% folks that claimed emergency fund is not needed.

KlangFool

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

Post by NMJack » Wed Jul 27, 2016 3:29 pm

Engineer250 wrote: Whether your allocation is 30/70, 50/50, 80/20, or 100/0. Someone who stands firm at 100/0 is no more brave than someone who stands firm at 50/50. Plenty of 80/20 folks have freaked out in downturns and increased their bond allocation. Many 100/0 folks have done nothing. 2008 is apparently not enough of a battle test for enough people, we'll see what the next downturn brings when we are all tested again. :beer


I think a true 50/50 is more brave than a 100/0.

A 100/0 can just shrug and say, "oh crap - my portfolio value just dropped 50%. Of course, there's nothing I can do about it until my next paycheck when I'll buy at 50% off. Hey, that's probably good!"

OTHO: the 50/50 is at a moment of crisis. His portfolio just dropped 25%, and it wasn't as big to begin with because he has been a relatively conservative investor. He now has to come face-to-face with the beast and move 17% of his remaining hard earned investment into the meat grinder, while all the pudits and friends shout "It's going to zero! Sell everything!!!!" That is what takes courage! :sharebeer

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

Post by sreynard » Wed Jul 27, 2016 3:36 pm

stemikger wrote:
dbr wrote:One thing that has to be understood about this high stock allocation is that it is a strategy of riding greater returns on average while imposing high uncertainty, aka volatility, both short and long term (stocks are risky in the long run).

In the example above the 100% stock strategy has $1M. A more conservative strategy would only have grown wealth to $500K. After the loss the stock investor is just as well off. The problem is whether or not that investor has undertaken this with an understanding that this can be the outcome. If that investor is counting on having $1M without fail then his plans are at great risk. If he is OK with a plan B of $500K and really understands that, then the strategy works. The 50% loss can happen just as well during accumulation and also not recover for a long time.


Good Points! I never thought of it this way!


Yes, very well said indeed. This agrees with many of the studies I've read recently. The all stock strategy is way more risky, but much of that risk is to the upside, as long as you are not forced to liquidate. While a 100% stock portfolio could easily do as badly as a conservative portfolio, it is likely it will do a lot better. A huge market drop would be from a much higher point.

Unless you're going to turn around that often used cliche, "Next time it's going to be different". . . . :twisted:

But I could be totally wrong and look like an idiot 10 years from now. At least I'll have plenty of company in the financial idiots club. :wink:

Which reminds me. I wonder how all those "never pay off your mortgage, pull out all the equity and invest it" guys are doing. The ones I knew lost their jobs back in 2001 and I haven't heard from them.

KlangFool
Posts: 7178
Joined: Sat Oct 11, 2008 12:35 pm

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

Post by KlangFool » Wed Jul 27, 2016 3:37 pm

young-ish wrote:
Engineer250 wrote:
young-ish wrote:This test is for someone who is asking about putting all their eggs in an extremely risky basket but hasn't yet lived through a bear market. By deploying their hard earned cash after a big market decline they will have passed the test and may be a candidate for a highly risky portfolio.


Maybe the only test for a 100% equities person is to see what they do in the event of a downturn. Do they stick to their AA? Do they reduce or increase contributions?



Yes, exactly. If after the downturn they stick with their 100% equity plan they are more likely to stick with it next time when an even bigger drawdown occurs.


young-ish,

<< If after the downturn they stick with their 100% equity plan they are more likely to stick with it next time when an even bigger drawdown occurs.>>

IMHO, it does not matter whether someone want to stick with 100%. If they run out of emergency fund and they are unemployed, they will be forced to stop investing and sell their stock holding. And, if the down turn /recession last long enough, the damage will be permanent and there will be no recovery from that.

It is as simple as that.

KlangFool

NMJack
Posts: 836
Joined: Sun Feb 14, 2016 1:22 pm

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

Post by NMJack » Wed Jul 27, 2016 3:37 pm

KlangFool wrote:
NMJack wrote:
Klang - I've probably shared as much personal info as I care to on the internet. In summary, I encourage young investors to consider 100% equities with a reasonable emergency fund based upon their personal responsibilities (i.e. single guy in an apartment may not need any, married guy with a kid and SAHM will need more). If they can commit to that path, I think they will likely benefit. I don't make similar recommendations to folks further along in their lives, as they likely have many more variables and a current investment situation that is more complicated than one grand in checking. I didn't learn that religion until I was around 30, but it has served me well. As always, YMMV.


NMJack,

No problem with whatever you choose to share. I just want to be clear that you are not one of those 100% folks that claimed emergency fund is not needed.

KlangFool


If somebody is saving aggressively and investing 100% equities, they may not need a separate FI emergency fund. If they are young and wish to gamble, they may look at their job and life situation and just decide to let it all ride on equities. They will still have resources in an emergency, it just might drive a sale at a "bad" time (there is never a good time to sell stocks unless looking in the rearview mirror). IIRC, once I went 100% I didn't really have any significant FI as an emergency fund until years later. I had started buying savings bonds for my kids education, and wound up with more than I needed, so that became my emergency fund. :oops:

As a committed, long term investor, I have never really worried too much if 100% would force a sale during a perfect storm. The math still would tell me I was playing a smart long term strategy. You don't have to win every hand to win the game! (hey, that isn't bad, did I just invent that?) 8-)

(probably not)

dbr
Posts: 24132
Joined: Sun Mar 04, 2007 9:50 am

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

Post by dbr » Wed Jul 27, 2016 3:56 pm

sreynard wrote:
stemikger wrote:
dbr wrote:One thing that has to be understood about this high stock allocation is that it is a strategy of riding greater returns on average while imposing high uncertainty, aka volatility, both short and long term (stocks are risky in the long run).

In the example above the 100% stock strategy has $1M. A more conservative strategy would only have grown wealth to $500K. After the loss the stock investor is just as well off. The problem is whether or not that investor has undertaken this with an understanding that this can be the outcome. If that investor is counting on having $1M without fail then his plans are at great risk. If he is OK with a plan B of $500K and really understands that, then the strategy works. The 50% loss can happen just as well during accumulation and also not recover for a long time.


Good Points! I never thought of it this way!


Yes, very well said indeed. This agrees with many of the studies I've read recently. The all stock strategy is way more risky, but much of that risk is to the upside, as long as you are not forced to liquidate. While a 100% stock portfolio could easily do as badly as a conservative portfolio, it is likely it will do a lot better. A huge market drop would be from a much higher point.

Unless you're going to turn around that often used cliche, "Next time it's going to be different". . . . :twisted:

But I could be totally wrong and look like an idiot 10 years from now. At least I'll have plenty of company in the financial idiots club. :wink:

Which reminds me. I wonder how all those "never pay off your mortgage, pull out all the equity and invest it" guys are doing. The ones I knew lost their jobs back in 2001 and I haven't heard from them.


I would still be sure to underline the caveat that "The problem is whether or not that investor has undertaken this with an understanding that this can be the outcome. If that investor is counting on having $1M without fail then his plans are at great risk."

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