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

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Engineer250
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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 5:53 pm

NMJack wrote:
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


Very valid points. But then the 50/50 guy can pick when he rebalances, right? And buying at a low with "dry powder" is supposed to be the dream around here. So the 50/50 might feel better that at least he can do something. 100/0 guy just has to shrug and do nothing. I don't think the dry powder argument is useful from a mathematical/investing standpoint, but it might be useful from a psychological one.

KlangFool wrote:<< 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


Valid points. I am not one of the 100% folks who don't think you should have an emergency fund. I like my emergency fund large and in cash. That's why one's retirement can be 100% equities. But I agree with the person above who stated you can be pro-100% equity without necessarily advocating that all the way to retirement. At my age given a job loss that overcame my emergency fund I'd probably just sell or foreclose my house and move back in with my parents or my in-laws. I can't foresee any series of events that would lead me to somehow tapping my retirement. Mine and my spouse's retirement accounts in total are probably 2.5x yearly household income now, so what would be the point? I know there were a lot of people in 2008 who raided their 401ks in order to survive, I can't really see anything leading to that decision for me. Also I have a really stable job. But I still don't see raiding retirement accounts as something I would ever do prior to actual retirement.

sreynard wrote: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:


Please let me know when the next club meeting is. Also, I can't afford to pay dues this month. :beer
Where the tides of fortune take us, no man can know.

KlangFool
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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 6:11 pm

Engineer250 wrote:
Valid points. I am not one of the 100% folks who don't think you should have an emergency fund. I like my emergency fund large and in cash. That's why one's retirement can be 100% equities. But I agree with the person above who stated you can be pro-100% equity without necessarily advocating that all the way to retirement. At my age given a job loss that overcame my emergency fund I'd probably just sell or foreclose my house and move back in with my parents or my in-laws. I can't foresee any series of events that would lead me to somehow tapping my retirement. Mine and my spouse's retirement accounts in total are probably 2.5x yearly household income now, so what would be the point? I know there were a lot of people in 2008 who raided their 401ks in order to survive, I can't really see anything leading to that decision for me. Also I have a really stable job. But I still don't see raiding retirement accounts as something I would ever do prior to actual retirement.


Engineer250,

This is assuming that they are not affected by the recession / down turn.

<< But I still don't see raiding retirement accounts as something I would ever do prior to actual retirement.>>

Life happens. Just because you cannot see it, it does not mean it will not happen.

Who knows? Maybe, you are a lot luckier than I am.

Houston Oil Bust, Texas Saving & Loan Crisis, Asian Currency Crisis, Telecom Boom & Bust, Real Estate Boom & Bust.

My life is a series of crises. And, they are the kind that affect the whole community and country.

<< Mine and my spouse's retirement accounts in total are probably 2.5x yearly household income now, so what would be the point?>>

Okay. It is too small to matter now. So, when will you change your AA? At what size, it will be too big for you to recover from.

KlangFool

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

Post by wander » Wed Jul 27, 2016 6:16 pm

Losing $50k from $100k portfolio is nothing compared to losing $500k from a $1M, or $2.5M from a $5M one, on and on. For me, size does matter. Good luck with the 100% equity approach, I must have some bonds for some cushion. I would think the feelings are different between wake up knowing you lose $50k and $500k :sharebeer

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

Post by longinvest » Wed Jul 27, 2016 6:44 pm

Here's some reference reading about Asset Allocation, authored by Larry Swedroe:
  1. Asset Allocation Guide: How much risk should you take?
  2. Asset Allocation Guide: What is your risk tolerance?
  3. Asset Allocation Guide: How much risk do you need?
  4. Asset Allocation Guide: Dealing with conflicting goals

I particularly like this part of the third article (How much risk do you need?):
Larry Swedroe wrote:The lesson about knowing when enough is enough can be learned from the following incident. In March of 2003, I was in Rochester, Minn., for a seminar based on my book, "Rational Investing in Irrational Times, How to Avoid the Costly Mistakes Even Smart People Make." During my visit, I met with a 71-year old couple with financial assets of $3 million. Three years earlier their portfolio was worth $13 million.

The only way they could have experienced that kind of loss was if they had held a portfolio that was almost all equities and heavily concentrated in U.S. large-cap growth stocks, especially technology stocks. They confirmed this. They told me they had been working with a financial advisor during this period -- demonstrating that while good advice doesn't have to be expensive, bad advice almost always costs you dearly.

I asked the couple if, instead of their portfolio falling almost 80 percent, doubling it to $26 million would have led to any meaningful change in the quality of their lives? Their response was a definitive no. I told them the experience of watching $13 million shrink to $3 million must have been very painful, and they probably had spent many sleepless nights. They agreed.

I then asked why they had taken the risks they did, knowing the potential benefit was not going to change their lives very much but a negative outcome like the one they experienced would be so painful. The wife turned to the husband and punched him, exclaiming, "I told you so!"

Some risks are not worth taking. Prudent investors don't take more risk than they have the ability, willingness or need to take.
Bogleheads investment philosophy | Lifelong Portfolio: 25% each of (domestic/international)stocks/(nominal/inflation-indexed)bonds | VCN/VXC/VAB/ZRR

NMJack
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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 6:57 pm

longinvest wrote:
Larry Swedroe wrote:I asked the couple if, instead of their portfolio falling almost 80 percent, doubling it to $26 million would have led to any meaningful change in the quality of their lives? Their response was a definitive no.

Some risks are not worth taking. Prudent investors don't take more risk than they have the ability, willingness or need to take.


Yes, but would it have made a difference in the lives of their kids, grandkids, charities? Maybe they didn't care about that..... :confused

Why are all things money about me, Me, ME??

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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 7:22 pm

NMJack wrote:ACWI


1. do you currently hold ACWI?

2. do you know what Vanguard fund is most similar to ACWI?

thank you
Last edited by Lieutenant.Columbo on Wed Jul 27, 2016 8:02 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 KlangFool » Wed Jul 27, 2016 7:25 pm

Engineer250 wrote:
Mine and my spouse's retirement accounts in total are probably 2.5x yearly household income now, so what would be the point?



Engineer250,

That is one way of looking at this. But, unless you save 100% of your income, this represents many more years of your savings. So, let's say you save 15% of your income and the market crashes. You just lost 250% x 50% = 125% of your annual income. But, this represents 125%/15% ~ 8 years worth of savings. If the market does not recover, you will need 8 years to get the money back.

KlangFool

Engineer250
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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 8:14 pm

KlangFool wrote:
Engineer250 wrote:
Mine and my spouse's retirement accounts in total are probably 2.5x yearly household income now, so what would be the point?



Engineer250,

That is one way of looking at this. But, unless you save 100% of your income, this represents many more years of your savings. So, let's say you save 15% of your income and the market crashes. You just lost 250% x 50% = 125% of your annual income. But, this represents 125%/15% ~ 8 years worth of savings. If the market does not recover, you will need 8 years to get the money back.

KlangFool


Interesting way of looking at it. I think it would take me less than 8 years though to catch up. I'm probably saving 3-4x a year more than what I was saving when I started 10 years ago. I expect to be saving 3-4x what I'm saving now in another 3 years or so. I suspect you are right, once the balance becomes something that 50% of would be painful to lose I may have a different perspective.

NMJack wrote:
longinvest wrote:
Larry Swedroe wrote:I asked the couple if, instead of their portfolio falling almost 80 percent, doubling it to $26 million would have led to any meaningful change in the quality of their lives? Their response was a definitive no.

Some risks are not worth taking. Prudent investors don't take more risk than they have the ability, willingness or need to take.


Yes, but would it have made a difference in the lives of their kids, grandkids, charities? Maybe they didn't care about that..... :confused

Why are all things money about me, Me, ME??


Hope you're being sarcastic. Not everyone has kids. Not everyone plans to leave money to their kids. Most Americans probably can't afford to. Many other Americans should not cut back on their well earned retirement just to leave money to adult children.
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 NMJack » Wed Jul 27, 2016 8:32 pm

Engineer250 wrote:
NMJack wrote:
longinvest wrote:
Larry Swedroe wrote:I asked the couple if, instead of their portfolio falling almost 80 percent, doubling it to $26 million would have led to any meaningful change in the quality of their lives? Their response was a definitive no.

Some risks are not worth taking. Prudent investors don't take more risk than they have the ability, willingness or need to take.


Yes, but would it have made a difference in the lives of their kids, grandkids, charities? Maybe they didn't care about that..... :confused

Why are all things money about me, Me, ME??


Hope you're being sarcastic. Not everyone has kids. Not everyone plans to leave money to their kids. Most Americans probably can't afford to. Many other Americans should not cut back on their well earned retirement just to leave money to adult children.


Sorry to disappoint, but no sarcasm here. It is truly sad that even the suggestion of providing for others might be mistaken for sarcasm. :(

I will encourage you to review the original context. It was not about "most Americans (who) probably can't afford to (leave money for their kids)." It was about a couple who had strong resources and could have left more for their kids if they hadn't done something stupid with their investments. Swedroe's message was apparently that they should have just hunkered down and kept everything for themselves. I'm firmly convinced that God does have a sense of humor, and it doesn't always work to the "benefit" of us mortals.

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

Post by dbr » Wed Jul 27, 2016 8:45 pm

Swedroe is simply making a point that the marginal utility of additional wealth or income is a diminishing function for most people. I think that is plausible. It could be a fair criticism that this is merely a symptom of lack of imagination.

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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 8:50 pm

dbr wrote:Swedroe is simply making a point that the marginal utility of additional wealth or income is a diminishing function for most people. I think that is plausible. It could be a fair criticism that this is merely a symptom of lack of imagination.


I think you're right. If most of us were honest with ourselves. an extra dollar that I need is worth a dollar. An extra dollar that my kid needs is worth 50 to 75 cents. An extra dollar that a hungry man needs probably isn't worth much (even though it might make me "feel good"). :(

Engineer250
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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 10:02 pm

NMJack wrote:Sorry to disappoint, but no sarcasm here. It is truly sad that even the suggestion of providing for others might be mistaken for sarcasm. :(

I will encourage you to review the original context. It was not about "most Americans (who) probably can't afford to (leave money for their kids)." It was about a couple who had strong resources and could have left more for their kids if they hadn't done something stupid with their investments. Swedroe's message was apparently that they should have just hunkered down and kept everything for themselves. I'm firmly convinced that God does have a sense of humor, and it doesn't always work to the "benefit" of us mortals.


My parents are under no obligation to leave anything to me. I probably already have more saved for retirement than they ever did, though they are lucky my father has a good pension. Neither of them went to college and my sibling and I did which they helped pay for while we lived at home. I do think parents have an obligation to support their children. Mine supported our needs and encouraged us to have better lives than they did, and certainly sacrificed for us many times. I owe what little frugality I retained from my parents. Their influence on me is obvious in everything I do. I don't need any monetary inheritance from them. I am an independent adult and this isn't a caste society. I don't think Americans want a return to a pre-industrial society with a landed gentry and elite families that perpetuate an aristocracy. Any child that thinks they are entitled to their parents wealth after their death doesn't deserve anything from anyone. I told my parents I hope they spend what they have on travel and enjoy their retirement. That if they get a reverse mortgage and spend down all their savings that that's fine by me. My in-laws make poor financial decisions all the time and I only hope I won't have to support them in their old age, I could care less if they leave nothing behind for my spouse. I won't touch what "God" might think of all this.
Where the tides of fortune take us, no man can know.

young-ish
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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 10:12 pm

KlangFool wrote:
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


Yes, that is why I suggest saving up 2 years of expenses in cash first. Then they can deploy half after the first market downturn.

If they get laid off in the recession they will still have 12 months of expenses in cash. This will hopefully convince them that they should not be 100% in stocks.

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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 10:31 pm

Engineer250 wrote: My parents are under no obligation to leave anything to me. I probably already have more saved for retirement than they ever did, though they are lucky my father has a good pension.


You've missed my point. This isn't about obligation, it is about charity. It's great that you've saved more for retirement than your parents ever did. Unfortunately, that's not always the case. Some children are awful savers, etc. and set themselves up for a poverty stricken old age through every fault of their own. Some children play by the rules but life deals them an unwinnable hand through no fault of their own, and they also face a poverty stricken old age. In both cases, their loving parents may (although apparently not in all cases) wish to "help out" if it is within their means. We've seen some posts suggesting this is not worth the parents bother and that they should be 100% focused only on their own "needs." That's all I was addressing.

I thank God that I haven't needed help from parents. That said, if I did, I would hope/pray that they would want to help me, especially if it only meant "taking a slightly more risky AA in retirement." (doesn't that sound stupid? :confused )

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

Post by fblade007 » Thu Jul 28, 2016 5:26 am

I have seen many many ideas on this Forum already but I just don't understand. I agree with the 100% during accumulation phase and I agree with having a large enough cash so you can either buy into the crash or just wait it out.

But for me - wouldn't it make more sence to just "one day" take 500K-1M out of your portfolio lets say as cash and keep it there. What ever happens with the stocks you have plenty to buy into and spend. It would reduce the risk of you having to sell out low and increases the possibility for you to buy into ... Some of you would say you lose out because your money is not in the market long term but it does buy you insurance you never have to sell low or cash out when not needed. That's priceless.

It seems much more easy to sell and cash out one day (or over multiple months and years). Everyone says to diversify but keeping all your eggs in the market is not diversifying... take some out, keep it cash, sleep well, buy into the crash/dip, count your blessings and winnings.

What am I missing?
Last edited by fblade007 on Thu Jul 28, 2016 6:41 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 KlangFool » Thu Jul 28, 2016 6:30 am

fblade007 wrote:I have seem many many ideas on this Forum already but I just don't understand. I agree with the 100% during accumulation phase and I agree with having a large enough cash so you can either buy into the crash or just wait it out.

But for me - wouldn't it make more send to just "one day" take 500K-1M our of your portfolio lets say as cash, and keep it there. Whatever happens with the stocks you have plenty to buy into and spend. It would reduce the risk of you having to sell out low and increases the possibility for you to buy into and more loads more ... Some of you would say you lose out because your money is not in the market long term but it does buy you insurance you never have to sell low or cash out when not needed. That's priceless.

It seems much more easy to sell and cash out one day (or over multiple months and years). Everyone says to diversify but keeping all your eggs in the market is not diversifying... take some out, keep it cash, sleep well, buy into the crash/dip, count your blessings and winnings.

What am I missing?


fblade007,

1) Your portfolio need to grow big enough for you to get there. Aka, you need to be LUCKY for a very long time. You need to hope that no major market crash and the down turn do not last for a very long time.

2) Or, you could have a 60/40 portfolio. It will make money under almost all circumstances. Slow and steady.

3) Even simpler and easier. Invest on one of those balanced fund or fund of funds like Wellington Fund and / or Life Strategy Moderate Growth Fund. It re-balances for you every day. So, you do nothing. Do not go slice and dice.

4) Why go to the extreme? Have a multiple layers /tiers of defense.

A) Keep some gold jewelry

B) 3 months to 1 years of emergency fund in cash

C) 25% to 75% of bond / fixed income allocation

D) 25% to 75% in stock.

KlangFool

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

Post by longinvest » Thu Jul 28, 2016 7:05 am

KlangFool wrote: C) 25% to 75% of bond / fixed income allocation

D) 25% to 75% in stock.

+1 :thumbsup

Here's my detailed take on this. I wrote that post a while ago:

viewtopic.php?f=10&t=183986#p2790463
longinvest wrote:The financial media and the entire investment industry want us to believe that predicting future returns is essential; their livelihood depends on it. Believing that knowing future returns is essential (when they are actually impossible to guess) keeps people anxious. It leads people to go read each new article to get better estimates, or to let the so-called "experts" manage their portfolio (while extracting fees).

It is my profound belief that predicting future returns is futile. One simply does not need to know future returns to invest wisely.

I invite you to read following post which provides an actual proof that nobody can predict future returns with enough accuracy as to know which asset class has the highest future return over any specific investment horizon: The Futility of Predicting Future Returns.

Here's what we know.

There are mostly three types of securities that pay investors to hold them:
  • Cash, which pays interests. (Savings accounts and CDs).
  • Bonds, which pay coupons and pay back their principal at maturity.
  • Stocks, which are ownership certificates in companies striving to make profits and use them to grow their assets or to pay dividends.

Cash has the property of not having a fluctuating market price. It is a safe store for money expected to be spent soon.

Bonds have a fluctuating market price, but this market price converges towards "par" (principal) as maturity approaches. As a consequence, long-term bonds can have a high volatility in price, but short-term bond volatility is limited by mathematics.

Stocks have no "principal". A stock certificate contains no promise to pay any specific amount of money to an investor at any specific date. It only gives its owner a voting right, and a right to receive a fair share of dividends. In case of dissolution, share owners are last in line behind bond holders to get anything left to distribute. The price of a stock takes into account not only the company's assets and liabilities, but also its future profit prospects which are inherently subjective. As a result, the price of stocks is highly volatile.

Stocks bought on foreign markets are subject to currency fluctuations and can expose their investors to risks that are not present in domestic stocks such as a higher risk of confiscation (foreign withholding taxes, ...) and lower legal protection (it is more difficult to seek justice abroad).

The law of demand and supply leads to the direct consequence that long-term bonds and stocks must return more than cash and short-term bonds often enough as to attract investors. Otherwise, investors would flee them and their price would drop down to the point where they became attractive (that's what happens during stock market crashes). The problem is that we never know, at any point in time, whether they are priced as to have the highest future returns over a specific horizon. This uncertainty is fundamental and can't be eliminated.

We also know that beating the market is a negative-sum game, thanks to William Sharpe's theorem:
If "active" and "passive" management styles are defined in sensible ways, it must be the case that
  1. before costs, the return on the average actively managed dollar will equal the return on the average passively managed dollar and
  2. after costs, the return on the average actively managed dollar will be less than the return on the average passively managed dollar
These assertions will hold for any time period. Moreover, they depend only on the laws of addition, subtraction, multiplication and division. Nothing else is required.


Based on the above, I invite you to consider adopting the following prudent plan which matches our philosophy:

  • One should always have enough cash available to meet upcoming expenses.
  • One should have a reasonably sized emergency fund in cash.
  • The portfolio should be allocated as follows:
    1. It should only contain stocks and bonds through the use of total-market index ETFs or mutual funds.
    2. It should have no less than 25% and no more than 75% in bonds.
    3. It should have no less than 25% and no more than 75% in stocks divided as follows:
      1. It should have no less than 25% and no more than 75% of the stock allocation in the domestic stock market.
      2. It should have no less than 25% and no more than 75% of the stock allocation in international markets, without the use of currency hedging*.

This plan is best implemented using a Three-Fund Portfolio.

Why 25% to 75%? There's no deep theory behind these ratios. They are simply the ranges within which the allocation will have a noticeable impact on returns. This insures that the portfolio will never be fully exposed to the worst performing asset class. (Note how the emphasis is on prudence while trying to get good returns, not on reaching for the ephemeral highest returns).

How much bonds, stocks, and international stocks, within these ranges? That's up to each individual investor to choose according to his own perception of risks and potential rewards. The most important is to make a choice that the investor will be able to stick to regardless of how markets and inflation behave. That's what we call staying the course.

New money should always be directed into the asset lagging its target allocation. Infrequently (once a year), it is a good idea to sell the asset too high above target, when that happens, to reinvest the proceeds into the lagging asset.

* Currency hedging requires the use of derivative instruments. Unlike cash, bonds, and stocks, derivatives do not pay investors to hold them. It's investors who pay to hold derivatives.
Bogleheads investment philosophy | Lifelong Portfolio: 25% each of (domestic/international)stocks/(nominal/inflation-indexed)bonds | VCN/VXC/VAB/ZRR

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

Post by KlangFool » Thu Jul 28, 2016 7:10 am

longinvest wrote:
KlangFool wrote: C) 25% to 75% of bond / fixed income allocation

D) 25% to 75% in stock.

+1 :thumbsup

Here's my detailed take on this. I wrote that post a while ago:

viewtopic.php?f=10&t=183986#p2790463


longinvest,

+1. I agree with you. The problem is buy , hold, and re-balance. For many people including me, it was a big jump to do slice and dice plus re-balancing. So, a person should start with something like balanced fund and / or fund of funds in order to take emotion out of re-balancing.

KlangFool.

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

Post by dbr » Thu Jul 28, 2016 8:30 am

fblade007 wrote:I have seen many many ideas on this Forum already but I just don't understand. I agree with the 100% during accumulation phase and I agree with having a large enough cash so you can either buy into the crash or just wait it out.

But for me - wouldn't it make more sence to just "one day" take 500K-1M out of your portfolio lets say as cash and keep it there. What ever happens with the stocks you have plenty to buy into and spend. It would reduce the risk of you having to sell out low and increases the possibility for you to buy into ... Some of you would say you lose out because your money is not in the market long term but it does buy you insurance you never have to sell low or cash out when not needed. That's priceless.

It seems much more easy to sell and cash out one day (or over multiple months and years). Everyone says to diversify but keeping all your eggs in the market is not diversifying... take some out, keep it cash, sleep well, buy into the crash/dip, count your blessings and winnings.

What am I missing?


You are missing that you are making a bunch of contradictory statements. Having large enough cash to buy into the crash is not having 100% stocks by definition. If you are 100% stocks you can't buy into crashes and if you are 100% stocks and you want to withdraw money then you have to sell some stocks -- obviously. The point is that the increased opportunity for return from being fully invested outruns any lost opportunity to buy at the bottom or to have to sell at the bottom. That part is not controversial. In any case this buying and selling stuff is not what investing and staying then course means; it is market timing and it doesn't work. The point for someone who wants to be 100% stocks is the degree to which he can live with the uncertainty in the outcome.

If you want to know what actually happens as a function of asset allocation when withdrawing money (the "pricelessness" you refer to), then you have to look at the actual data. You can do that, for example, by looking at the actual history shown in a program like FireCalc. What you will observe is that asset allocation has little effect on failure rates at moderate withdrawal rates until there is too little in stocks and retirement failures skyrocket. 100% stocks fare a little worse than 50% but in general it is still true that the more stocks the wider the range of end point wealth and mostly to the upside. This however is not about the original question of during accumulation when there is no selling involved.

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

Post by KlangFool » Thu Jul 28, 2016 8:55 am

dbr wrote:

This however is not about the original question of during accumulation when there is no selling involved.



dbr,

I believe that assumption is flawed. It is normal for a person to be unemployed or under-employed for some periods through out their working lives. It is normal for a person to experience multiple recessions through out their working lives. Depending on the size of their emergency fund and effect of the recession, they either will stop accumulating or force to sell some of their investment. So, even in the "accumulation" stage of a person's life, it is normal for person to sell some of their investment. To think otherwise is to assume that person can count on being lucky for their whole lives.

Counting on being lucky is not a good strategy. At the minimum, a person should plan on being normal and average for a successful outcome.

KlangFool

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

Post by fblade007 » Thu Jul 28, 2016 8:58 am

dbr wrote:
You are missing that you are making a bunch of contradictory statements. Having large enough cash to buy into the crash is not having 100% stocks by definition. If you are 100% stocks you can't buy into crashes and if you are 100% stocks and you want to withdraw money then you have to sell some stocks -- obviously. The point is that the increased opportunity for return from being fully invested outruns any lost opportunity to buy at the bottom or to have to sell at the bottom. That part is not controversial. In any case this buying and selling stuff is not what investing and staying then course means; it is market timing and it doesn't work. The point for someone who wants to be 100% stocks is the degree to which he can live with the uncertainty in the outcome.

If you want to know what actually happens as a function of asset allocation when withdrawing money (the "pricelessness" you refer to), then you have to look at the actual data. You can do that, for example, by looking at the actual history shown in a program like FireCalc. What you will observe is that asset allocation has little effect on failure rates at moderate withdrawal rates until there is too little in stocks and retirement failures skyrocket. 100% stocks fare a little worse than 50% but in general it is still true that the more stocks the wider the range of end point wealth and mostly to the upside. This however is not about the original question of during accumulation when there is no selling involved.


I am sorry but you are making a lot of very wrong assumptions here as "full stocks" doesn't mean "put everything you have against it". It means that as far as my cash allocation to the stock market, it can be all stocks. I would never push for anyone to be full stocks without any other types of assets or buffer. All I read here is diversification of asset allocation, so not sure why I (or anyone on this forum) would go all in on stocks and not keep cash or assets beside funds ... that would mean you would already break the very first rule of investing in funds.. diversify !

Besides stock market, I also have an additional saving rate, cash on my savings account.
Besides stocks, I have a house that I still consider an investment.
I might buy gold or a very old guitar or painting as investment also, who knows?
My Wife still has cash and income.
And so on.

It also means that I will have cash at hand when there is a market crash. It has nothing to do with market timing but yes I wil be able to buy into a crash. I won't time the all time low and I won't time the all time high. I just need to decide - when there is a crash - if I am comfortable to rebalance my cash savings to my stock market savings. I might chicken out because I am close to retirement and never do it, or I just might, time will tell but I do like the idea of being able to ...

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

Post by dbr » Thu Jul 28, 2016 9:06 am

KlangFool wrote:
dbr wrote:

This however is not about the original question of during accumulation when there is no selling involved.



dbr,

I believe that assumption is flawed. It is normal for a person to be unemployed or under-employed for some periods through out their working lives. It is normal for a person to experience multiple recessions through out their working lives. Depending on the size of their emergency fund and effect of the recession, they either will stop accumulating or force to sell some of their investment. So, even in the "accumulation" stage of a person's life, it is normal for person to sell some of their investment. To think otherwise is to assume that person can count on being lucky for their whole lives.

Counting on being lucky is not a good strategy. At the minimum, a person should plan on being normal and average for a successful outcome.

KlangFool


I'll buy that. I was just wondering where the OP was coming from, whether it was just a casual reference to being in accumulation or meant to apply assumptions that one is not withdrawing money. Even so I wrote about both cases. I should add that if a person does not have much in assets and has to take money that the way we manage that problem is that we always talk about an emergency fund. If a person has saved perhaps $100K he could put it all in stocks but also have a $100K emergency fund in case of set-backs. I advocate that the emergency fund be counted in the asset allocation, so this person is 50% stocks which then alleviates the "sell when stocks are down" problem.

What remains to be proved, however, is that putting the $200K in stocks and having to "sell when down" is a worse strategy than holding 50/50 and not having to "sell when down." It is really a trade-off of future potential gains and losses, the probability of each happening, and the severity of the consequences. The usual reason for an emergency fund in cash has less to do with asset allocation than with avoiding other hazards such as having to pay taxes to withdraw from a 401k or having to take out large credit card debt.

Again, I am not advocating that people should be 100% stocks, much less in emergency funds, but the reasons are not necessarily so simple as what might be thought.

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

Post by stemikger » Thu Jul 28, 2016 9:12 am

The problem is buy , hold, and re-balance. For many people including me, it was a big jump to do slice and dice plus re-balancing. So, a person should start with something like balanced fund and / or fund of funds in order to take emotion out of re-balancing.
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Re: Help Me Understand: Why Shouldn't AA Be 100% Stocks During Accumulation Phase?

Post by KlangFool » Thu Jul 28, 2016 9:25 am

dbr wrote:
I'll buy that. I was just wondering where the OP was coming from, whether it was just a casual reference to being in accumulation or meant to apply assumptions that one is not withdrawing money. Even so I wrote about both cases. I should add that if a person does not have much in assets and has to take money that the way we manage that problem is that we always talk about an emergency fund. If a person has saved perhaps $100K he could put it all in stocks but also have a $100K emergency fund in case of set-backs. I advocate that the emergency fund be counted in the asset allocation, so this person is 50% stocks which then alleviates the "sell when stocks are down" problem.

What remains to be proved, however, is that putting the $200K in stocks and having to "sell when down" is a worse strategy than holding 50/50 and not having to "sell when down." It is really a trade-off of future potential gains and losses, the probability of each happening, and the severity of the consequences. The usual reason for an emergency fund in cash has less to do with asset allocation than with avoiding other hazards such as having to pay taxes to withdraw from a 401k or having to take out large credit card debt.

Again, I am not advocating that people should be 100% stocks, much less in emergency funds, but the reasons are not necessarily so simple as what might be thought.


dbr,

<< What remains to be proved, however, is that putting the $200K in stocks and having to "sell when down" is a worse strategy than holding 50/50 and not having to "sell when down.">>

The rule of thumb that I read some where say that for every 10K of annual income, it takes one month to find a new job. And, in a recession, a person need to be prepared to be out of job for 2 years.

In line of the above assumptions, a person should evaluate the impact of 2 years unemployment can do to his /her portfolio. Aka. "stress test" his / her portfolio.

It is normal for a person to experience multiple recessions in his / her life. It is normal for one or more recessions to affect a person's employment.

This rule of thumb had served me very well. I had survived multiple recessions by "stress testing" my portfolio before hand.

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

Post by Lieutenant.Columbo » Thu Jul 28, 2016 10:40 am

KlangFool wrote:
2) Or, you could have a 60/40 portfolio. It will make money under almost all circumstances. Slow and steady


is your intention to stay at 60/40 at all times?

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

Post by longinvest » Thu Jul 28, 2016 10:42 am

KlangFool wrote:
longinvest wrote:
KlangFool wrote: C) 25% to 75% of bond / fixed income allocation

D) 25% to 75% in stock.

+1 :thumbsup

Here's my detailed take on this. I wrote that post a while ago:

viewtopic.php?f=10&t=183986#p2790463


longinvest,

+1. I agree with you. The problem is buy , hold, and re-balance. For many people including me, it is a big jump to do slice and dice plus re-balancing. So, a person should start with something like balanced fund and / or fund of funds in order to take emotion out of re-balancing.

KlangFool.


KlangFool,

You're totally right! I forgot to include balanced funds into my post. Effectively, an alternative to using a Three-Fund Portfolio is to buy a single low-cost balanced mutual fund that invests in total markets. That's the case of LifeStrategy funds and TargetRetirement funds (despite their token investment in currency-hedged international bonds). But, one has to be careful, when selecting these funds. Some of the LifeStrategy/TargetRetirement funds have a bond or stock allocation below the 25% minimum. Another fund, Vanguard's Balanced Fund fails to meet the minimum allocation to international stocks. In other words, very few balanced mutual funds (if any) really meet the recommended selection of asset classes and/or allocation ranges.

Furthermore, for people with big portfolios overflowing into a taxable account, a Three-Fund portfolio is more tax efficient than a balanced fund.

I think that removing emotions from rebalancing can be mostly achieved using three techniques:

Technique 1: Partially rebalance lazily by targeting contributions towards the asset below its target allocation (accumulation phase), and taking withdrawal from the asset above its target allocation (decumulation phase).

Ideally, one should not let distributions be automatically reinvested. One should simply let these distributions accumulate. In the accumulation phase, they are then combined with contributions to buy into the asset below target. In the decumulation phase, they are combined with the proceeds of selling from the asset above target to provide a withdrawal.

Technique 2: Use an infrequent and fixed schedule to fully-rebalance the portfolio.

Once a year, or every two years on a specific date written in one's Investment Policy Statement (IPS) is sufficient to keep the portfolio close enough to the desired target asset allocation (AA).

Many select their birthday; the idea is not to be too predictable. Rebalancing on January 1st, at the same time as everyone else, is not necessarily the best of ideas.

I think that one should never let the market decide when one should rebalance. Many of those who let rebalancing bands decide when to rebalance their portfolio, checking the bands daily or weekly during the 2008 crisis, failed to continue rebalancing over and over as stocks were dropping. The goal of rebalancing is not higher returns (which is what rebalancing bands aim to achieve relative to scheduled rebalancing), but keeping risk in check.

Technique 3: Break full-rebalancing into two independent steps separated by 6 months: selling step, and buying step.

Actually, it would be more accurate to say that one should do separate half full-rebalancing (buy-half and sell-half) every 6 months, as nothing prevent these steps from being combined with regular contribution/withdrawal transactions.

That's a technique that I have developed to solve a collection of annoying problems:
  • My asset allocation is implemented across multiple accounts (to minimize the number of holdings and increase tax efficiency). I sometimes have to sell an asset in one account and buy it back into another. By separating the sell from the buy, I can avoid tax issues (wash sales).
  • By keeping the proceeds of the sale in cash (money-market/savings-account), I don't develop any fear to sell some bonds during a crisis.
  • When the time for the buy-step comes, I am limited to buy no more than the cash available; I don't have to sell more bonds (even if they're above target again) when stocks have continued to plunge. Actually, I get to buy a limited amount of cheaper stocks than if I had bought them right away 6 months ago. (That should feel way better than normal rebalancing, if it doesn't feel good).
  • Selling from the asset above target to buy into the asset below target makes one quite predictable. Delaying the buy transaction reduces predictability. (I don't like to be too predictable for market-makers when buying or selling my three total-market index ETFs).


A practical implementation of this approach

I have fully integrated the above techniques into a very slow investing/2-step-rebalancing approach.

Let me insist that its main goal is risk and emotion control, not maximizing profits. One of its drawbacks is that it lets accumulating savings sit in interest-bearing cash for up to one year, and half-rebalancing proceeds up to 6 months.

Here's what I do:
  • I let distributions accumulate in (interest bearing) cash until the buy-step.
  • I accumulate contributions (saved off paycheck) in (interest bearing) cash until the buy-step.
  • On the scheduled sell-step date, I calculate the perfect across-account allocation of assets, so as to meet my target AA (subtracting any planned withdrawal from the balance of the account it will be taken from). I make all the sell transactions so that to trim any excess of an asset, in each account.
  • On the scheduled buy-step date, I calculate the perfect across-account allocation of assets, so as to meet my target AA. I use all available cash (accumulated during the year from distributions, savings, and sell-step) to buy into assets below their perfect target, in each account. Thanks to mathematics, all cash will be invested. But, often, the target allocation is not reached, because I am limited to buy no more than I have cash available.

This might seem complicated, but it is actually very simple, and completely solves the wash-sales problem for those with a taxable account, while keeping a minimum number of holdings across accounts and increasing tax efficiency.


Example: How to put it all together

Let's say that my target AA is 25/25/50 total-domestic-stocks/total-international-stocks/total-domestic-bonds. Let me select February 15 and August 15 as sell and buy dates, respectively.

February 15

On the sell-step date, my accounts are as follows:

401K: $300 cash / $15,000 bonds
Roth: $200 cash / $1,000 domestic / $7,000 international / $1,000 bonds
Taxable: $700 cash / $9,000 domestic
High-interest savings account: $3,000

That's a total of $37,200, which should ideally be allocated as: $9,300 domestic / $9,300 international / $18,600 bonds

The ideal distribution across accounts would be for bonds to all be in tax-advantaged space, and stocks filling the rest. Here's one possible perfect allotment:

(ideal allotment)
401K: $15,300 bonds
Roth: $5,900 international / $3,300 bonds
Taxable: $9,300 domestic / $3,400 international
High-interest savings account: $0

Now, I just compare my current accounts with this ideal target and sell anything above target. The proceeds are kept in interest-bearing cash.

401K: No transaction
Roth: Sell $1,100 international and $1,000 domestic
Taxable: No transaction

Nothing else is touched, in my portfolio. In particular: there is no buy transaction. This might leave the portfolio somewhat unbalanced, but no asset will be left above its target allocation, which is our risk-control strategy at work!

August 15

By now, additional cash has accumulated because of savings and distributions. Invested assets have also fluctuated. On the buy-step date, my accounts are as follows:

401K: $525 cash / $15,300 bonds
Roth: $2,374 cash / $5,015 international / $1,020 bonds
Taxable: $790 cash / $8,100 domestic
High-interest savings account: $8,000

That's a total of $41,124, which should ideally be allocated as: $10,281 domestic / $10,281 international / $20,562 bonds

Note that domestic stock prices are down 10% and international stock prices are down 15%. (This does not include their distributions). We are supposed, at this point, to be hearing a lot of gloom and doom in the media. The Bogleheads forums should start to get more frequent "Why international stocks?" threads.

Let's find a new perfect allotment. I assume, for simplicity, that all accumulated savings, in the savings account, will be invested into the taxable account:

(ideal allotment)
401K: $15,825 bonds
Roth: $3,672 international / $4,737 bonds
Taxable: $10,281 domestic / $6,609 international
High-interest savings account: $0

Now, I just compare my current accounts with this ideal target and use available cash to buy anything below target:

a) First
High-interest savings account: Transfer $8,000 to Taxable investment account. (This step should be done a few days before the 15th, to make sure the cash is available on the buy-step rebalance date).

b) Second
401K: Buy $525 bonds.
Roth: Buy $2,374 bonds.
Taxable: Buy $2,181 domestic and $6,609 international.

Emotions: Luckily, we did not have to sell any of our safe bonds to invest into the "dropping" domestic and international markets; we just used our limited amount of cash to buy cheaper domestic and international stocks, and even buy some more of our beloved safe bonds, in these trying times. This should feel safe enough, don't you think?


Rince and repeat every 6 months.

Think about it:
  • No selling safe bonds more than once a year.
  • Don't send the proceeds of selling safe bonds into risky stocks during a crisis; keep the proceeds in cash (for 6 months).
  • Never buy more risky stocks than available cash allows for during a crisis; never sell bonds to buy more (not before another 6 months, which won't be invested before 12 months into the future).

I think that many people don't use an appropriate rebalancing/contribution/withdrawal strategy; which is what paralyzes them during a crisis. It is a mistake, in my opinion, to select a rebalancing strategy to maximize an ephemeral rebalancing bonus. I think that rebalancing is done to control risk by not letting the portfolio drift away from its target AA, and that the rebalancing strategy should take emotions into account.

Anyway, this works for me.

Added: I've created a new thread to discuss this rebalancing strategy: Two-Step Rebalancing -- to keep both emotions and risk in check.
Last edited by longinvest on Thu Jul 28, 2016 1:11 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 longinvest » Thu Jul 28, 2016 11:44 am

And, for those who are more afraid of bonds than of stocks, on this thread, I could have written:

Think about it:
  • No selling growing stocks more than once a year.
  • Don't send the proceeds of selling growing stocks into risky bonds during a period of increasing yields; keep the proceeds in high-interest bearing cash (for 6 months).
  • Never buy more risky bonds than available cash allows for during a period of increasing yields; never sell stocks to buy more (not before another 6 months, which won't be invested before 12 months into the future).


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

Post by BogleBoogie » Thu Jul 28, 2016 12:17 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


Simple answer, 100% stocks isn't the most diversity you can get. Bonds provide diversity. Bonds may provide a better upside during down years.

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

Post by KlangFool » Thu Jul 28, 2016 1:14 pm

JLMA wrote:
KlangFool wrote:
2) Or, you could have a 60/40 portfolio. It will make money under almost all circumstances. Slow and steady


is your intention to stay at 60/40 at all times?

thank you


JLMA,

I was 70/30. I am on a glide path to 60/40 as my portfolio gets bigger. I intend to stay at 60/40 in my retirement. If and when my SS kick in, it will cover 50% of my annual expense. So, 60/40 is not risky for me in retirement.

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

Post by Lieutenant.Columbo » Thu Sep 22, 2016 6:41 am

dbr wrote:Swedroe is simply making a point that the marginal utility of additional wealth or income is a diminishing function for most people. I think that is plausible. It could be a fair criticism that this is merely a symptom of lack of imagination.
dbr,

Re-reading my summer learning's...

what does this refer to in your sentence above?

and why could this be a symptom of lack of imagination
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Re: Help Me Understand: Why Shouldn't AA Be 100% Stocks During Accumulation Phase?

Post by dbr » Thu Sep 22, 2016 9:05 am

Lieutenant.Columbo wrote:
dbr wrote:Swedroe is simply making a point that the marginal utility of additional wealth or income is a diminishing function for most people. I think that is plausible. It could be a fair criticism that this is merely a symptom of lack of imagination.
dbr,

Re-reading my summer learning's...

what does this refer to in your sentence above?

and why could this be a symptom of lack of imagination


That means that people might choose to take more risk for more money in retirement if they were more thoughtful regarding all the ways that wealth could be used. Some conversations on this board involve situations where there is plenty of money and the only focus is on a nearly needless effort to make sure one does not run out. The context is about deciding when lack of need to take risk trumps ability to take risk. Maybe there would be more need to take risk if more imagination were applied to what to do with the money. However, this whole comment is a philosophical point.

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

Post by knpstr » Thu Sep 22, 2016 10:00 am

wander wrote:Losing $50k from $100k portfolio is nothing compared to losing $500k from a $1M, or $2.5M from a $5M one, on and on. For me, size does matter. Good luck with the 100% equity approach, I must have some bonds for some cushion. I would think the feelings are different between wake up knowing you lose $50k and $500k :sharebeer


This is the rebuttal to that logic. 100% stocks (blue) vs 60% stock 40% bonds (orange). The "bottom" was nearly identical in early 2009, yet the 100% stocks have much higher peaks. Sure the "percentage drop" was greater in 09 for the stocks but the "actual dollar value" at the bottom was about the same, yet much different at the top.

So over the past 24 years with 100% stocks you're ahead by more than $20,000 versus the 60/40. Also I just hit "maximum" time frame on the chart and didn't attempt to cherry pick dates.

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

Post by KlangFool » Thu Sep 22, 2016 10:17 am

knpstr wrote:
wander wrote:Losing $50k from $100k portfolio is nothing compared to losing $500k from a $1M, or $2.5M from a $5M one, on and on. For me, size does matter. Good luck with the 100% equity approach, I must have some bonds for some cushion. I would think the feelings are different between wake up knowing you lose $50k and $500k :sharebeer


This is the rebuttal to that logic. 100% stocks (blue) vs 60% stock 40% bonds (orange). The "bottom" was nearly identical in early 2009, yet the 100% stocks have much higher peaks. Sure the "percentage drop" was greater in 09 for the stocks but the "actual dollar value" at the bottom was about the same, yet much different at the top.

So over the past 24 years with 100% stocks you're ahead by more than $20,000 versus the 60/40. Also I just hit "maximum" time frame on the chart and didn't attempt to cherry pick dates.

Image


knpstr,

So, a person is only ahead of a little aka insignificant gain by taking a lot of risk over 24 years where the person could be wiped out in any single downturn. So, why bother?

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

Post by Theoretical » Thu Sep 22, 2016 10:40 am

KlangFool wrote:
knpstr wrote:
wander wrote:Losing $50k from $100k portfolio is nothing compared to losing $500k from a $1M, or $2.5M from a $5M one, on and on. For me, size does matter. Good luck with the 100% equity approach, I must have some bonds for some cushion. I would think the feelings are different between wake up knowing you lose $50k and $500k :sharebeer


This is the rebuttal to that logic. 100% stocks (blue) vs 60% stock 40% bonds (orange). The "bottom" was nearly identical in early 2009, yet the 100% stocks have much higher peaks. Sure the "percentage drop" was greater in 09 for the stocks but the "actual dollar value" at the bottom was about the same, yet much different at the top.

So over the past 24 years with 100% stocks you're ahead by more than $20,000 versus the 60/40. Also I just hit "maximum" time frame on the chart and didn't attempt to cherry pick dates.

Image


knpstr,

So, a person is only ahead of a little aka insignificant gain by taking a lot of risk over 24 years where the person could be wiped out in any single downturn. So, why bother?

KlangFool


That's not an encouraging chart for going 100% stocks, at least not 100% US stocks. All of those gains are elusive paper gains that get stripped away as soon as the market crashes, and that's assuming perfect investor behavior with the chart.

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

Post by rbaldini » Thu Sep 22, 2016 10:52 am

If you are certain - and to be clear, you aren't - that you won't need *any* invested money in the short term, then this is somewhat reasonable. In the past, stocks provided a better long term return than bonds. Two caveats:

(1) You'll want to start investing in bonds before you starting pulling money out (i.e. while you are still accumulating). How early depends on how risky you can afford to be with your accumulated stash. If a big stock crash happens the year before you retire, you're obviously in much worse shape than if you had substantial bond holdings. So it's not as simple as "stocks for accumulation phase, bonds for withdrawal phase." Of course, if you're super rich, you can afford to lose a lot of money, so there's no simple answer anyway.

(2) The future needn't behave like the past, even in a broad sense. You might want to consider systemic risk, like the possibility that the Japan scenario happens to the US stock market. This risk generally isn't included in the usual volatility calculations of a fund. I think it's a general principle that any time you add more uncertainty and risk to your model of the world, the greater the benefit to diversification. Simply put: putting some money in bonds even early in life is a good idea if the US stock market enters an unprecedented long-term period of poor returns. Same goes for any other form of diversification, presumably.

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

Post by MrKnight » Thu Sep 22, 2016 11:11 am

BolderBoy 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?
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.


Reallocating your portfolio based on age, time left to invest, and risk aversion is certainly NOT market timing unless you are adhering to a colloquial non-finance definition of the word


Investopedia's definition of market timing:
Market timing is the act of moving in and out of the market or switching between asset classes based on using predictive methods such as technical indicators or economic data. Because it is extremely difficult to predict the future direction of the stock market, investors who try to time the market, especially mutual fund investors, tend to underperform investors who remain invested.

Read more: Market Timing Definition | Investopedia http://www.investopedia.com/terms/m/mar ... z4L08SIdvq
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Yes, you can find 20 year periods where bonds out perform stocks. My response is why is that relevant?

How many 20 year periods? You set aside money over the course of your life time. I am sure you will be able to find periods where you purchased stocks at a market peak and then compare it to a future market trough to show bonds outperforming stocks. Did you invest all your money into stocks at only that market peak and never put anything else in?

The next questions is, even if bonds did out perform, by how much? You are still generating investment gains through your stock holdings.

My thoughts is the following, if you have low risk-aversion and an investing life measured in decades, a 100% equity portfolio may certainly be the right choice for you. If you have high risk aversion or less of a investment life left, then a higher bond allocation may be the right choice for you.

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

Post by rbaldini » Thu Sep 22, 2016 11:17 am

knpstr wrote:
This is the rebuttal to that logic. 100% stocks (blue) vs 60% stock 40% bonds (orange). The "bottom" was nearly identical in early 2009, yet the 100% stocks have much higher peaks. Sure the "percentage drop" was greater in 09 for the stocks but the "actual dollar value" at the bottom was about the same, yet much different at the top.

So over the past 24 years with 100% stocks you're ahead by more than $20,000 versus the 60/40. Also I just hit "maximum" time frame on the chart and didn't attempt to cherry pick dates.

Image

Note that by using "maximum" time frame, you are likely to get an answer favoring stocks, since we know that in the historical long run, stocks provide better return than bonds. But don't mislead into thinking (and I'm sure you aren't) that this chart means that a 100% stock AA is no more risky than an AA with bonds thrown in. The 100% stock AA is much more likely to lose a large chunk of his current money over the next few years than the other.

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

Post by staybalanced » Thu Sep 22, 2016 11:35 am

I sometimes think that young investors take too much risk, and old investors not enough. What's wrong with the 60/40 for life for all investors?

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

Post by soboggled » Thu Sep 22, 2016 11:51 am

InvestorAdam wrote:I sometimes think that young investors take too much risk, and old investors not enough. What's wrong with the 60/40 for life for all investors?

Younger investors have time and human capital on their side to wait out long periods of volatility, recession and inflation.
The problem with 100% stocks for younger investors is that no one has lived through a period like the depression when stocks tanked 1929-1932 as follows: -8.3%, -25.1%, -43.8%, -8.64% - followed by a 47% and 32% rise. How many will really stay the course and continue to rebalance to 100% stocks under circumstances like that while bonds were steadily rising at 4%+? Yet that is what all the monte carlo models assume.

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

Post by staybalanced » Thu Sep 22, 2016 12:03 pm

soboggled wrote:
InvestorAdam wrote:I sometimes think that young investors take too much risk, and old investors not enough. What's wrong with the 60/40 for life for all investors?

Younger investors have time and human capital on their side to wait out long periods of volatility, recession and inflation.


That doesn't mean that they won't behave irrationally. Always good to have an anchor to the windward as our fried Jack says.

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

Post by soboggled » Thu Sep 22, 2016 12:09 pm

InvestorAdam wrote:
soboggled wrote:
InvestorAdam wrote:I sometimes think that young investors take too much risk, and old investors not enough. What's wrong with the 60/40 for life for all investors?

Younger investors have time and human capital on their side to wait out long periods of volatility, recession and inflation.


That doesn't mean that they won't behave irrationally. Always good to have an anchor to the windward as our fried Jack says.

I get it, I amended my post above. I don't know if it would really be irrational to panic during something like the Great Depression as stocks dropped off a cliff for several years. It took the "economic stimulus" of a world war in which the US was the "arsenal of democracy" and emerged relatively unscathed compared to the rest of the world to fully recover.

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

Post by jjface » Thu Sep 22, 2016 12:17 pm

knpstr wrote:
Image


Do note your orange line start later than your blue! Though it probably makes little difference. Stick vwelx on there too and see how well 100% stocks really has done.

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

Post by staybalanced » Thu Sep 22, 2016 12:25 pm

soboggled wrote:
InvestorAdam wrote:
soboggled wrote:
InvestorAdam wrote:I sometimes think that young investors take too much risk, and old investors not enough. What's wrong with the 60/40 for life for all investors?

Younger investors have time and human capital on their side to wait out long periods of volatility, recession and inflation.


That doesn't mean that they won't behave irrationally. Always good to have an anchor to the windward as our fried Jack says.

I get it, I amended my post above. I don't know if it would really be irrational to panic during something like the Great Depression as stocks dropped off a cliff for several years. It took the "economic stimulus" of a world war in which the US was the "arsenal of democracy" and emerged relatively unscathed compared to the rest of the world to fully recover.


Whether it would be irrational or rational is debatable. My thought is the best plan or AA is the one you can stick with through entire cycles. My worry for many investors young or old would be the propensity to change course half way through the game.

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

Post by knpstr » Thu Sep 22, 2016 12:31 pm

Theoretical wrote:
That's not an encouraging chart for going 100% stocks, at least not 100% US stocks. All of those gains are elusive paper gains that get stripped away as soon as the market crashes, and that's assuming perfect investor behavior with the chart.


"All those losses are elusive paper losses that get restored plus more as soon as the market recovers" 8-)

Note, the OP is in the "accumulation" phase. Not the withdrawal phase, which is an important distinction
And again, as you can see in the "worst market since the great depression" (as 08/09 was called) The 100% stocks dropped only slightly below the 60/40 allocation in actual dollar value despite the much larger percentage drop.

So at the risk of being down $981 to the 60/40 portfolio, in the "worst bear market since the great depression" (as 08/09 was dubbed), you think THAT risk is too great to be up $23,153 on the upside?!

Volatility is not risk to those accumulating and are far from retirement.

"The unconventional, but inescapable, conclusion to be drawn from the past fifty years is that it has been far safer to invest in a diversified collection of American businesses than to invest in securities - Treasuries, for example - whose values have been tied to American currency. That was also true in the preceding half-century, a period including the Great Depression and two world wars. Investors should heed this history. To one degree or another it is almost certain to be repeated during the next century." -- Warren Buffett
emphasis mine
Very little is needed to make a happy life; it is all within yourself, in your way of thinking. -Marcus Aurelius

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

Post by knpstr » Thu Sep 22, 2016 12:37 pm

jjface wrote:Do note your orange line start later than your blue! Though it probably makes little difference. Stick vwelx on there too and see how well 100% stocks really has done.


Hey now you're comparing indexing to active management, that's cheating! :D
The Modern Portfolio Theorists just say that these guys are just lucky and their luck is bound to run out! (reversion to the mean) So you better not invest with them.

But for what it is worth the the overall performance is about the same, though the ride has been much smoother.

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Very little is needed to make a happy life; it is all within yourself, in your way of thinking. -Marcus Aurelius

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

Post by rbaldini » Thu Sep 22, 2016 12:46 pm

knpstr wrote:And again, as you can see in the "worst market since the great depression" (as 08/09 was called) The 100% stocks dropped only slightly below the 60/40 allocation in actual dollar value despite the much larger percentage drop.

I want to make sure that people aren't confused by this. The reason the 100% stock AA didn't drop very far below the 60/40 AA is because, since the arbitrary starting point of the analysis (1993), the 100% stock had accumulated more money to lose. Of course, had he started this analysis in, say, 2005, or just before the drop, then the answer would be very different.

It's the difference between a long-term and short-term view of things: if you suspect you might need some of the money in the short term (say, <5 years) it is absolutely true that the 100% stock portfolio is more likely to lose money in that time. This is true even though its expected return is higher. In short, it's more volatile. In the long term, the expected value is mostly what matters, and since the expected return to stocks is higher than bonds (historically), those big drops get cancelled out. So most of the risk is removed (again, that ignores systemic risk, wherein the stock market starts behaving very different from the past).

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

Post by knpstr » Thu Sep 22, 2016 12:50 pm

rbaldini wrote:
knpstr wrote:And again, as you can see in the "worst market since the great depression" (as 08/09 was called) The 100% stocks dropped only slightly below the 60/40 allocation in actual dollar value despite the much larger percentage drop.

I want to make sure that people aren't confused by this. The reason the 100% stock AA didn't drop very far below the 60/40 AA is because, since the arbitrary starting point of the analysis (1993), the 100% stock had accumulated more money to lose. Of course, had he started this analysis in, say, 2005, or just before the drop, then the answer would be very different.

It's the difference between a long-term and short-term view of things: if you suspect you might need some of the money in the short term (say, <5 years) it is absolutely true that the 100% stock portfolio is more likely to lose money in that time. This is true even though its expected return is higher. In short, it's more volatile. In the long term, the expected value is mostly what matters, and since the expected return to stocks is higher than bonds (historically), those big drops get cancelled out. So most of the risk is removed (again, that ignores systemic risk, wherein the stock market starts behaving very different from the past).


Absolutely! and in regards to this post, to which I'm replying, where the OP asks because of what you said, why not invest 100% stocks? The answer is you should.
Very little is needed to make a happy life; it is all within yourself, in your way of thinking. -Marcus Aurelius

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

Post by knpstr » Thu Sep 22, 2016 12:51 pm

knpstr wrote:
rbaldini wrote:
knpstr wrote:And again, as you can see in the "worst market since the great depression" (as 08/09 was called) The 100% stocks dropped only slightly below the 60/40 allocation in actual dollar value despite the much larger percentage drop.

I want to make sure that people aren't confused by this. The reason the 100% stock AA didn't drop very far below the 60/40 AA is because, since the arbitrary starting point of the analysis (1993), the 100% stock had accumulated more money to lose. Of course, had he started this analysis in, say, 2005, or just before the drop, then the answer would be very different.

It's the difference between a long-term and short-term view of things: if you suspect you might need some of the money in the short term (say, <5 years) it is absolutely true that the 100% stock portfolio is more likely to lose money in that time. This is true even though its expected return is higher. In short, it's more volatile. In the long term, the expected value is mostly what matters, and since the expected return to stocks is higher than bonds (historically), those big drops get cancelled out. So most of the risk is removed (again, that ignores systemic risk, wherein the stock market starts behaving very different from the past).


Absolutely! and in regards to this post, to which I'm replying, where the OP asks knowing the greater expected value and a long run to invest ahead, why not invest 100% stocks? The answer is you should.
Very little is needed to make a happy life; it is all within yourself, in your way of thinking. -Marcus Aurelius

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

Post by rbaldini » Thu Sep 22, 2016 1:00 pm

knpstr wrote:Absolutely! and in regards to this post, to which I'm replying, where the OP asks knowing the greater expected value and a long run to invest ahead, why not invest 100% stocks? The answer is you should.

I agree for the most part, minus the two caveats I mentioned above. Namely, (1) systemic risk to the stock market (Long-term expected value is calculated on past data; what if "something happens" that causes stock market returns to fundamentally change? Same goes for any investment vehicle. Accounting for this always favors a bit more diversification than you might have otherwise calculated.) and (2) once you are 5-10 years from retirement, your investment needs are no longer just long-term, so you shouldn't be 100% stock (unless you can easily afford a few bad years). This is true even though you are still in the accumulation phase. It's not like the day you retire you suddenly switch from 100% to 50% stock because you are no longer an accumulator! I suppose a third caveat is (3) you can never be sure that you won't need short-term money. In other words, the transition from accumulator to withdrawer is also uncertain. You can lose your job for a while, and this is mostly likely to happen when the stock market crashes, I bet.

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

Post by knpstr » Thu Sep 22, 2016 1:07 pm

rbaldini wrote:
knpstr wrote:Absolutely! and in regards to this post, to which I'm replying, where the OP asks knowing the greater expected value and a long run to invest ahead, why not invest 100% stocks? The answer is you should.

I agree for the most part, minus the two caveats I mentioned above. Namely, (1) systemic risk to the stock market (Long-term expected value is calculated on past data; what if "something happens" that causes stock market returns to fundamentally change? Same goes for any investment vehicle. Accounting for this always favors a bit more diversification than you might have otherwise calculated.) and (2) once you are 5-10 years from retirement, your investment needs are no longer just long-term, so you shouldn't be 100% (unless you can easily afford a few bad years). This is true even though you are still in the accumulation phase. It's not like the day you retire you suddenly switch from 100% to 50% stock because you are no longer an accumulator! I suppose a third caveat is (3) you can never be sure that you won't need short-term money. In other words, the transition from accumulator to withdrawer is also uncertain. You can lose your job for a while, and this is mostly likely to happen when the stock market crashes, I bet.


Yes, all of these things matter.
The first being virtually meaningless as an argument can be made for complete disaster or difference unlike before, for anything. Bonds can become just as worthless as stocks given various circumstances. I'd argue that your point 2 would be a separate transition phase. I also think, roughly speaking, 10 years out is a good time to start getting serious about it. Point 3 is what an emergency fund is for, which I regard as insurance, not investing. No one wants to dip into any designated retirement funds as they come with about a 40% tax in both actual tax and early withdrawal fees.
Very little is needed to make a happy life; it is all within yourself, in your way of thinking. -Marcus Aurelius

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