This is why a 100% stock allocation is a bad idea

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CajunDan
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This is why a 100% stock allocation is a bad idea

Post by CajunDan » Sat Aug 20, 2016 10:46 am

As one astute observer commented earlier this week, the amount of investors asking why a 100% stock allocation isn't a good idea increases dramatically during extended bull markets. Bogleheads are quick to respond with all sorts of excellent academic and numbers-based answers, but perhaps it would be more effective for some of us more "seasoned" investors to relate just why a 100% stock allocation wasn't or wouldn't have been a good idea for each of us. Young investors think they are bullet proof and many see no way they would ever have an emergency requiring them to tap their retirement savings, but many older investors know better from personal experience.

Here's my story, what's yours?

I was cut back from full to part time in 2009 and decided to start my own business. I needed $50k in startup capital, so I had to borrow it from my 401k, which my employer let me maintain even though I was a part-timer. I was 100% in stocks via an S&P500 index fund, so I was forced to withdraw very near a stock market bottom. At the time my 401k was about $250k, so just 20% bonds would have allowed me to withdraw from an asset with a much less severe drop. Live and learn, I'm now 50/50. And by the way, starting my own business turned out to be a great move, so there was a happy ending.

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Re: This is why a 100% stock allocation is a bad idea

Post by FIREchief » Sat Aug 20, 2016 10:53 am

Are we going to have a companion thread for success stories? :twisted:
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Re: This is why a 100% stock allocation is a bad idea

Post by tfb » Sat Aug 20, 2016 11:11 am

CajunDan wrote:At the time my 401k was about $250k, so just 20% bonds would have allowed me to withdraw from an asset with a much less severe drop.
After you borrow that $50k, you would be 100% in stocks. That all of sudden becomes OK, not a bad idea any more?
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Re: This is why a 100% stock allocation is a bad idea

Post by livesoft » Sat Aug 20, 2016 11:18 am

When one borrows from a 401(k), I am not sure one can select which assets are sold to get the money, but no matter. One would simply rebalance the 401(k) back to whatever asset allocation they had before or any newly desired asset allocation.
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Re: This is why a 100% stock allocation is a bad idea

Post by flyingaway » Sat Aug 20, 2016 11:19 am

What about the (additional) gains from 100% stock allocation from 2001 to 2008?

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Re: This is why a 100% stock allocation is a bad idea

Post by Buddtholomew » Sat Aug 20, 2016 11:31 am

OP is providing a real world scenario where being invested 100% in equities was not the "ideal" allocation at the time the emergency surfaced.
It may not be the best example to drive the lesson home to younger investors who can't fathom having a need to withdraw from retirement assets sooner than expected.
From that perspective the post has merit.
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Re: This is why a 100% stock allocation is a bad idea

Post by staythecourse » Sat Aug 20, 2016 11:37 am

You DON'T need to be an experienced investor to figure out when you should or not be 100% equities. It is pretty common sense. The same negatives have happened time and time again, but the folks most affected are those who DON'T learn from others.

I have written NUMEROUS times, but here is a prerequisite criteria folks need to be able to check of before even considering 100% equities:
1. Recession proof job
2. Long time horizon for the money (10+ years)
3. No need for liquidity before that
4. At least 1 yr. EF
5. Ability to stay the course

I have found, in my not so humble opinion, there is TOO much focus on number 4 of this list. A Fidelity study done on their 401k's they manage (which are A LOT) showed most folks had no activity during the 2008 crises disproving the notion of everyone bailing out when the market thins. I think the biggest risk and the reason most can't/ shouldn't be 100% stocks is no. 1. When economy is hitting the tank there is way too high a chance of market tanking and getting fired and as Murphy's law usually has it it is right when you are about to send your kids to college or retire in the next 2 years.

I would say if you are a tenured professor, federal worker, doctor/ nurse/ pharmacist/ etc... you can say you meant no. 1 above. Otherwise, I think folks are kidding yourself as to the level of stability of one's job. Not to be ageist, but especially young workers who have not been through many/ any economic cycles. Those who have are usually aware that NO ONE is off limits when downsizing is started.

As for the OP, always good to hear an actual story, but I would have warned about the same thing before 2008, during 2008, and even now. Very few folks can say they have a trully stable job and that is what gets folks in trouble.

Good luck.
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Re: This is why a 100% stock allocation is a bad idea

Post by reriodan » Sat Aug 20, 2016 11:47 am

Go big or go home IMO.

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Re: This is why a 100% stock allocation is a bad idea

Post by joebh » Sat Aug 20, 2016 11:51 am

Seems more like a lesson why it's a bad idea to borrow from your 401k.

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Fieldsy1024
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Re: This is why a 100% stock allocation is a bad idea

Post by Fieldsy1024 » Sat Aug 20, 2016 12:03 pm

joebh wrote:Seems more like a lesson why it's a bad idea to borrow from your 401k.
+1 Even a young investor like myself knows that if you go 100% stock, you better have a nice emergency fund.

I'm 100% into stocks and whatever happens, happens. I live my life taking risks on everything. Sometimes it doesn't play out the way you want, and you have to prepare for that. I don't worry until I need to worry. My opinion is that you have one life. Take risks that the reward is sweet. I want the world in my hand, but I am not greedy. I'll give the shirt off my back to help somebody and I have a lot of great people in my life I can call friends. My life used to be different until I turned into one hopeful, optimistic kid. Even if I have 1% chance at something I really want, I will try my hardest to get it until it is gone.

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Re: This is why a 100% stock allocation is a bad idea

Post by CajunDan » Sat Aug 20, 2016 12:49 pm

tfb wrote:
CajunDan wrote:At the time my 401k was about $250k, so just 20% bonds would have allowed me to withdraw from an asset with a much less severe drop.
After you borrow that $50k, you would be 100% in stocks. That all of sudden becomes OK, not a bad idea any more?
No, but it would have prevented me from taking out $50k at the stock market bottom.

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Re: This is why a 100% stock allocation is a bad idea

Post by CajunDan » Sat Aug 20, 2016 12:50 pm

Buddtholomew wrote:OP is providing a real world scenario where being invested 100% in equities was not the "ideal" allocation at the time the emergency surfaced.
It may not be the best example to drive the lesson home to younger investors who can't fathom having a need to withdraw from retirement assets sooner than expected.
From that perspective the post has merit.
Thanks Bud, guess everyone else hasn't had any ups and downs over the course of their investing lifetimes.

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Re: This is why a 100% stock allocation is a bad idea

Post by CajunDan » Sat Aug 20, 2016 12:51 pm

staythecourse wrote:You DON'T need to be an experienced investor to figure out when you should or not be 100% equities. It is pretty common sense. The same negatives have happened time and time again, but the folks most affected are those who DON'T learn from others.

I have written NUMEROUS times, but here is a prerequisite criteria folks need to be able to check of before even considering 100% equities:
1. Recession proof job
2. Long time horizon for the money (10+ years)
3. No need for liquidity before that
4. At least 1 yr. EF
5. Ability to stay the course

I have found, in my not so humble opinion, there is TOO much focus on number 4 of this list. A Fidelity study done on their 401k's they manage (which are A LOT) showed most folks had no activity during the 2008 crises disproving the notion of everyone bailing out when the market thins. I think the biggest risk and the reason most can't/ shouldn't be 100% stocks is no. 1. When economy is hitting the tank there is way too high a chance of market tanking and getting fired and as Murphy's law usually has it it is right when you are about to send your kids to college or retire in the next 2 years.

I would say if you are a tenured professor, federal worker, doctor/ nurse/ pharmacist/ etc... you can say you meant no. 1 above. Otherwise, I think folks are kidding yourself as to the level of stability of one's job. Not to be ageist, but especially young workers who have not been through many/ any economic cycles. Those who have are usually aware that NO ONE is off limits when downsizing is started.

As for the OP, always good to hear an actual story, but I would have warned about the same thing before 2008, during 2008, and even now. Very few folks can say they have a trully stable job and that is what gets folks in trouble.

Good luck.
From the OP, I just think stories sometimes resonate better than numbers with some people.

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Re: This is why a 100% stock allocation is a bad idea

Post by CajunDan » Sat Aug 20, 2016 12:53 pm

joebh wrote:Seems more like a lesson why it's a bad idea to borrow from your 401k.
OP: My choices were borrow from 401k, borrow from credit cards, or not start the business. My business now grosses $750k/year and nets me $350k/year, so I'd say borrowing from my 401k turned out pretty good.

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Re: This is why a 100% stock allocation is a bad idea

Post by tfb » Sat Aug 20, 2016 1:13 pm

CajunDan wrote:
tfb wrote:
CajunDan wrote:At the time my 401k was about $250k, so just 20% bonds would have allowed me to withdraw from an asset with a much less severe drop.
After you borrow that $50k, you would be 100% in stocks. That all of sudden becomes OK, not a bad idea any more?
No, but it would have prevented me from taking out $50k at the stock market bottom.
When you realize it's still a bad idea to hold the remaining $200k 100% in stocks, you then sell $40k to buy bonds, in order to go back down to 80%. After all you can't know when the stock market bottom is. In the end the difference is only $10k. In light of the success of your business, it sounds like a good price to pay, although borrowing from credit cards is probably a better idea.
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Re: This is why a 100% stock allocation is a bad idea

Post by investorguy1 » Sat Aug 20, 2016 10:51 pm

CajunDan wrote:As one astute observer commented earlier this week, the amount of investors asking why a 100% stock allocation isn't a good idea increases dramatically during extended bull markets. Bogleheads are quick to respond with all sorts of excellent academic and numbers-based answers, but perhaps it would be more effective for some of us more "seasoned" investors to relate just why a 100% stock allocation wasn't or wouldn't have been a good idea for each of us. Young investors think they are bullet proof and many see no way they would ever have an emergency requiring them to tap their retirement savings, but many older investors know better from personal experience.

Here's my story, what's yours?

I was cut back from full to part time in 2009 and decided to start my own business. I needed $50k in startup capital, so I had to borrow it from my 401k, which my employer let me maintain even though I was a part-timer. I was 100% in stocks via an S&P500 index fund, so I was forced to withdraw very near a stock market bottom. At the time my 401k was about $250k, so just 20% bonds would have allowed me to withdraw from an asset with a much less severe drop. Live and learn, I'm now 50/50. And by the way, starting my own business turned out to be a great move, so there was a happy ending.
Looks like you are not getting much sympathy here. It sounds like what you went through was a pretty trying time. I'm sure borrowing from your 401k and the same time as have reduced income could be pretty scary. I'm happy things worked out for you.

When I started investing I did so with a lump sum in 2000 right at the very peak of the market. my account drop in half and slowly built back up again. Then it happened all over again I wanted to get out after the first 10% drop in 2007 but was advised to stick it out. I did until finally in 2009 I ditched the broker and went the DIY route. I switched to 50/50 portfolio like you did. It took me till around 2011 to get back to even. Also just about every year I was down during that period. It's not like I had made money and then lost it I just lost from day 1. So i had lots of volatility and nothing to show for it.

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Re: This is why a 100% stock allocation is a bad idea

Post by papiper » Sun Aug 21, 2016 6:43 am

If you borrowed from a 401k and invested in your own business, you essentially made a much riskier investment than the stock market. And since it worked out fine, your argument facts actually support the side to increase risk versus having bonds. Your feelings don't match that, but your personal facts do.

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Re: This is why a 100% stock allocation is a bad idea

Post by Gort » Sun Aug 21, 2016 12:40 pm

FIREchief wrote:Are we going to have a companion thread for success stories? :twisted:
?

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Re: This is why a 100% stock allocation is a bad idea

Post by Runner01 » Sun Aug 21, 2016 1:02 pm

My wife and I are 30 and we keep 100% of our investments in stocks. This is how we have invested since we were 21 and it's how we plan to continue for the foreseeable future. We do have 12 months of living expenses in cash ($30k) so technically we are not 100% stocks. Having low living expenses also protects us in the event of job loss as we would both be able to find $10/hour jobs while we searched for new professional jobs in the event of a recession. Or the alternative is if my wife can keep her job, she could work 20 hours per week and more than pay for our household living expenses. Having low living expenses presents many options beyond cashing out stock investments.

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Re: This is why a 100% stock allocation is a bad idea

Post by TOJ » Sun Aug 21, 2016 1:18 pm

If you had sold from bonds instead, you would have had to sell stocks to rebalance back into bonds.

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Re: This is why a 100% stock allocation is a bad idea

Post by Calhoon » Sun Aug 21, 2016 2:13 pm

I'm not sure this is the best example.

You used your one hundred percent allocation to invest in something that was far, far less diversified than the one hundred percent stock portfolio you started with. Glad it worked out for you though, that's great. So, I guess what you're saying is that when all is said and done your investments as a whole performed rather well.

I think in all these arguments people just look for evidence to support their claims and no one's really changing anyone's mind.

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Re: This is why a 100% stock allocation is a bad idea

Post by roflwaffle » Sun Aug 21, 2016 2:46 pm

Do you mind sharing any of the specifics? I compared 100% US stocks to 80% US stocks/20% Total bonds in PV from 95-09 with a $11k/year in contributions and in 2009 I'm seeing <$5k difference in value. In this example, even after the $50k withdraw at the bottom of the market, the 100% portfolio would be ahead of the 80%/20% portfolio as of 2015. It could easily drop below the 80/20 portfolio during the next recession too, but in the long run, it would probably earn more, and in shorter time periods both portfolios behave in a similar fashion. The extra .5+% the 100% portfolio earns will eventually give it a solid lead over a 80%/20% portfolio, but it takes a while, and the 80%/20% portfolio still has 80% of the volatility of the 100% portfolio.

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Re: This is why a 100% stock allocation is a bad idea

Post by Meaty » Sun Aug 21, 2016 2:56 pm

CajunDan wrote:As one astute observer commented earlier this week, the amount of investors asking why a 100% stock allocation isn't a good idea increases dramatically during extended bull markets. Bogleheads are quick to respond with all sorts of excellent academic and numbers-based answers, but perhaps it would be more effective for some of us more "seasoned" investors to relate just why a 100% stock allocation wasn't or wouldn't have been a good idea for each of us. Young investors think they are bullet proof and many see no way they would ever have an emergency requiring them to tap their retirement savings, but many older investors know better from personal experience.

Here's my story, what's yours?

I was cut back from full to part time in 2009 and decided to start my own business. I needed $50k in startup capital, so I had to borrow it from my 401k, which my employer let me maintain even though I was a part-timer. I was 100% in stocks via an S&P500 index fund, so I was forced to withdraw very near a stock market bottom. At the time my 401k was about $250k, so just 20% bonds would have allowed me to withdraw from an asset with a much less severe drop. Live and learn, I'm now 50/50. And by the way, starting my own business turned out to be a great move, so there was a happy ending.

All the experts indicate bonds will return 0% real over the next decade. For better or worse, there are very few in the accumulation phase that can afford that. I'm 100% stocks because I see zero alternative; I'm just glad I'm not ~45 where I would be forced to have some bonds
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Re: This is why a 100% stock allocation is a bad idea

Post by am » Sun Aug 21, 2016 8:54 pm

Meaty wrote:
CajunDan wrote:As one astute observer commented earlier this week, the amount of investors asking why a 100% stock allocation isn't a good idea increases dramatically during extended bull markets. Bogleheads are quick to respond with all sorts of excellent academic and numbers-based answers, but perhaps it would be more effective for some of us more "seasoned" investors to relate just why a 100% stock allocation wasn't or wouldn't have been a good idea for each of us. Young investors think they are bullet proof and many see no way they would ever have an emergency requiring them to tap their retirement savings, but many older investors know better from personal experience.

Here's my story, what's yours?

I was cut back from full to part time in 2009 and decided to start my own business. I needed $50k in startup capital, so I had to borrow it from my 401k, which my employer let me maintain even though I was a part-timer. I was 100% in stocks via an S&P500 index fund, so I was forced to withdraw very near a stock market bottom. At the time my 401k was about $250k, so just 20% bonds would have allowed me to withdraw from an asset with a much less severe drop. Live and learn, I'm now 50/50. And by the way, starting my own business turned out to be a great move, so there was a happy ending.

All the experts indicate bonds will return 0% real over the next decade. For better or worse, there are very few in the accumulation phase that can afford that. I'm 100% stocks because I see zero alternative; I'm just glad I'm not ~45 where I would be forced to have some bonds

Could this be at least part of the reason for the bull market we're seeing? No reasonable alternatives to stocks?

0% real stinks, but we're spoiled with this bull market. 0% real is much better than -50% real or a flat market like 66-82' or a never recovered market like Japan after 89'. Just because we've recovered each time from bear markets doesn't mean we will in the future during your investment lifetime.

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Re: This is why a 100% stock allocation is a bad idea

Post by peterinjapan » Sun Aug 21, 2016 11:39 pm

What do you mean, will return 0%? They'll kick out smallish yields as they're doing now, but the inevitable rise of interest rates will push the prices down at the same rate, resulting in zero?

I literally can't believe how bonds are to understand. It's like playing 3-D chess with a Vulcan.

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Re: This is why a 100% stock allocation is a bad idea

Post by HomerJ » Sun Aug 21, 2016 11:55 pm

Fieldsy1024 wrote:
joebh wrote:Seems more like a lesson why it's a bad idea to borrow from your 401k.
+1 Even a young investor like myself knows that if you go 100% stock, you better have a nice emergency fund.

I'm 100% into stocks and whatever happens, happens. I live my life taking risks on everything. Sometimes it doesn't play out the way you want, and you have to prepare for that. I don't worry until I need to worry. My opinion is that you have one life. Take risks that the reward is sweet. I want the world in my hand, but I am not greedy. I'll give the shirt off my back to help somebody and I have a lot of great people in my life I can call friends. My life used to be different until I turned into one hopeful, optimistic kid. Even if I have 1% chance at something I really want, I will try my hardest to get it until it is gone.
My favorite Calvin and Hobbes cartoon:

Calvin: If you had a wish, what would you wish for?
Hobbes: A sandwich.
Calvin: A sandwich!!? That's stupid! I'd wish for a billion gajillion dollars!
(Later in the kitchen, Hobbes is eating a sandwich)
Hobbes: I got MY wish.

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Re: This is why a 100% stock allocation is a bad idea

Post by FIREchief » Mon Aug 22, 2016 1:39 am

peterinjapan wrote:What do you mean, will return 0%? They'll kick out smallish yields as they're doing now, but the inevitable rise of interest rates will push the prices down at the same rate, resulting in zero?
You may have missed the word "real."
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Re: This is why a 100% stock allocation is a bad idea

Post by Ari » Mon Aug 22, 2016 2:00 am

staythecourse wrote:I have written NUMEROUS times, but here is a prerequisite criteria folks need to be able to check of before even considering 100% equities:
1. Recession proof job
2. Long time horizon for the money (10+ years)
3. No need for liquidity before that
4. At least 1 yr. EF
5. Ability to stay the course
Assuming you'd need to withdraw money if you lost your job. If you can live on the income you get even if you lose your job, the list doesn't apply. I'm sure there are other circumstances where some points on the list can be ignored. It's a good start, though.
All in, all the time.

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Re: This is why a 100% stock allocation is a bad idea

Post by peterinjapan » Mon Aug 22, 2016 2:01 am

Thanks. Is it a better approach to pick a bond fund with a set maturity that will be held to that date, rather than a general bond fund? Or to explore individual bonds and hold them to their maturity date?

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Re: This is why a 100% stock allocation is a bad idea

Post by FIREchief » Mon Aug 22, 2016 3:48 am

peterinjapan wrote:Thanks. Is it a better approach to pick a bond fund with a set maturity that will be held to that date, rather than a general bond fund? Or to explore individual bonds and hold them to their maturity date?
You'll get a lot of different opinions on these questions. There are generally no agreed upon right/wrong answers. I'm not aware of any bond fund that has a set maturity date (although I guess there could be one). You first need to decide what type of risks you're willing to take on. The simplest scenario is if you want your bonds to be 100% safe from default. Then you're talking US treasuries. They are very easy to buy directly, so you can basically build your own bond fund and increase your returns by the ER avoided. That said, safety comes at a price of lower returns than agency bonds, investment grade corporate bonds, lesser rated bonds, etc. If you decide to take on slightly higher risk, then you'll likely be looking to invest in something like a total bond market index fund. It gets more complicated beyond that.

I consider the absolute safest approach as building a ladder of TIPS bought at auction and held to maturity. With this type of approach, you know exactly how much purchasing power you will have in the future and at what times. This comes at the price of very marginal investment returns currently.
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Re: This is why a 100% stock allocation is a bad idea

Post by Meaty » Mon Aug 22, 2016 5:53 am

am wrote:
Meaty wrote:
CajunDan wrote:As one astute observer commented earlier this week, the amount of investors asking why a 100% stock allocation isn't a good idea increases dramatically during extended bull markets. Bogleheads are quick to respond with all sorts of excellent academic and numbers-based answers, but perhaps it would be more effective for some of us more "seasoned" investors to relate just why a 100% stock allocation wasn't or wouldn't have been a good idea for each of us. Young investors think they are bullet proof and many see no way they would ever have an emergency requiring them to tap their retirement savings, but many older investors know better from personal experience.

Here's my story, what's yours?

I was cut back from full to part time in 2009 and decided to start my own business. I needed $50k in startup capital, so I had to borrow it from my 401k, which my employer let me maintain even though I was a part-timer. I was 100% in stocks via an S&P500 index fund, so I was forced to withdraw very near a stock market bottom. At the time my 401k was about $250k, so just 20% bonds would have allowed me to withdraw from an asset with a much less severe drop. Live and learn, I'm now 50/50. And by the way, starting my own business turned out to be a great move, so there was a happy ending.

All the experts indicate bonds will return 0% real over the next decade. For better or worse, there are very few in the accumulation phase that can afford that. I'm 100% stocks because I see zero alternative; I'm just glad I'm not ~45 where I would be forced to have some bonds

Could this be at least part of the reason for the bull market we're seeing? No reasonable alternatives to stocks?

0% real stinks, but we're spoiled with this bull market. 0% real is much better than -50% real or a flat market like 66-82' or a never recovered market like Japan after 89'. Just because we've recovered each time from bear markets doesn't mean we will in the future during your investment lifetime.
Your right, the market may behave differently this time. If it does, we're SOL - but in the same position had we invested at 0% real in bonds (I.e. I won't be able to retire). So, while not guaranteed, the experts indicate 4% real in stocks over the next 10 years and 0 from bonds. If that's true I have to be 100% stocks to get any inflation adjusted accumulation. If it turns out stocks are forever doomed (Japan scenario) then it really doesn't matter what I do (either 0 real from bonds or negative stocks = delayed/part time work in retirement)

You're also probably right the stock market highs are partly the result of no alternatives. I kind of look at it like the unemployment rate - just a few years ago ~450,000 jobs was the amount necessary for the UE to drop a little; today it's ~200,000. The market has shifted; all I can do is keep saving in the asset that will likely give me the highest risk adjusted return and hope the Japan scenario doesn't occur
"Discipline equals Freedom" - Jocko Willink

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Re: This is why a 100% stock allocation is a bad idea

Post by seanmerron » Mon Aug 22, 2016 6:53 am

I've decided this ultimately comes down to risk appetite. If I have a surplus of money above my retirement needs then I'll be shifting more towards a 100% equities portfolio. Until then I need the protection from vehicles with low correlation to equities to weather storms.

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Re: This is why a 100% stock allocation is a bad idea

Post by Fieldsy1024 » Mon Aug 22, 2016 8:30 am

HomerJ wrote:
Fieldsy1024 wrote:
joebh wrote:Seems more like a lesson why it's a bad idea to borrow from your 401k.
+1 Even a young investor like myself knows that if you go 100% stock, you better have a nice emergency fund.

I'm 100% into stocks and whatever happens, happens. I live my life taking risks on everything. Sometimes it doesn't play out the way you want, and you have to prepare for that. I don't worry until I need to worry. My opinion is that you have one life. Take risks that the reward is sweet. I want the world in my hand, but I am not greedy. I'll give the shirt off my back to help somebody and I have a lot of great people in my life I can call friends. My life used to be different until I turned into one hopeful, optimistic kid. Even if I have 1% chance at something I really want, I will try my hardest to get it until it is gone.
My favorite Calvin and Hobbes cartoon:

Calvin: If you had a wish, what would you wish for?
Hobbes: A sandwich.
Calvin: A sandwich!!? That's stupid! I'd wish for a billion gajillion dollars!
(Later in the kitchen, Hobbes is eating a sandwich)
Hobbes: I got MY wish.
haha, I did like that cartoon when I used to read the papers.

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Re: This is why a 100% stock allocation is a bad idea

Post by boo-yah » Mon Aug 22, 2016 2:39 pm

I guess I'm not clear on the point that the OP is trying to make. He seems to be suggesting that 100% stocks is too risky, and provides an example of the negative consequences of that risk. However, selling a diversified S&P index fund to put money into an idiosyncratic single business startup massively increases risk. Clearly the OP has a very high risk tolerance, and so 100% stocks was probably just fine for him in the first place. Not everyone can handle the risk of starting a business, particularly with their own retirement money - but the OP can. Even though the risk showed up in 2009, it didn't stop him from taking even more risk on. Doesn't seem consistent with the stated message of 100% stock allocation is a bad idea because it's too risky.

What might the OP had posted back in 2009 just after his hours were cut and he made the decision to withdraw the $50,000 before knowing how things would turn out? I think that posting now after he's lived through the risk and received his high reward obscures the real issue that individuals should evaluate their risk tolerance using staythecourse's criteria and select a portfolio risk level that's appropriate for them - and that individuals will vary hugely in their risk tolerance.

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Re: This is why a 100% stock allocation is a bad idea

Post by SQRT » Mon Aug 22, 2016 2:51 pm

I am certainly an outlier. Retired 10 years, 66. Entire portfolio is equities, however, when I include the notional present value of my pension my AA is about 60/40, equities to fixed income. Never owned a bond or bond fund/ ETF. Obviously I have a very high risk tolerance. I am fully aware of the theory as I have a CPA. MBA, and a CFA. I figure if I could get through 2008-2009, I can get through almost anything. Not making any recommendations, just sharing my story.

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Re: This is why a 100% stock allocation is a bad idea

Post by Stonebr » Mon Aug 22, 2016 3:42 pm

"Everybody has a plan until they get punched in the mouth." -- Mike Tyson
"have more than thou showest, | speak less than thou knowest" -- The Fool in King Lear

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Re: This is why a 100% stock allocation is a bad idea

Post by staythecourse » Mon Aug 22, 2016 6:44 pm

Ari wrote:
staythecourse wrote:I have written NUMEROUS times, but here is a prerequisite criteria folks need to be able to check of before even considering 100% equities:
1. Recession proof job
2. Long time horizon for the money (10+ years)
3. No need for liquidity before that
4. At least 1 yr. EF
5. Ability to stay the course
Assuming you'd need to withdraw money if you lost your job. If you can live on the income you get even if you lose your job, the list doesn't apply. I'm sure there are other circumstances where some points on the list can be ignored. It's a good start, though.
I am not understanding?

If you don't have a job AND don't need to withdraw money how do you pay the bills? I am assuming you mean if your significant other makes enough to cover all the basics even without your paycheck? If so, what happens if they lose their job as well or gets their hours cut?

Or are you assuming if you lose your job you will get another job so quick? What if you get another job in a different state at less pay and now have increased liabilities (paying for new rent along with rent/ mortgage)?

The only thing I have seen is NO ONE is immune to losing their job. My wife and I are both physicians and don't consider ourselves immune so not sure how others can be so confident.

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

CajunDan
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Re: This is why a 100% stock allocation is a bad idea

Post by CajunDan » Mon Aug 22, 2016 9:57 pm

investorguy1 wrote:
CajunDan wrote:As one astute observer commented earlier this week, the amount of investors asking why a 100% stock allocation isn't a good idea increases dramatically during extended bull markets. Bogleheads are quick to respond with all sorts of excellent academic and numbers-based answers, but perhaps it would be more effective for some of us more "seasoned" investors to relate just why a 100% stock allocation wasn't or wouldn't have been a good idea for each of us. Young investors think they are bullet proof and many see no way they would ever have an emergency requiring them to tap their retirement savings, but many older investors know better from personal experience.

Here's my story, what's yours?

I was cut back from full to part time in 2009 and decided to start my own business. I needed $50k in startup capital, so I had to borrow it from my 401k, which my employer let me maintain even though I was a part-timer. I was 100% in stocks via an S&P500 index fund, so I was forced to withdraw very near a stock market bottom. At the time my 401k was about $250k, so just 20% bonds would have allowed me to withdraw from an asset with a much less severe drop. Live and learn, I'm now 50/50. And by the way, starting my own business turned out to be a great move, so there was a happy ending.
Looks like you are not getting much sympathy here. It sounds like what you went through was a pretty trying time. I'm sure borrowing from your 401k and the same time as have reduced income could be pretty scary. I'm happy things worked out for you.

When I started investing I did so with a lump sum in 2000 right at the very peak of the market. my account drop in half and slowly built back up again. Then it happened all over again I wanted to get out after the first 10% drop in 2007 but was advised to stick it out. I did until finally in 2009 I ditched the broker and went the DIY route. I switched to 50/50 portfolio like you did. It took me till around 2011 to get back to even. Also just about every year I was down during that period. It's not like I had made money and then lost it I just lost from day 1. So i had lots of volatility and nothing to show for it.
There's some sympathy! I wasn't looking for sympathy, just some stories illustrating why 100% stock allocation can be risky. Some people relate better to stories than numbers.

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Re: This is why a 100% stock allocation is a bad idea

Post by CajunDan » Mon Aug 22, 2016 9:59 pm

boo-yah wrote:I guess I'm not clear on the point that the OP is trying to make. He seems to be suggesting that 100% stocks is too risky, and provides an example of the negative consequences of that risk. However, selling a diversified S&P index fund to put money into an idiosyncratic single business startup massively increases risk. Clearly the OP has a very high risk tolerance, and so 100% stocks was probably just fine for him in the first place. Not everyone can handle the risk of starting a business, particularly with their own retirement money - but the OP can. Even though the risk showed up in 2009, it didn't stop him from taking even more risk on. Doesn't seem consistent with the stated message of 100% stock allocation is a bad idea because it's too risky.

What might the OP had posted back in 2009 just after his hours were cut and he made the decision to withdraw the $50,000 before knowing how things would turn out? I think that posting now after he's lived through the risk and received his high reward obscures the real issue that individuals should evaluate their risk tolerance using staythecourse's criteria and select a portfolio risk level that's appropriate for them - and that individuals will vary hugely in their risk tolerance.
Good point, but I didn't start my business because I liked risked, but because I was sort of forced into it. It's a long story, I won't bore you with the details, but it certainly ended well.

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Re: This is why a 100% stock allocation is a bad idea

Post by CajunDan » Mon Aug 22, 2016 10:01 pm

staythecourse wrote:You DON'T need to be an experienced investor to figure out when you should or not be 100% equities. It is pretty common sense. The same negatives have happened time and time again, but the folks most affected are those who DON'T learn from others.

I have written NUMEROUS times, but here is a prerequisite criteria folks need to be able to check of before even considering 100% equities:
1. Recession proof job
2. Long time horizon for the money (10+ years)
3. No need for liquidity before that
4. At least 1 yr. EF
5. Ability to stay the course

I have found, in my not so humble opinion, there is TOO much focus on number 4 of this list. A Fidelity study done on their 401k's they manage (which are A LOT) showed most folks had no activity during the 2008 crises disproving the notion of everyone bailing out when the market thins. I think the biggest risk and the reason most can't/ shouldn't be 100% stocks is no. 1. When economy is hitting the tank there is way too high a chance of market tanking and getting fired and as Murphy's law usually has it it is right when you are about to send your kids to college or retire in the next 2 years.

I would say if you are a tenured professor, federal worker, doctor/ nurse/ pharmacist/ etc... you can say you meant no. 1 above. Otherwise, I think folks are kidding yourself as to the level of stability of one's job. Not to be ageist, but especially young workers who have not been through many/ any economic cycles. Those who have are usually aware that NO ONE is off limits when downsizing is started.

As for the OP, always good to hear an actual story, but I would have warned about the same thing before 2008, during 2008, and even now. Very few folks can say they have a trully stable job and that is what gets folks in trouble.

Good luck.
Your logic is irrefutable, and it's easy for me to understand as I'm an engineer. My post is for those who respond more to stories than to logic, the artists among us.

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Re: This is why a 100% stock allocation is a bad idea

Post by CajunDan » Mon Aug 22, 2016 10:05 pm

papiper wrote:If you borrowed from a 401k and invested in your own business, you essentially made a much riskier investment than the stock market. And since it worked out fine, your argument facts actually support the side to increase risk versus having bonds. Your feelings don't match that, but your personal facts do.
Having been laid off/downsized 3x, working for "the man" seemed terribly risky to me, and still does.

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Re: This is why a 100% stock allocation is a bad idea

Post by CajunDan » Mon Aug 22, 2016 10:08 pm

Stonebr wrote:"Everybody has a plan until they get punched in the mouth." -- Mike Tyson

My favorite quote of all time!

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Re: This is why a 100% stock allocation is a bad idea

Post by CajunDan » Mon Aug 22, 2016 10:09 pm

SQRT wrote:I am certainly an outlier. Retired 10 years, 66. Entire portfolio is equities, however, when I include the notional present value of my pension my AA is about 60/40, equities to fixed income. Never owned a bond or bond fund/ ETF. Obviously I have a very high risk tolerance. I am fully aware of the theory as I have a CPA. MBA, and a CFA. I figure if I could get through 2008-2009, I can get through almost anything. Not making any recommendations, just sharing my story.
60/40 is a solid number, nothing wrong with it for sure. Great point about pension, many could say the same for SS.

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Re: This is why a 100% stock allocation is a bad idea

Post by gkaplan » Mon Aug 22, 2016 10:15 pm

Stonebr wrote:"Everybody has a plan until they get punched in the mouth." -- Mike Tyson
Or until they get bitten on the ear.
Gordon

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tfb
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Re: This is why a 100% stock allocation is a bad idea

Post by tfb » Mon Aug 22, 2016 10:22 pm

staythecourse wrote:
Ari wrote:
staythecourse wrote:I have written NUMEROUS times, but here is a prerequisite criteria folks need to be able to check of before even considering 100% equities:
1. Recession proof job
2. Long time horizon for the money (10+ years)
3. No need for liquidity before that
4. At least 1 yr. EF
5. Ability to stay the course
Assuming you'd need to withdraw money if you lost your job. If you can live on the income you get even if you lose your job, the list doesn't apply. I'm sure there are other circumstances where some points on the list can be ignored. It's a good start, though.
I am not understanding?

If you don't have a job AND don't need to withdraw money how do you pay the bills?
Use other money such as rent from real estate, book/music/software royalties, or dividends from portfolio (unless you count not reinvesting the diverted dividends the same as withdrawing).
Harry Sit, taking a break from the forums.

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Re: This is why a 100% stock allocation is a bad idea

Post by Ari » Tue Aug 23, 2016 12:40 am

staythecourse wrote:I am not understanding?

If you don't have a job AND don't need to withdraw money how do you pay the bills? I am assuming you mean if your significant other makes enough to cover all the basics even without your paycheck? If so, what happens if they lose their job as well or gets their hours cut?

Or are you assuming if you lose your job you will get another job so quick? What if you get another job in a different state at less pay and now have increased liabilities (paying for new rent along with rent/ mortgage)?

The only thing I have seen is NO ONE is immune to losing their job. My wife and I are both physicians and don't consider ourselves immune so not sure how others can be so confident.

Good luck.
I don't have a significant other. If I lose my job, I'll get support from the government until I can find a new one. My current expenses are around the level of the government unemplyment benefits. Of course, if the Swedish government collapses, those, too, could get lost, but if that happens, my portfolio will be the least of my worries. :)
All in, all the time.

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Re: This is why a 100% stock allocation is a bad idea

Post by White Coat Investor » Tue Aug 23, 2016 12:48 am

I'm a pretty risk tolerant guy. I go climbing and canyoneering and road biking on steep mountain roads for fun. I take 9 year olds to the top of major mountains and rappel with them into pools in deep canyons.

That said, I can remember back in 2008-2009 wondering if REITs were going to go to zero. They had already lost 78% of their value. My portfolio was down 35% or so peak to trough and I remember thinking my chosen asset allocation, 75/25, that before the crash I thought was definitely more conservative than I can handle, was about right. Many Bogleheads were posting about how they were selling low as a "plan B" and many more were probably too embarrassed to admit it.

Don't skip the bonds if you weren't investing in 2008-2009. You have no idea what your risk tolerance is. In the words of Bernstein, you're an investing virgin.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course

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Re: This is why a 100% stock allocation is a bad idea

Post by FIREchief » Tue Aug 23, 2016 1:01 am

White Coat Investor wrote: Don't skip the bonds if you weren't investing in 2008-2009. You have no idea what your risk tolerance is. In the words of Bernstein, you're an investing virgin.
Haha!! I took all the market could dish out in 2008-2009 (and 2000, and.....). Virgin? You have no idea. Careful what names you toss around. There are some fine young folks out there more than ready to face the beast! Full, Speed, Ahead!!! :twisted:
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

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Re: This is why a 100% stock allocation is a bad idea

Post by cjking » Tue Aug 23, 2016 7:01 am

CajunDan wrote:
Stonebr wrote:"Everybody has a plan until they get punched in the mouth." -- Mike Tyson

My favorite quote of all time!
The only England rugby coach to win a world cup used to say that "no plan survives first contact with the enemy." I think he was paraphrasing Field Marshall von Moltke.

https://en.wikiquote.org/wiki/Helmuth_v ... _the_Elder

(Although maybe this is a slightly different point to Tyson's, von Moltke's point was presumably that a plan has to change as soon as you experience what the other guy does, whereas Tyson's might be more that thinking goes out the window when you are under pressure.)

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Re: This is why a 100% stock allocation is a bad idea

Post by 4nursebee » Tue Aug 23, 2016 7:19 am

The title of this post is very misleading and not a good example.
4nursebee

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