Why go with an 80% stock / 20% bond portfolio?

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KlangFool
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Re: Why go with an 80% stock / 20% bond portfolio?

Post by KlangFool »

HornedToad wrote:
KlangFool wrote:Folks,

Let's forget about the emotional part for a while.

So, you have a choice:

A) Carry 3 to 6 months EF and 100/0. You assume that you will have an above-average luck in finding a job across multiple recessions over 20 to 30 years. You will not run out of EF before you find a job and forced to sell your stock for a severe loss.

B) Carry 3 to 6 months EF and another 6 to 12 months of expense in fixed income. You may invest the remainder in stock. You assume that you have average luck in finding a job in a recession across 20 to 30 years. It may take you more than 1 year to find a job. Hence, you do not need to sell your stock at a severe loss after you run out of EF.

What would you choose? Are you that lucky all the time?

KlangFool
Here's the thing. We've now switched the discussion of stock/bond percentage from asset allocation to instead focus cash available in the event of a recession. I'm fine with that topic and think it's more appropriate, but then you have to look at the entire picture.

Someone who's 100/0 but with very low expenses might be able to last 12-18 months in a recession with unemployment benefits, cutting costs, etc. While another person who's 80/20 but who's living expenses match their income (mortgage, daycare, private school, etc) might only have 9-12 months of salary available even with the higher bond amount and considering the early withdrawal penalty.

So we shouldn't look at it as a hard and fast percentage but how it fits into your overall financial picture. And that picture is not just about panic selling, but also ability to survive in a recession, existing expenses, income replacement options, etc

That then gets the stock/bond split back to what it's original purpose should be: Reducing volatility, asset diversification, rebalancing bonus, etc
HornedToad,

That is a fair point.

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Re: Why go with an 80% stock / 20% bond portfolio?

Post by willthrill81 »

zaboomafoozarg wrote:
qwertyjazz wrote:Interesting combination of 'average investor' and 1 million dollars in investable assets
$1 million is average on this forum. Per the 2015 survey, average investable assets were $1.6 million, with a median of just over $900k.

Factoring in other assets those numbers were $2 million average and $1.3 million median.
Average investor ≠ on this forum
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Re: Why go with an 80% stock / 20% bond portfolio?

Post by NibbanaBanana »

I have to agree with the OP to a large extent. I've looked at the volatility of those model portfolios on Vanguards website many, many times. IIRC a 60/40 experienced a worst year on the order of -25% and 100/0 a worst year on the order of -45%. To be honest, I don't think I'm going to feel all that much better losing 25% than 45%. Either way, I'm not going to be happy. More like very unhappy.

I've lived through 2 market downturns of 50% now. I have always been at least 95% in stocks, never sold a share in a down market and continued to invest every penny I could come up with. (I guess I have great faith in the stock market.) And it's paid off for me.

I think it would be prudent advice to start ones investing career with a very conservative allocation, say 60/40. Then see if one can weather a storm. If they sell, not so big a loss and lesson learned. If they ride out the storm and prove their mettle, then switch to all stocks and enjoy the ride.
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Re: Why go with an 80% stock / 20% bond portfolio?

Post by Fieldsy1024 »

I'm 100% stocks at the moment while I am younger (32). Maybe in 3-5 years I might go 80/20
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Re: Why go with an 80% stock / 20% bond portfolio?

Post by Ari »

KlangFool wrote:But, it does not matter to a person with a very high gross saving rate. For example, me. I save one year worth of annual expense every year. I have no need to take the risk. I can get there in 25 years with 0% real return. This is not subjective. This is based on calculation.

There are people out there with a very high gross saving rate. They have no need to take the risk. So, why should they take the risk of losing their money?
It's interesting how attitudes differ. I have a savings rate of about 60-70%, and my thinking is rather that, because I have such a high savings rate, I can afford to take more risks. My savings are large in relation to my expenses, which means that I need to take out a smaller amount if I do have to get my money out. That means the impact on my savings would be smaller than if I had had a lower savings rate. Therefore I can afford a higher stock percentage.

We are of course both correct, as a higher savings rate means a lower need but a higher ability to take risks. I guess it's up to the willingness to break the tie. :)
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Re: Why go with an 80% stock / 20% bond portfolio?

Post by caklim00 »

Been away from this forum for quite some time, but this is an interesting discussion and relates well to a decision we just made. We've done quite well in the past 8 years with a >90% allocation to stocks (part of the time at 100% equity). Well enough that given the current market growth we decided it would be a good time to reduce our overall exposure. That said we are still in our mid/late 30s so we have a significant amount of investing career left. But, palating a 50% loss right now would definitely be much more difficult than when we were in our 20s (doable, but difficult). We actually had no problems handling 2008 (or whenever it was). But that said we know we have less need to take risk. Actually just moved a decent chunk at market close yesterday to Fixed Income.

Do I expect that amount that was moved to Fixed Income will make less over the rest of our Investing career. I sure hope so.

*Note: target AA is now slightly less than 90% stocks (88% to be exact), so some may view this as not much...
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Re: Why go with an 80% stock / 20% bond portfolio?

Post by caklim00 »

Been away from this forum for quite some time, but this is an interesting discussion and relates well to a decision we just made. We've done quite well in the past 8 years with a >90% allocation to stocks (part of the time at 100% equity). Well enough that given the current market growth we decided it would be a good time to reduce our overall exposure. That said we are still in our mid/late 30s so we have a significant amount of investing career left. But, palating a 50% loss right now would definitely be much more difficult than when we were in our 20s (doable, but difficult). We actually had no problems handling 2008 (or whenever it was). But that said we know we have less need to take risk. Actually just moved a decent chunk at market close yesterday to Fixed Income.

Do I expect that amount that was moved to Fixed Income will make less over the rest of our Investing career. I sure hope so.

*Note: target AA is now slightly less than 90% stocks (88% to be exact), so some may view this as not much... I expect we'll likely glide down 1% each year which would put us at 75/25 at age 50
Last edited by caklim00 on Fri Feb 10, 2017 9:34 am, edited 2 times in total.
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Re: Why go with an 80% stock / 20% bond portfolio?

Post by willthrill81 »

Ari wrote:
KlangFool wrote:But, it does not matter to a person with a very high gross saving rate. For example, me. I save one year worth of annual expense every year. I have no need to take the risk. I can get there in 25 years with 0% real return. This is not subjective. This is based on calculation.

There are people out there with a very high gross saving rate. They have no need to take the risk. So, why should they take the risk of losing their money?
It's interesting how attitudes differ. I have a savings rate of about 60-70%, and my thinking is rather that, because I have such a high savings rate, I can afford to take more risks. My savings are large in relation to my expenses, which means that I need to take out a smaller amount if I do have to get my money out. That means the impact on my savings would be smaller than if I had had a lower savings rate. Therefore I can afford a higher stock percentage.

We are of course both correct, as a higher savings rate means a lower need but a higher ability to take risks. I guess it's up to the willingness to break the tie. :)
I entirely agree. Those who can afford to take the risks are often those who aren't required to.

I've heard it also said that those who can afford to retire usually don't, while those can't afford it strongly desire retirement.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
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Re: Why go with an 80% stock / 20% bond portfolio?

Post by HomerJ »

willthrill81 wrote:Your scenario could easily play out for many, and if that's the way that an investor would believe him/herself to think and act in such a situation, then 80/20 is probably great for them. But many, many investors would still panic sell in that scenario as well.
But probably less than if all those 80/20 investors were 100/0.

At first I was thinking you were actually curious about why others might go 80/20, but you seem determined to prove that your point is correct for the "average" investor; that 80/20 is silly, because the volatility is basically the same as 100/0.

You may be right, and I may be wrong. Neither of us really can state with authority much about "average investors". I was just offering a different point of view why having a hard floor might help some people "stay the course" during a downturn.
Last edited by HomerJ on Fri Feb 10, 2017 11:27 am, edited 1 time in total.
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Re: Why go with an 80% stock / 20% bond portfolio?

Post by CyclingDuo »

chrischris wrote:I recently moved to 100% equities....

I'm 31 years old, make around $100k a year and have around $130k spread between my wife's 401k and both our Roth accounts. I have very strong job security (civil service) and have a solid pension available to me when I am eligible for retirement at 53 years old.

I feel my risk tolerance is strong. I don't log in and check my portfolio value. I hope for the market to crash so I can buy more funds. While it is true I started investing in 2009 after the crash, I realistically feel I would sleep fine if my portfolio was cut in half. I probably wouldn't be this aggressive if I didn't have my pension...

I of course plan to reevaluate my asset allocation in 9 years. I don't plan to hold this aggressive portfolio this long but based on my situation I think I can afford the risk.

Am I crazy?
No you're not crazy, but hopefully you have thought it all through and are prepared for what you will or will not do in your first upcoming bear market (whenever it appears). Even a garden variety bear market throws the baby out with the bath water. It's nice to say your tolerance is "strong", but until you really actually go through a standard economic cycle, or even go through a black swan event (Twin Towers Attack, Financial Crisis - where the drop is fast, furious, and nothing short of incredible) - you really won't know until you experience it for yourself. Standard Asset Allocation models don't work so well during a black swan event. That's probably why all those retirement planner Monte Carlo simulations don't include "black swan" events in their predictions. There will be more black swan events going forward. That's is the one thing we can rely on happening. And there will be plenty of garden variety bear markets caused by the economic cycle.

Unfortunately, human nature has not evolved which leads to the usual buying when markets are high, and selling when markets are low. The 2008-2009 period was a pretty devastating bear market. Even the best professionals with long term track records were tossing in the towel. My only solace during that time frame was knowing that our monthly contributions in our retirement investments and educational funds were hopefully going to be viewed in retrospect as excellent dollar cost averaging (and that did prove to be true, but boy did it feel ugly at the time). It was a major, major gut check for all of us. Even those of us who lived through our investments tanking in some previous bear markets...

-29.6% for 3 months in 1987-1988
-44.7% for 2.1 years in 2000-2002

...the -50.9% for 1.3 years in 2008 - 2009 was a gut check grunt.

It's all nice and good for this thread to be chit-chatting following 8 years of up in a bull market that has produced 245%+ thus far.

Not trying to deter your thinking, but just advising based on lots of us who have been through things before that even though you currently feel your tolerance is strong after 8 years of gains, and you feel that you will be able to sleep well at night - history of human behavior states that you won't sleep so well when the time comes. 8-)
"Save like a pessimist, invest like an optimist." - Morgan Housel
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Re: Why go with an 80% stock / 20% bond portfolio?

Post by willthrill81 »

HomerJ wrote:
willthrill81 wrote:Your scenario could easily play out for many, and if that's the way that an investor would believe him/herself to think and act in such a situation, then 80/20 is probably great for them. But many, many investors would still panic sell in that scenario as well.
But probably less than if all those 80/20 investors were 100/0.

At first I was thinking you were actually curious about why others might go 80/20, but you seem determined to prove that your point is correct for the "average" investor; that 80/20 is silly, because the volatility is basically the same as 100/0.

You may be right, and I may be wrong. I was just offering a different point of view why having a hard floor might help some people "stay the course" during a downturn.
I'm not determined to prove a point, but I have yet to hear a convincing argument that the typical investor, who is not remotely a BH, is significantly more likely to stay the course with 80/20 compared to 100/0. In fact, many in this thread have agreed with this assertion. That being said, a BH is not typical, so it may not be worthwhile to continue the discussion among a lot of BHs who know what they're doing.

My concern is for the many investors out there (1) who have been told that they shouldn't go 100/0 even though their risk tolerance, situation, and goals would allow for it and (2) those who have been told that 80/20 is significantly less volatile than 100/0, so they should be able to weather the storm of downturns just fine despite their low risk tolerance.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
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Re: Why go with an 80% stock / 20% bond portfolio?

Post by willthrill81 »

CyclingDuo wrote:
chrischris wrote:I recently moved to 100% equities....

I'm 31 years old, make around $100k a year and have around $130k spread between my wife's 401k and both our Roth accounts. I have very strong job security (civil service) and have a solid pension available to me when I am eligible for retirement at 53 years old.

I feel my risk tolerance is strong. I don't log in and check my portfolio value. I hope for the market to crash so I can buy more funds. While it is true I started investing in 2009 after the crash, I realistically feel I would sleep fine if my portfolio was cut in half. I probably wouldn't be this aggressive if I didn't have my pension...

I of course plan to reevaluate my asset allocation in 9 years. I don't plan to hold this aggressive portfolio this long but based on my situation I think I can afford the risk.

Am I crazy?
No you're not crazy, but hopefully you have thought it all through and are prepared for what you will or will not do in your first upcoming bear market (whenever it appears). Even a garden variety bear market throws the baby out with the bath water. It's nice to say your tolerance is "strong", but until you really actually go through a standard economic cycle, or even go through a black swan event (Twin Towers Attack, Financial Crisis - where the drop is fast, furious, and nothing short of incredible) - you really won't know until you experience it for yourself. Standard Asset Allocation models don't work so well during a black swan event. That's probably why all those retirement planner Monte Carlo simulations don't include "black swan" events in their predictions. There will be more black swan events going forward. That's is the one thing we can rely on happening. And there will be plenty of garden variety bear markets caused by the economic cycle.

Unfortunately, human nature has not evolved which leads to the usual buying when markets are high, and selling when markets are low. The 2008-2009 period was a pretty devastating bear market. Even the best professionals with long term track records were tossing in the towel. My only solace during that time frame was knowing that our monthly contributions in our retirement investments and educational funds were hopefully going to be viewed in retrospect as excellent dollar cost averaging (and that did prove to be true, but boy did it feel ugly at the time). It was a major, major gut check for all of us. Even those of us who lived through our investments tanking in some previous bear markets...

-29.6% for 3 months in 1987-1988
-44.7% for 2.1 years in 2000-2002

...the -50.9% for 1.3 years in 2008 - 2009 was a gut check grunt.

It's all nice and good for this thread to be chit-chatting following 8 years of up in a bull market that has produced 245%+ thus far.

Not trying to deter your thinking, but just advising based on lots of us who have been through things before that even though you currently feel your tolerance is strong after 8 years of gains, and you feel that you will be able to sleep well at night - history of human behavior states that you won't sleep so well when the time comes. 8-)
That's all quite true, but chrischris does not sound like most investors either. Most are not hoping for a market downturn in order to buy more shares (I feel that way myself a bit). And most are not in careers where they will have a pension in addition to SS upon retirement, which can dramatically increase one's risk tolerance.

In that vein, I've heard of many retirees who purchased lifetime annuities (SPIAs) not necessarily because it was the best mathematical choice but because knowing that they had an income source they would not outlive gave them the psychological freedom to be more aggressive with the rest of their capital and to feel better at the same time. Knowing that one has a pension waiting for them in the future can be a great stabilizing force.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
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Re: Why go with an 80% stock / 20% bond portfolio?

Post by CyclingDuo »

willthrill81 wrote:That's all quite true, but chrischris does not sound like most investors either. Most are not hoping for a market downturn in order to buy more shares (I feel that way myself a bit). And most are not in careers where they will have a pension in addition to SS upon retirement, which can dramatically increase one's risk tolerance.

In that vein, I've heard of many retirees who purchased lifetime annuities (SPIAs) not necessarily because it was the best mathematical choice but because knowing that they had an income source they would not outlive gave them the psychological freedom to be more aggressive with the rest of their capital and to feel better at the same time. Knowing that one has a pension waiting for them in the future can be a great stabilizing force.
I agree with you. I was just saying the gut check for Chris is one thing to talk about in advance, but to actually experience it is another ball of wax so to speak. We've used the buy and hold strategy for nearly 27 years now, but those down periods were rough - even with a pension, two annuities, a 403b plan, and SS income all coming in retirement. Based on your 100% stock allocation, it is also a strategy we used for the majority of our investing lives. It is only in the past 6 months our asset allocation has moved away from such a high percentage based on our current age, retirement goals, and a readjustment of allocation.

https://www.ftportfolios.com/Common/Con ... 8ff9bfe12d

And has been mentioned throughout this thread, tolerance is different for everyone and is adjusted, shaped over the years through real world/life experience.
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Re: Why go with an 80% stock / 20% bond portfolio?

Post by nps »

willthrill81 wrote:I'm not determined to prove a point, but I have yet to hear a convincing argument that the typical investor, who is not remotely a BH, is significantly more likely to stay the course with 80/20 compared to 100/0. In fact, many in this thread have agreed with this assertion. That being said, a BH is not typical, so it may not be worthwhile to continue the discussion among a lot of BHs who know what they're doing.

My concern is for the many investors out there (1) who have been told that they shouldn't go 100/0 even though their risk tolerance, situation, and goals would allow for it and (2) those who have been told that 80/20 is significantly less volatile than 100/0, so they should be able to weather the storm of downturns just fine despite their low risk tolerance.
It's hard to nail down your concept of the typical investor. What is better established is that the "average" investor under performs the market.

If that's the investor you have in mind, I would propose that such an individual could be less damaged under an 80/20 portfolio even if the investor would have made the same moves under 100/0. For example, panic selling after a 50 percent drop results in fewer lost dollars under 80/20 than 100/0.
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Re: Why go with an 80% stock / 20% bond portfolio?

Post by willthrill81 »

nps wrote:
willthrill81 wrote:I'm not determined to prove a point, but I have yet to hear a convincing argument that the typical investor, who is not remotely a BH, is significantly more likely to stay the course with 80/20 compared to 100/0. In fact, many in this thread have agreed with this assertion. That being said, a BH is not typical, so it may not be worthwhile to continue the discussion among a lot of BHs who know what they're doing.

My concern is for the many investors out there (1) who have been told that they shouldn't go 100/0 even though their risk tolerance, situation, and goals would allow for it and (2) those who have been told that 80/20 is significantly less volatile than 100/0, so they should be able to weather the storm of downturns just fine despite their low risk tolerance.
It's hard to nail down your concept of the typical investor. What is better established is that the "average" investor under performs the market.

If that's the investor you have in mind, I would propose that such an individual could be less damaged under an 80/20 portfolio even if the investor would have made the same moves under 100/0. For example, panic selling after a 50 percent drop results in fewer lost dollars under 80/20 than 100/0.
That's a fair point. My concern is that the typical 401k holder doesn't know why their AA is what it is and they're basing it purely on advice that doesn't mean anything to them personally.

That's why I really like Vanguard's Wellesley Income fund even though it's 40/60. Sure it's trailed the S&P 500 for nearly a half century, but by only around .4% or less when you account for fees. And the worst year it's ever experienced was only a 9.84% loss, about the same as a 20/80 portfolio in TSM and TBM. For those investors who want, historically speaking, strong returns with minimal volatility, it's hard to beat. The 'average' investor is likely to do far worse than they would just buying and holding Wellesley for decades.

Some might be surprised, but I almost begged my father, who's 67 and only a 2-3 years from at least partial retirement (part-time work perhaps), from moving from 100% equities to at least 70/30. He wants to have every penny he can when he does retire and is, frankly, more than a bit greedy about it. When I mention to him that there's, historically, almost a one in three chance of a down year at any given time, he just says that he would sell if the market started in that direction. :oops: I blame it on the "I used to change your diapers" effect.
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Re: Why go with an 80% stock / 20% bond portfolio?

Post by Beensabu »

nps wrote:I would propose that such an individual could be less damaged under an 80/20 portfolio even if the investor would have made the same moves under 100/0. For example, panic selling after a 50 percent drop results in fewer lost dollars under 80/20 than 100/0.
willthrill81 wrote:My concern is that the typical 401k holder doesn't know why their AA is what it is and they're basing it purely on advice that doesn't mean anything to them personally.
Perhaps that advice is intended exactly for the typical 401k holder that you have in mind.

Take, for instance, the "age in bonds" advice. When they panic in any downturn where they are paying attention to their portfolio balance, the "I don't know why I'm doing what I'm doing" investor that has followed that advice will do less harm to themselves than one that goes 100/0. For those who stay the course, following that advice results in them being more conservative with risk over time as they get closer to needing to access their funds (even if they don't know that). Someone who panic sells in their first downturn has now figured out just how risk adverse they are and will take the time to do it right the next time.
willthrill81 wrote:My concern is for the many investors out there (1) who have been told that they shouldn't go 100/0 even though their risk tolerance, situation, and goals would allow for it and (2) those who have been told that 80/20 is significantly less volatile than 100/0, so they should be able to weather the storm of downturns just fine despite their low risk tolerance.
If they take the time to explore their risk tolerance, situation, and goals, they will come up with a personal investment strategy they can explain and stand behind. At that point, they are no longer the "typical" investor you are concerned for and will go 100/0 if that works for them.

Maybe someone who just dutifully funnels in their biweekly 401k funds in their 20s and 30s can weather downturns in total unaware bliss, resting easy in their belief that their 80/20 portfolio is the same as 50/50 in terms of volatility. That belief is not true. But if they're not paying attention, and they think that, it's actually a protection of sorts (from themselves).
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Re: Why go with an 80% stock / 20% bond portfolio?

Post by KnowNth »

Curious whether you experienced year 2002? There were big "No Hire" signs outside my local Target and Toys R Us. There were just NO jobs, not even flip burger jobs available.

willthrill81 wrote: If I have to sell my house, flip burgers for a living, and eat rice and beans, I'll do so before I raid my retirement accounts.
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Re: Why go with an 80% stock / 20% bond portfolio?

Post by willthrill81 »

KnowNth wrote:Curious whether you experienced year 2002? There were big "No Hire" signs outside my local Target and Toys R Us. There were just NO jobs, not even flip burger jobs available.
willthrill81 wrote: If I have to sell my house, flip burgers for a living, and eat rice and beans, I'll do so before I raid my retirement accounts.
I was employed throughout that period and saw plenty of help wanted signs throughout it.

I'm not saying that I absolutely never would raid my retirement accounts, but it's certainly the dead last resort.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
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Re: Why go with an 80% stock / 20% bond portfolio?

Post by KnowNth »

Then I think 100% stock fits your personality perfectly, and you are more likely to make better returns too. Good luck.

willthrill81 wrote:
KnowNth wrote:Curious whether you experienced year 2002? There were big "No Hire" signs outside my local Target and Toys R Us. There were just NO jobs, not even flip burger jobs available.
willthrill81 wrote: If I have to sell my house, flip burgers for a living, and eat rice and beans, I'll do so before I raid my retirement accounts.
I was employed throughout that period and saw plenty of help wanted signs throughout it.

I'm not saying that I absolutely never would raid my retirement accounts, but it's certainly the dead last resort.
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Re: Why go with an 80% stock / 20% bond portfolio?

Post by triceratop »

I received some advice here that I think is good, to have 10% in bonds (so about age minus 15) so that I can get some discipline and practice rebalancing. David Jay's comments on the first page of this thread resonate. But my portfolio volatility is still likely equivalent to or exceeds 100% stock, what with 50/50 international tilt and overweights to SCV and emerging markets. My bonds are probably about 5 months expenses, but I expect to use them to rebalance and not bail me out. During the last downturn in early 2016 I was eagerly buying. I am looking forward to my first real bear market to 'show my mettle'.

Note: My employment contract as a graduate student researcher is certain through September 2018 (and realistically another 2 years beyond but at marginally less certainty), which allows a more aggressive allocation.
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Re: Why go with an 80% stock / 20% bond portfolio?

Post by BW1985 »

triceratop wrote:I received some advice here that I think is good, to have 10% in bonds (so about age minus 15) so that I can get some discipline and practice rebalancing. David Jay's comments on the first page of this thread resonate. But my portfolio volatility is still likely equivalent to or exceeds 100% stock, what with 50/50 international tilt and overweights to SCV and emerging markets. My bonds are probably about 5 months expenses, but I expect to use them to rebalance and not bail me out. During the last downturn in early 2016 I was eagerly buying. I am looking forward to my first real bear market to 'show my mettle'.

Note: My employment contract as a graduate student researcher is certain through September 2018 (and realistically another 2 years beyond but at marginally less certainty), which allows a more aggressive allocation.
Do you mind sharing how much you tilt and which funds you use?
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Re: Why go with an 80% stock / 20% bond portfolio?

Post by bb »

I'm not determined to prove a point, but I have yet to hear a convincing argument that the typical investor
You have heard several reasons. You just don't agree with them.
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Re: Why go with an 80% stock / 20% bond portfolio?

Post by triceratop »

BW1985 wrote:
triceratop wrote:I received some advice here that I think is good, to have 10% in bonds (so about age minus 15) so that I can get some discipline and practice rebalancing. David Jay's comments on the first page of this thread resonate. But my portfolio volatility is still likely equivalent to or exceeds 100% stock, what with 50/50 international tilt and overweights to SCV and emerging markets. My bonds are probably about 5 months expenses, but I expect to use them to rebalance and not bail me out. During the last downturn in early 2016 I was eagerly buying. I am looking forward to my first real bear market to 'show my mettle'.

Note: My employment contract as a graduate student researcher is certain through September 2018 (and realistically another 2 years beyond but at marginally less certainty), which allows a more aggressive allocation.
Do you mind sharing how much you tilt and which funds you use?
Currently all-Vanguard due to previous availability of funds w/o commissions. I'll likely be using DGS and perhaps iShares for developed value. Domestically I am 60/40 VTI/VBR; internationally I am 25% overtilted to EM (VWO) w/ the remaining 75% split between Total Market (VXUS) and Small (VSS).

But you shouldn't just blindly use anybody's allocation; find something you can stick with. The funds are just vehicles to gain exposures to various risk factors at cheap costs.
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Re: Why go with an 80% stock / 20% bond portfolio?

Post by BW1985 »

triceratop wrote:
BW1985 wrote:
triceratop wrote:I received some advice here that I think is good, to have 10% in bonds (so about age minus 15) so that I can get some discipline and practice rebalancing. David Jay's comments on the first page of this thread resonate. But my portfolio volatility is still likely equivalent to or exceeds 100% stock, what with 50/50 international tilt and overweights to SCV and emerging markets. My bonds are probably about 5 months expenses, but I expect to use them to rebalance and not bail me out. During the last downturn in early 2016 I was eagerly buying. I am looking forward to my first real bear market to 'show my mettle'.

Note: My employment contract as a graduate student researcher is certain through September 2018 (and realistically another 2 years beyond but at marginally less certainty), which allows a more aggressive allocation.
Do you mind sharing how much you tilt and which funds you use?
Currently all-Vanguard due to previous availability of funds w/o commissions. I'll likely be using DGS and perhaps iShares for developed value. Domestically I am 60/40 VTI/VBR; internationally I am 25% overtilted to EM (VWO) w/ the remaining 75% split between Total Market (VXUS) and Small (VSS).

But you shouldn't just blindly use anybody's allocation; find something you can stick with. The funds are just vehicles to gain exposures to various risk factors at cheap costs.
Yeah I get that. I just like to see how people choose to tilt and which funds they use since the costs tend to go up by doing so. Thx
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Re: Why go with an 80% stock / 20% bond portfolio?

Post by bb »

Summary:

1) OP didn't find any merit to 80/20 portfolio vs 100/0 in terms of reduced volatility being convincing
2) If you invest in stocks you need non-stock funds to weather a bear market - call it 5 years
3) As you get older you never know when you are going to be unemployed/underemployed/retired
4) OP has a 1 year contract - that's a big emergency fund - 99.9% of employees have no such contract

So sounds like as you get older everyone agrees you need a bunch of money outside of stocks
(think years not months).
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Re: Why go with an 80% stock / 20% bond portfolio?

Post by willthrill81 »

bb wrote:Summary:

1) OP didn't find any merit to 80/20 portfolio vs 100/0 in terms of reduced volatility being convincing I am hardly the only one to have that perspective, as many in this thread have attested.
2) If you invest in stocks you need non-stock funds to weather a bear market - call it 5 years What does the time frame have to do it, unless you're preparing to use your capital as a big emergency fund?
3) As you get older you never know when you are going to be unemployed/underemployed/retired Being unemployed at 50 is likely more detrimental than at 25, but most never know when they will be unemployed. Conversely, if you don't have at least 25 times your desired income, retirement isn't going to catch you by surprise.
4) OP has a 1 year contract - that's a big emergency fund - 99.9% of employees have no such contract I suspect that more than .1% of U.S. employees work under a contract.

So sounds like as you get older everyone agrees you need a bunch of money outside of stocks
(think years not months).
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Re: Why go with an 80% stock / 20% bond portfolio?

Post by bb »

What does the time frame have to do it, unless you're preparing to use your capital as a big emergency fund?
If you are forced to retire your capital is all you have to live on.
Conversely, if you don't have at least 25 times your desired income, retirement isn't going to catch you by surprise.
If you are forced to retire in your 50s retirement "just caught you by suprise".
I suspect that more than .1% of U.S. employees work under a contract.
Ok let's call it 10% - so what - you were arguing broad points about "most people". I don't
think 10% qualifies as "most people".

I call BS about saying you are going to live in a tent instead of raid your retirement funds.

I can agree when young 100/0 or 80/20 might be a wash in terms of not selling due to
volatility.

But I would say as you get into your 50s you need a significant (multiple years) allocation
to something other than equities for food/shelter/clothing. That's not my definition
of an emergency fund.
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Re: Why go with an 80% stock / 20% bond portfolio?

Post by bb »

I have very strong job security (civil service)
OP - do you have a defined benefit pension coming your way? Boy that sure would
be a relevant factor affecting need/ability/desire to take risk.
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Re: Why go with an 80% stock / 20% bond portfolio?

Post by willthrill81 »

bb wrote:What does the time frame have to do it, unless you're preparing to use your capital as a big emergency fund?
bb wrote:Conversely, if you don't have at least 25 times your desired income, retirement isn't going to catch you by surprise.
If you are forced to retire in your 50s retirement "just caught you by suprise".
A layoff in your 50s does not necessarily force you into retirement. I've seen many such people retool and go back into the workforce.
bb wrote:If you are forced to retire your capital is all you have to live on.
So I guess that a six month emergency fund and unemployment benefits are nothing?
bb wrote:Ok let's call it 10% - so what - you were arguing broad points about "most people". I don't
think 10% qualifies as "most people".
You are taking what I said completely out of context. I never said that most people have as secure a job as I do, quite the contrary actually.
bb wrote:I call BS about saying you are going to live in a tent instead of raid your retirement funds.
I never said anything about living in a tent. I said that I would sell my house (presumably rent or move in with a family member). Big difference.
bb wrote:I can agree when young 100/0 or 80/20 might be a wash in terms of not selling due to
volatility.
That's been my main point all along. The typical investor won't see sufficient reduction in volatility with 80/20 over 100/0 to keep them from selling. Many Bogleheads would, but we are not typical investors.
bb wrote:But I would say as you get into your 50s you need a significant (multiple years) allocation to something other than equities for food/shelter/clothing. That's not my definition of an emergency fund.
That's your opinion. There is no hard and fast definition of an emergency fund nor how large it should be.
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Re: Why go with an 80% stock / 20% bond portfolio?

Post by Beensabu »

Back to your OP.
willthrill81 wrote:In my humble opinion, if a 100% stock portfolio is too volatile for someone, for whatever reason, then they should probably consider making stocks no more than 70% of their portfolio.

Is there something I'm missing here?
No. You are not missing anything. A person who would sell in a downturn (for whatever reason) with a 100/0 AA would be better served with a 70/30 AA (or much lower equity allocation). Which I think we've all actually agreed on :D
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Re: Why go with an 80% stock / 20% bond portfolio?

Post by willthrill81 »

Beensabu wrote:Back to your OP.
willthrill81 wrote:In my humble opinion, if a 100% stock portfolio is too volatile for someone, for whatever reason, then they should probably consider making stocks no more than 70% of their portfolio.

Is there something I'm missing here?
No. You are not missing anything. A person who would sell in a downturn (for whatever reason) with a 100/0 AA would be better served with a 70/30 AA (or much lower equity allocation). Which I think we've all actually agreed on :D
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Re: Why go with an 80% stock / 20% bond portfolio?

Post by aristotelian »

Just joining this discussion. I am 80/20 at Age 42. I would like to increase my bond allocation but stocks keep going up faster than I can rebalance without having to cash in taxable funds. At some point I will make a major shift toward bonds but don't feel the need to do it any time soon. I figure if the market collapses I still have 20 years to make it back up.

That said, I work for a mid-size foundation with an endowment that provides all our operating expenses. I was surprised to find we are about 90/10. We compensate for market fluctuation by budgeting on a 3 year rolling average. It makes for some tight years but we just live with the uncertainty. Over the long run, the thinking is that we maximize return on the endowment. So far it seems to be working.
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Re: Why go with an 80% stock / 20% bond portfolio?

Post by HomerJ »

willthrill81 wrote:A layoff in your 50s does not necessarily force you into retirement. I've seen many such people retool and go back into the workforce.
Just curious. Retool and get a comparable paying job? Or even 75% pay?

Can you give some examples? Do you really know many people in their 50s who have gone through this?
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Re: Why go with an 80% stock / 20% bond portfolio?

Post by willthrill81 »

HomerJ wrote:
willthrill81 wrote:A layoff in your 50s does not necessarily force you into retirement. I've seen many such people retool and go back into the workforce.
Just curious. Retool and get a comparable paying job? Or even 75% pay?

Can you give some examples? Do you really know many people in their 50s who have gone through this?
If you're incapable of getting another job after a layoff, it has little to do with your age and mostly to do with your skills. I can easily recall two people, one who was in his late 40s and the other in his 50s, who saw the writing on the wall and voluntarily shifted from one employer to another with little to no retooling actually. They both had marketable skills that were valued across the industry (at least one got pay raise, perhaps both), not just at their former employer.

Think about this from an employer's perspective. Who would you rather hire? Someone with lots of experience who still has a solid decade of work in front of them, or some wet-behind-the-ears youngster who has to be trained extensively only to quite likely go to leave almost immediately for another opportunity elsewhere? I heard one employer ask that very question almost verbatim. It's no contest.

The problem is that too many in their 50s are only valuable to their current employer. If they get laid off, they're screwed. The key is to keep yourself marketable to an industry. Otherwise, you're rolling the dice. Those in that position should be squirreling away every penny they can for a potentially early retirement and/or working hard to make/keep themselves valuable to their industry. If your entire industry is on the ropes, you've got more work in front of you to stay valuable in the workforce.
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Re: Why go with an 80% stock / 20% bond portfolio?

Post by bayview »

I agree that we all have to be continually retooling and upgrading our skills. I do so at the age of 62.

But if you believe that an employer would rather hire someone in his/her upper 50's, supposedly with all these life skills, than someone in his/her upper 20's, then I can only say that you are completely naive. Age discrimination is very, very real, especially in tech industries, but across the board in fields that look at potential health insurance and pension costs. In their eyes, older = expensive and not worth it.

I completely agree that the smart hire would be the older, experienced worker, but that's not what is happening these days.
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Re: Why go with an 80% stock / 20% bond portfolio?

Post by willthrill81 »

bayview wrote:I agree that we all have to be continually retooling and upgrading our skills. I do so at the age of 62.

But if you believe that an employer would rather hire someone in his/her upper 50's, supposedly with all these life skills, than someone in his/her upper 20's, then I can only say that you are completely naive. Age discrimination is very, very real, especially in tech industries, but across the board in fields that look at potential health insurance and pension costs. In their eyes, older = expensive and not worth it.

I completely agree that the smart hire would be the older, experienced worker, but that's not what is happening these days.
You can call me any name you want, but I'm merely reiterating what I heard an employer say myself. There is certainly age discrimination in many industries, but this view that a unemployed but valuable 50 something is completely hosed is defeatist.

“Older workers more and more are in much higher demand,” said John Challenger, whose company helps laid-off workers find new jobs. While “certainly (age) discrimination hasn’t disappeared,” he said, “for those who want to work the market is opening up to them.”
http://www.nbcnews.com/id/15537917/ns/b ... J_NQG8rLIU
Last edited by willthrill81 on Sat Feb 11, 2017 11:33 pm, edited 1 time in total.
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Re: Why go with an 80% stock / 20% bond portfolio?

Post by bb »

OP: Have you ever worked for a Fortune 500 Company?
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Re: Why go with an 80% stock / 20% bond portfolio?

Post by willthrill81 »

bb wrote:OP: Have you ever worked for a Fortune 500 Company?
To be honest, that's none of your business.

This thread is turning into personal attacks on me and my own experiences for some inexplicable reason. Apparently some do not like to have their beliefs, even when it comes to investment strategy, questioned in the slightest.
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Re: Why go with an 80% stock / 20% bond portfolio?

Post by siamond »

Actually, I had that perception too about age discrimination. And I started to question it over the past decade. I just had dinner with a very nice couple, I believe she is in her late 50s or early 60s, she's a software developer, has been for the longest time, no management ambition, just good at what she does, and although she navigated from start-ups to larger cut-throat environments, she stayed employed, likes her job and is appreciated. This is just an anecdote, but I've seen stories like that again and again in high-tech, grey hair isn't necessarily a bad thing, far from it. I've also seen countless other people retooling themselves. The US is such a great country in this respect, this would be MUCH harder in Europe, for cultural reasons. But of course, for each 'feel good' story, there is a story of struggle and despair. We just can't generalize.

This is a little bit like stock returns. We see broad patterns a little too easily based on our past experience, and draw hasty conclusions. This doesn't even start to reflect the incredible diversity of things. Which brings us back to the 80/20 portfolio vs 100/0 portfolio. Where the potential diversity of returns on the '80' part is such that, yes, it is hard to discern a significant difference with 100/0 besides some emotional/behavioral considerations which are highly personal, and just can't be generalized.
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Re: Why go with an 80% stock / 20% bond portfolio?

Post by qwertyjazz »

willthrill81 wrote:
bb wrote:OP: Have you ever worked for a Fortune 500 Company?
To be honest, that's none of your business.

This thread is turning into personal attacks on me and my own experiences for some inexplicable reason. Apparently some do not like to have their beliefs, even when it comes to investment strategy, questioned in the slightest.
I think a lot of the problem gets to what the AA model hides by being a simple percentage and not even an absolute number. The ageism and length of work arguments gets at the unsure time frame of work. Emergency funds are that work can end at any point for some length of time. But it is also true that it could end depending on your field AND employer type for potentially ever. Yes, you might get a job as a guy flipping burgers three towns down from where you currently live. But that might be all you can get. So with these ambiguities, how do you convert that to a percentage? A huge loss would cause panic by the number more likely than the percent for the 80 to 100 range. If we are talking millions of dollars and multiples of living expenses, then 80-100 might make a difference as a form of emergency fund, whatever that is. But devoid of absolute amounts of assets, likely future employment prospects and spend rates, AA is a very shallow model.

Getting back to the original post, is there ever a time where 80/20 makes sense? The answer for which I now think is yes is in the limited circumstance where the absolute value of that 20 would help psychologically or in some form of EF. But I agree with the OP - that would be rare especially for an age in bonds minus some number type.
Last edited by qwertyjazz on Sun Feb 12, 2017 8:49 am, edited 1 time in total.
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Re: Why go with an 80% stock / 20% bond portfolio?

Post by Valuethinker »

willthrill81 wrote:
HomerJ wrote:
willthrill81 wrote:A layoff in your 50s does not necessarily force you into retirement. I've seen many such people retool and go back into the workforce.
Just curious. Retool and get a comparable paying job? Or even 75% pay?

Can you give some examples? Do you really know many people in their 50s who have gone through this?
If you're incapable of getting another job after a layoff, it has little to do with your age and mostly to do with your skills. I can easily recall two people, one who was in his late 40s and the other in his 50s, who saw the writing on the wall and voluntarily shifted from one employer to another with little to no retooling actually. They both had marketable skills that were valued across the industry (at least one got pay raise, perhaps both), not just at their former employer.

Think about this from an employer's perspective. Who would you rather hire? Someone with lots of experience who still has a solid decade of work in front of them, or some wet-behind-the-ears youngster who has to be trained extensively only to quite likely go to leave almost immediately for another opportunity elsewhere? I heard one employer ask that very question almost verbatim. It's no contest.

The problem is that too many in their 50s are only valuable to their current employer. If they get laid off, they're screwed. The key is to keep yourself marketable to an industry. Otherwise, you're rolling the dice. Those in that position should be squirreling away every penny they can for a potentially early retirement and/or working hard to make/keep themselves valuable to their industry. If your entire industry is on the ropes, you've got more work in front of you to stay valuable in the workforce.
I don't know about the USA, but in the UK, where age discrimination is illegal, there is massive de facto age discrimination.

We don't tend to have CEOs over 60, for example, unless they own the company. At 55 you are expected to be exiting. *Chairmen* retire at 65 (UK standard is a separate, non executive, chairman).

Financial services over age 50 you are either:

- top dog, but there aren't many of those
- working on an eat-what-you-kill basis (ie the firm gives you regulatory cover, a postal address and someone to answer the phone)
- working in Private Wealth Management (with a book of clients)

Tech is something similar.
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Re: Why go with an 80% stock / 20% bond portfolio?

Post by bb »

Ok - even if we concede that 100/0 vs 80/20 might not drive any different
behavior in the 20s-30s - walk me through 40s-60s assuming no employment
contract, no defined benefit retirement plan, no employer provided health
insurance. When does the allocation to fixed income start?
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Re: Why go with an 80% stock / 20% bond portfolio?

Post by qwertyjazz »

bb wrote:Ok - even if we concede that 100/0 vs 80/20 might not drive any different
behavior in the 20s-30s - walk me through 40s-60s assuming no employment
contract, no defined benefit retirement plan, no employer provided health
insurance. When does the allocation to fixed income start?
That is where the sorites paradox strikes. There is sone transition that will make people feel safer with more investible assets between their 40-60s but no clean delination. There is nothing magical about a glidepath vs a step function. But at some point the transition is needed. I think there is some methodology of doing it, but at any stage the next step will be simmilar to the first.
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Re: Why go with an 80% stock / 20% bond portfolio?

Post by WarChest »

I'm in my early 30s and am moving towards an 80/20 target. I am all for ignoring the noise and avoiding market timing, but you can't ignore that there are better odds of being heavy or light in your equity allocation depending on how long of an up (or down) swing there's been. Shifting a bit at the margin towards more equities makes sense when markets go down a lot or have been soggy for some time. I think shifting a bit more towards bonds makes sense now after a nice 8 year run. Even if you have a few more years of nice gains, 80% capture is pretty solid.
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Re: Why go with an 80% stock / 20% bond portfolio?

Post by willthrill81 »

WarChest wrote:I'm in my early 30s and am moving towards an 80/20 target. I am all for ignoring the noise and avoiding market timing, but you can't ignore that there are better odds of being heavy or light in your equity allocation depending on how long of an up (or down) swing there's been. Shifting a bit at the margin towards more equities makes sense when markets go down a lot or have been soggy for some time. I think shifting a bit more towards bonds makes sense now after a nice 8 year run. Even if you have a few more years of nice gains, 80% capture is pretty solid.
You are basically advocating market timing. The problem is that it doesn't work. Even if you're just doing it as part of annual rebalancing, 80/20 still falls short of the returns of 100/0 in the long-term.

"For the twenty years ending 12/31/2015, the S&P 500 Index averaged 9.85% a year. A pretty attractive historical return. The average equity fund investor earned a market return of only 5.19%."
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Re: Why go with an 80% stock / 20% bond portfolio?

Post by bayview »

willthrill81 wrote:
bayview wrote:I agree that we all have to be continually retooling and upgrading our skills. I do so at the age of 62.

But if you believe that an employer would rather hire someone in his/her upper 50's, supposedly with all these life skills, than someone in his/her upper 20's, then I can only say that you are completely naive. Age discrimination is very, very real, especially in tech industries, but across the board in fields that look at potential health insurance and pension costs. In their eyes, older = expensive and not worth it.

I completely agree that the smart hire would be the older, experienced worker, but that's not what is happening these days.
You can call me any name you want, but I'm merely reiterating what I heard an employer say myself. There is certainly age discrimination in many industries, but this view that a unemployed but valuable 50 something is completely hosed is defeatist.

“Older workers more and more are in much higher demand,” said John Challenger, whose company helps laid-off workers find new jobs. While “certainly (age) discrimination hasn’t disappeared,” he said, “for those who want to work the market is opening up to them.”
http://www.nbcnews.com/id/15537917/ns/b ... J_NQG8rLIU
I'm surprised at the name-calling allegation, as I don't think that I did so. It was certainly not my intention, and if my post was offensive to you, I apologize.

You cited what one employer said, along with the Challenger quote. Another poster made a similar observation.

Others have posted the opposite: that in certain fields, age discrimination is very real.

"Completely hosed" is an overstatement of what I wrote. I was simply noting that despite what ought to be true, we are not all completely able to shift professions without at least a temporary downgrade in rank and pay. And IMO this should be taken into consideration when looking at risk in the last 5-10 years of employment, which many automatically assume to be the peak earning years. I'm saying that one shouldn't assume a smooth increase in income in those final years, because it may very well not happen.

You might very well be in a field that is in constant demand, and if so, congratulations for your prescience in knowing (or guessing) that this would be so.
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Re: Why go with an 80% stock / 20% bond portfolio?

Post by KlangFool »

bayview wrote:
"Completely hosed" is an overstatement of what I wrote. I was simply noting that despite what ought to be true, we are not all completely able to shift professions without at least a temporary downgrade in rank and pay. And IMO this should be taken into consideration when looking at risk in the last 5-10 years of employment, which many automatically assume to be the peak earning years. I'm saying that one shouldn't assume a smooth increase in income in those final years, because it may very well not happen.
bayview,

The problem is even if you are willing to do that the employer may not give you a shot.

A) You are more experienced and capable than the hiring manager. You can be a threat to the hiring manager.

B) The employer assumes that you will leave as soon as you find a better opportunity.

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Re: Why go with an 80% stock / 20% bond portfolio?

Post by KlangFool »

willthrill81 wrote:
WarChest wrote:I'm in my early 30s and am moving towards an 80/20 target. I am all for ignoring the noise and avoiding market timing, but you can't ignore that there are better odds of being heavy or light in your equity allocation depending on how long of an up (or down) swing there's been. Shifting a bit at the margin towards more equities makes sense when markets go down a lot or have been soggy for some time. I think shifting a bit more towards bonds makes sense now after a nice 8 year run. Even if you have a few more years of nice gains, 80% capture is pretty solid.
You are basically advocating market timing. The problem is that it doesn't work. Even if you're just doing it as part of annual rebalancing, 80/20 still falls short of the returns of 100/0 in the long-term.

"For the twenty years ending 12/31/2015, the S&P 500 Index averaged 9.85% a year. A pretty attractive historical return. The average equity fund investor earned a market return of only 5.19%."
https://www.thebalance.com/why-average- ... ns-2388519
willthrill81,

Given that most of us do not know whether our career will last 20 years. Then, the long-term return has no meaning to us. We do not have the time to get the return.

So, please stop using the long-term return number for us. We do not have the above average luck in term of career.

KlangFool
bayview
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Re: Why go with an 80% stock / 20% bond portfolio?

Post by bayview »

KlangFool wrote:
bayview wrote:
"Completely hosed" is an overstatement of what I wrote. I was simply noting that despite what ought to be true, we are not all completely able to shift professions without at least a temporary downgrade in rank and pay. And IMO this should be taken into consideration when looking at risk in the last 5-10 years of employment, which many automatically assume to be the peak earning years. I'm saying that one shouldn't assume a smooth increase in income in those final years, because it may very well not happen.
bayview,

The problem is even if you are willing to do that the employer may not give you a shot.

A) You are more experienced and capable than the hiring manager. You can be a threat to the hiring manager.

B) The employer assumes that you will leave as soon as you find a better opportunity.

KlangFool
I completely agree. This happened to us. There's nothing like having a new manager who is nearly 30 years younger, and whose prior "experience" is writing provocative fluff pieces for social media. (It seems that this is now considered to be experience, wisdom, and credentials.) Plus leadership is now made up of people who are apparently shining up their resumes, as opposed to growing the company.

I was trying to be diplomatic. :D :shock: :D
The continuous execution of a sound strategy gives you the benefit of the strategy. That's what it's all about. --Rick Ferri
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willthrill81
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Re: Why go with an 80% stock / 20% bond portfolio?

Post by willthrill81 »

KlangFool wrote:Given that most of us do not know whether our career will last 20 years. Then, the long-term return has no meaning to us. We do not have the time to get the return.

So, please stop using the long-term return number for us. We do not have the above average luck in term of career.

KlangFool
I've already provided you with solid data which shows from 2004 to 2010, early withdrawals from tax advantaged accounts increased by a grand total of 2%, yet you're still on this kick that we should always be prepared to either drain a substantial portion of these accounts due to a job loss.

I know that our own personal experiences us bias our perceptions of the occurrence of those experiences in general, but the data simply do not support your viewpoint.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
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