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 »

willthrill81 wrote:
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.
willthrill81,

You are a professor. You are supposedly an expert with the statistic. But, you do not understand the basic concept of personal finance. You are giving advice to individuals over the Internet forum.

So, unless you can guarantee the person that he/she will not be forced into long-term employment and/or under-employment over 20 years, why should you use the long-term return number to convince them? We are not a statistic.

<< 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%,>>

This has absolutely no meaning to us. We might be one of the 2%. Then, what? Are you going to support our family with your money? Ditto, we cannot be 4.8% unemployed.

Why is this so hard for you to understand? Statistic only works at the aggregate aka large number level. It does not work at the individual level. We are not a theory. We are real people and real family living on real income in the real world. Life happened as a matter of fact to us.

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

Post by willthrill81 »

KlangFool wrote:willthrill81,

You are a professor. You are supposedly an expert with the statistic. But, you do not understand the basic concept of personal finance. You are giving advice to individuals over the Internet forum.

So, unless you can guarantee the person that he/she will not be forced into long-term employment and/or under-employment over 20 years, why should you use the long-term return number to convince them? We are not a statistic.

<< 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%,>>

This has absolutely no meaning to us. We might be one of the 2%. Then, what? Are you going to support our family with your money? Ditto, we cannot be 4.8% unemployed.

Why is this so hard for you to understand? Statistic only works at the aggregate aka large number level. It does not work at the individual level. We are not a theory. We are real people and real family living on real income in the real world. Life happened as a matter of fact to us.

KlangFool
So you orient your investment strategy around a 2% possibility of an event during the worst recession in decades? And then you're criticizing me for not doing the same?

Wow.

I understand that either an event happens to you or it doesn't, but ignoring the likelihood of an event is foolhardy. If we oriented our lives around a minute possibility during a turbulent time, we'd all have forgone a great many things we do all the time, such as driving, due to the risks involved.
“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
Beensabu
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Re: Why go with an 80% stock / 20% bond portfolio?

Post by Beensabu »

@willthrill81: I think KlangFool is just trying to make sure that someone without an adequate emergency fund or stable liquid assets of some kind doesn't stumble on this thread and go, "Look at those 20 year returns. I'm going to go 100% equities." Because for someone in that position to come away with that and implement it would be... :oops: No?
"The only thing that makes life possible is permanent, intolerable uncertainty; not knowing what comes next."
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Re: Why go with an 80% stock / 20% bond portfolio?

Post by bb »

OP: Please indulge me on extending your asset allocation model from
from 20's to 60's. Please list your assumptions.
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Re: Why go with an 80% stock / 20% bond portfolio?

Post by willthrill81 »

bb wrote:OP: Please indulge me on extending your asset allocation model from
from 20's to 60's. Please list your assumptions.
Currently, I'm 35 and 100% equities. I'm planning a bit aggressively for retiring at 55, but if it needs to be delayed, that's fine.

I anticipate staying 100% equities until I'm 45 (10 years from tentative retirement), at which point I'll likely shift to around 70/30. When I'm around 50, I'll see if I'm on track to meet my goals by 55 and whether I can back down to maybe 60/40 or if I need to maintain 70/30 longer. I anticipate that I'll likely be 60/40 throughout my retirement, continuing my current equity tilt toward small and value.

Based on my contributions (increases to which I'm not including in my projections), to meet my goal of FI at 55, I'll need to achieve approximately a 7% real return, which is actually 2.5% lower than the real rate of return of my portfolio (given my tilt) over the last 40 years. If I achieve a 5% real return, it will delay FI until 58. A 3% return would move it to 63.

I'm aware that changing my AA to 70/30 at around 45 will likely reduce my return by around 1.5%, but given the tilt of my portfolio, that should still put me on track to FI by 55, assuming an average return.

Further, while I don't incorporate it into my plans, I'll likely come into a sum of money within this time frame that would be at least one third of the assets needed to achieve FI.
“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
avalpert
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Re: Why go with an 80% stock / 20% bond portfolio?

Post by avalpert »

willthrill81 wrote:
bb wrote:OP: Please indulge me on extending your asset allocation model from
from 20's to 60's. Please list your assumptions.
Currently, I'm 35 and 100% equities. I'm planning a bit aggressively for retiring at 55, but if it needs to be delayed, that's fine.

I anticipate staying 100% equities until I'm 45 (10 years from tentative retirement), at which point I'll likely shift to around 70/30. When I'm around 50, I'll see if I'm on track to meet my goals by 55 and whether I can back down to maybe 60/40 or if I need to maintain 70/30 longer. I anticipate that I'll likely be 60/40 throughout my retirement, continuing my current equity tilt toward small and value.

Based on my contributions (increases to which I'm not including in my projections), to meet my goal of FI at 55, I'll need to achieve approximately a 7% real return, which is actually 2.5% lower than the real rate of return of my portfolio (given my tilt) over the last 40 years. If I achieve a 5% real return, it will delay FI until 58. A 3% return would move it to 63.

I'm aware that changing my AA to 70/30 at around 45 will likely reduce my return by around 1.5%, but given the tilt of my portfolio, that should still put me on track to FI by 55, assuming an average return.

Further, while I don't incorporate it into my plans, I'll likely come into a sum of money within this time frame that would be at least one third of the assets needed to achieve FI.
Have you done the math to see what your planned risk exposure across your life would translate into if you maintained a flat allocation until 55 or later? Since your portfolio in the later years will (presumably) be higher than today, it seems likely that your actual exposure will be similar to or less than a constant 80/20 portfolio would be... are you so sure that moving from 100/0 to 70/30 is better than a constant mix?
KlangFool
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Re: Why go with an 80% stock / 20% bond portfolio?

Post by KlangFool »

willthrill81 wrote:
bb wrote:OP: Please indulge me on extending your asset allocation model from
from 20's to 60's. Please list your assumptions.
Currently, I'm 35 and 100% equities. I'm planning a bit aggressively for retiring at 55, but if it needs to be delayed, that's fine.

I anticipate staying 100% equities until I'm 45 (10 years from tentative retirement),
willthrill81,

So, you only have 10 years for 100/0.

From page 2 of this thread by Nisi

viewtopic.php?f=10&t=210178&start=50

<< According to the 2015 Ibbotson SBBI Classic Yearbook, page 49, from 1926-2014, out of 80 overlapping 10-year periods,

a portfolio of 100% large stocks lost money 4 times;
a 90/10 portfolio lost money one time;
70/30, 50/50, and 30/70 did not lose money in any ten-year period.>>

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

Post by bb »

anticipate staying 100% equities until I'm 45 (10 years from tentative retirement), at which point I'll likely shift to around 70/30.
Thank you. That certainly helps me frame the discussion which I thought was lacking.
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Re: Why go with an 80% stock / 20% bond portfolio?

Post by willthrill81 »

avalpert wrote:Have you done the math to see what your planned risk exposure across your life would translate into if you maintained a flat allocation until 55 or later? Since your portfolio in the later years will (presumably) be higher than today, it seems likely that your actual exposure will be similar to or less than a constant 80/20 portfolio would be... are you so sure that moving from 100/0 to 70/30 is better than a constant mix?
No, I haven't done the calculation, but I don't really see a need to. Based on all of the data I've seen, I'm mathematically better off now at 100/0 than anything else. This is a subjective assessment, but I don't personally see enough historic risk reduction to justify moving from 100/0 to 80/20. Further, even if I did move to 80/20 now, I would not want to be 80/20 right before I reach FI.
“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
Beensabu
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Re: Why go with an 80% stock / 20% bond portfolio?

Post by Beensabu »

bogle_rad wrote:I'm not entirely certain, but I think the OP is a believer that holding equities for longer time periods reduces their risk.
John Norstad disabused me of that notion:
http://www.norstad.org/finance/risk-and-time.html
I've had a tab to that open and finally got around to reading through it. He explains how risk of equities actually increases with time. The only factor that mitigates risk over a long time horizon is human capital. There's also some stuff there about considering both the probability and weight of possible outcomes. For instance, a possible outcome with a 2% probability of occurrence but pretty disastrous consequences should it occur. And there are links to math.

The info on iso-elastic utility was illuminating to me as well. Constant relative risk aversion by determining an AA you would have with any level of wealth and maintain over any time horizon.

If you feel like reading through that link and want to discuss it, that would be cool.
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Re: Why go with an 80% stock / 20% bond portfolio?

Post by NibbanaBanana »

Really stupid question here. I guess I don't understand the purpose of AA. Or the retirement withdraw rules that I've been reading about.

So what if you have to sell into a down market sometimes? Don't the different withdraw rules (1/N, 4%, 30 X expenses, etc) take that into account? Is there some particular AA that the withdraw rules are designed for? (I guess it can't be too heavy on bonds as Vanguard warns against this.) Is there some particular retirement age they're designed for?

Granted, I would prefer not to sell into a down market. But don't we have to assume that that's going to happen occasionally?
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Re: Why go with an 80% stock / 20% bond portfolio?

Post by KlangFool »

willthrill81 wrote:
avalpert wrote:Have you done the math to see what your planned risk exposure across your life would translate into if you maintained a flat allocation until 55 or later? Since your portfolio in the later years will (presumably) be higher than today, it seems likely that your actual exposure will be similar to or less than a constant 80/20 portfolio would be... are you so sure that moving from 100/0 to 70/30 is better than a constant mix?
No, I haven't done the calculation, but I don't really see a need to. Based on all of the data I've seen, I'm mathematically better off now at 100/0 than anything else. This is a subjective assessment, but I don't personally see enough historic risk reduction to justify moving from 100/0 to 80/20. Further, even if I did move to 80/20 now, I would not want to be 80/20 right before I reach FI.
willthrill81,

https://personal.vanguard.com/us/insigh ... about-risk

Historically,

Portfolio Average Return
100/0 10.2%
90/10 9.9%
80/20 9.6%
70/30 9.2%

So, you are taking the risk of losing money in 10 years for the average return of 1% more per year.

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

Post by willthrill81 »

KlangFool wrote:
willthrill81 wrote:
avalpert wrote:Have you done the math to see what your planned risk exposure across your life would translate into if you maintained a flat allocation until 55 or later? Since your portfolio in the later years will (presumably) be higher than today, it seems likely that your actual exposure will be similar to or less than a constant 80/20 portfolio would be... are you so sure that moving from 100/0 to 70/30 is better than a constant mix?
No, I haven't done the calculation, but I don't really see a need to. Based on all of the data I've seen, I'm mathematically better off now at 100/0 than anything else. This is a subjective assessment, but I don't personally see enough historic risk reduction to justify moving from 100/0 to 80/20. Further, even if I did move to 80/20 now, I would not want to be 80/20 right before I reach FI.
willthrill81,

https://personal.vanguard.com/us/insigh ... about-risk

Historically,

Portfolio Average Return
100/0 10.2%
90/10 9.9%
80/20 9.6%
70/30 9.2%

So, you are taking the risk of losing money in 10 years for the average return of 1% more per year.

KlangFool
Using the data you referenced (assuming S&P 500 for equities, which I don't hold with my small/value tilt), about a 5% probability yes, in return for an expected additional return of 10.9% (1/9.2). I'm aware of that and accept the risk.
larryswedroe wrote:Investing isn't about certainty, but about putting odds on your side.
Last edited by willthrill81 on Sun Feb 12, 2017 11:07 pm, edited 2 times in total.
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Re: Why go with an 80% stock / 20% bond portfolio?

Post by KlangFool »

NibbanaBanana wrote:Really stupid question here. I guess I don't understand the purpose of AA. Or the retirement withdraw rules that I've been reading about.

So what if you have to sell into a down market sometimes? Don't the different withdraw rules (1/N, 4%, 30 X expenses, etc) take that into account? Is there some particular AA that the withdraw rules are designed for? (I guess it can't be too heavy on bonds as Vanguard warns against this.) Is there some particular retirement age they're designed for?

Granted, I would prefer not to sell into a down market. But don't we have to assume that that's going to happen occasionally?
NibbanaBanana,

There was a thread on this.

viewtopic.php?t=195344

You can find this with the search function.

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

Post by VaR »

There a lot of optimization of the mean and ignoring variance going on in this thread. Does anyone think a Monte-Carlo analysis of portfolio success/failure can help provide some insight?

FWIW, I switched from 100/0 to 80/20 recently as a result of doing some Monte-Carlo analysis of portfolio allocations.

Note: I think there is a logical fallacy in layering a dynamic strategy of "and if things go badly, I will just keep working until the long run comes" on top of an asset allocation plan. Don't assume reversion to mean.
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Re: Why go with an 80% stock / 20% bond portfolio?

Post by Beensabu »

VaR wrote:There a lot of optimization of the mean and ignoring variance going on in this thread. Does anyone think a Monte-Carlo analysis of portfolio success/failure can help provide some insight?
I didn't know about this. Thank you.
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Re: Why go with an 80% stock / 20% bond portfolio?

Post by willthrill81 »

VaR wrote:There a lot of optimization of the mean and ignoring variance going on in this thread. Does anyone think a Monte-Carlo analysis of portfolio success/failure can help provide some insight?

FWIW, I switched from 100/0 to 80/20 recently as a result of doing some Monte-Carlo analysis of portfolio allocations.

Note: I think there is a logical fallacy in layering a dynamic strategy of "and if things go badly, I will just keep working until the long run comes" on top of an asset allocation plan. Don't assume reversion to mean.
I've done Monte Carlo simulations using Portfolio Visualizer with my portfolio. Using data from 1972 to 2016, my needed FI number (in $) is about 30% below the 25th percentile ending balance by the time I'm 55 even if I went 70/30 the whole time. I know full well that the future won't look just like the past, but as Larry says, it's about putting the odds on your side.
“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 KlangFool »

willthrill81 wrote:
VaR wrote:There a lot of optimization of the mean and ignoring variance going on in this thread. Does anyone think a Monte-Carlo analysis of portfolio success/failure can help provide some insight?

FWIW, I switched from 100/0 to 80/20 recently as a result of doing some Monte-Carlo analysis of portfolio allocations.

Note: I think there is a logical fallacy in layering a dynamic strategy of "and if things go badly, I will just keep working until the long run comes" on top of an asset allocation plan. Don't assume reversion to mean.
I've done Monte Carlo simulations using Portfolio Visualizer with my portfolio. Using data from 1972 to 2016, my needed FI number (in $) is about 30% below the 25th percentile ending balance by the time I'm 55 even if I went 70/30 the whole time. I know full well that the future won't look just like the past, but as Larry says, it's about putting the odds on your side.
willthrill81,

1) Besides 100/0, you are heavily tilted to small cap value? Aka, you only take the risk side of the Larry portfolio but not the fixed income side.

<< Using data from 1972 to 2016, my needed FI number (in $) is about 30% below the 25th percentile ending balance by the time I'm 55 even if I went 70/30 the whole time. >>

2) This is a very common story at the forum. People assume that they could take more risk in order to compensate for their low saving rate. And, usually, those people has a 100/0 portfolio.

3) I can't change your mind. Nobody could change my mind too when I was 100/0 about your age. And, I lost 50% of my portfolio in the process. I hope you have a better outcome than I do.

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

Post by Admiral »

willthrill81,

What happened to your portfolio in 2008?

If you (like many of us here) lived through that period and actually had a decently sized portfolio, then you know the risks of this type of allocation. Trust me, I was 100% equity at that time, and it was terrible.

You need to understand sequence of return risk to understand that just because, statistically and historically, a 100% stock portfolio recovers its value eventually, this means nothing to the person who has very bad sequencing luck. The portfolio does not have time to recover. As Klang and others noted, you give up very little return and reduce a lot of risk by going from 100/0 to 70/30.
Last edited by Admiral on Mon Feb 13, 2017 10:34 am, edited 1 time in total.
onourway
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Re: Why go with an 80% stock / 20% bond portfolio?

Post by onourway »

willthrill81 wrote: Currently, I'm 35 and 100% equities. I'm planning a bit aggressively for retiring at 55, but if it needs to be delayed, that's fine.
Will, you keep saying that you are at 100/0 but in this very thread you have stated that you are aggressively paying down your mortgage (only 3.5 years left) and you have substantial funds in your Roth IRA invested in Wellesley. This is not a 100/0 portfolio. You have a portion of your portfolio at 100/0 but what matters is the entire picture.
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Re: Why go with an 80% stock / 20% bond portfolio?

Post by goingup »

onourway wrote:
willthrill81 wrote: Currently, I'm 35 and 100% equities. I'm planning a bit aggressively for retiring at 55, but if it needs to be delayed, that's fine.
Will, you keep saying that you are at 100/0 but in this very thread you have stated that you are aggressively paying down your mortgage (only 3.5 years left) and you have substantial funds in your Roth IRA invested in Wellesley. This is not a 100/0 portfolio. You have a portion of your portfolio at 100/0 but what matters is the entire picture.
I agree. I've pointed out before that this poster is not 100% stock. It's disingenuous that he is presenting his position as such.

How is someone who has his Roth filled with Wellesley, and has 9% of his Net Worth in Cash invested 100% in equity?

Frankly, he's leading people right over the cliff with this but he himself has a big parachute.

(I apologize for this discourteous tone and won't post regarding this again.)
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Re: Why go with an 80% stock / 20% bond portfolio?

Post by willthrill81 »

onourway wrote:Will, you keep saying that you are at 100/0 but in this very thread you have stated that you are aggressively paying down your mortgage (only 3.5 years left) and you have substantial funds in your Roth IRA invested in Wellesley. This is not a 100/0 portfolio. You have a portion of your portfolio at 100/0 but what matters is the entire picture.
goingup wrote:I agree. I've pointed out before that this poster is not 100% stock. It's disingenuous that he is presenting his position as such.

How is someone who has his Roth filled with Wellesley, and has 9% of his Net Worth in Cash invested 100% in equity?

Frankly, he's leading people right over the cliff with this but he himself has a big parachute.

(I apologize for this discourteous tone and won't post regarding this again.)
As I have already noted, the funds I have in Wellesley are part of my EF which just happens to be stored in a Roth IRA so I can access the contributions when needed. I do not consider those funds part of my retirement assets. And even so, that represents about 3% of my invested assets, so even if you counted that, I'm less than 2% in bonds.
Last edited by willthrill81 on Mon Feb 13, 2017 10:54 am, edited 2 times in total.
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Re: Why go with an 80% stock / 20% bond portfolio?

Post by willthrill81 »

KlangFool wrote:2) This is a very common story at the forum. People assume that they could take more risk in order to compensate for their low saving rate. And, usually, those people has a 100/0 portfolio.
Do you consider a pre-tax savings rate of 40% to be low?
“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 onourway »

duplicate
Last edited by onourway on Mon Feb 13, 2017 10:57 am, edited 1 time in total.
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Re: Why go with an 80% stock / 20% bond portfolio?

Post by onourway »

onourway wrote:
willthrill81 wrote:
onourway wrote:
willthrill81 wrote: Currently, I'm 35 and 100% equities. I'm planning a bit aggressively for retiring at 55, but if it needs to be delayed, that's fine.
Will, you keep saying that you are at 100/0 but in this very thread you have stated that you are aggressively paying down your mortgage (only 3.5 years left) and you have substantial funds in your Roth IRA invested in Wellesley. This is not a 100/0 portfolio. You have a portion of your portfolio at 100/0 but what matters is the entire picture.
As I have already noted, the funds I have in Wellesley are part of my EF which just happens to be stored in a Roth IRA so I can access the contributions when needed. I do not consider those funds part of my retirement assets.
This is simply mental accounting on your part. I don't disagree that we all do this to some extent, but you have to look at the entire picture. By paying down your mortgage and keeping significant assets in cash rather than funneling those funds into equities you are effectively increasing your fixed-income portion of your portfolio.
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Re: Why go with an 80% stock / 20% bond portfolio?

Post by onourway »

onourway wrote:
onourway wrote:
willthrill81 wrote:
onourway wrote:
willthrill81 wrote: Currently, I'm 35 and 100% equities. I'm planning a bit aggressively for retiring at 55, but if it needs to be delayed, that's fine.
Will, you keep saying that you are at 100/0 but in this very thread you have stated that you are aggressively paying down your mortgage (only 3.5 years left) and you have substantial funds in your Roth IRA invested in Wellesley. This is not a 100/0 portfolio. You have a portion of your portfolio at 100/0 but what matters is the entire picture.
As I have already noted, the funds I have in Wellesley are part of my EF which just happens to be stored in a Roth IRA so I can access the contributions when needed. I do not consider those funds part of my retirement assets.
This is simply mental accounting on your part. I don't disagree that we all do this to some extent, but you have to look at the entire picture. By paying down your mortgage and keeping significant assets in cash rather than funneling those funds into equities you are effectively increasing your fixed-income portion of your portfolio.
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Re: Why go with an 80% stock / 20% bond portfolio?

Post by onourway »

willthrill81 wrote:
onourway wrote:
Will, you keep saying that you are at 100/0 but in this very thread you have stated that you are aggressively paying down your mortgage (only 3.5 years left) and you have substantial funds in your Roth IRA invested in Wellesley. This is not a 100/0 portfolio. You have a portion of your portfolio at 100/0 but what matters is the entire picture.
As I have already noted, the funds I have in Wellesley are part of my EF which just happens to be stored in a Roth IRA so I can access the contributions when needed. I do not consider those funds part of my retirement assets.
This is simply mental accounting on your part. I don't disagree that we all do this to some extent, but you have to look at the entire picture. By paying down your mortgage and keeping significant assets in cash rather than funneling those funds into equities you are effectively increasing your fixed-income portion of your portfolio.[/quote]
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Re: Why go with an 80% stock / 20% bond portfolio?

Post by KlangFool »

willthrill81 wrote:
KlangFool wrote:2) This is a very common story at the forum. People assume that they could take more risk in order to compensate for their low saving rate. And, usually, those people has a 100/0 portfolio.
Do you consider a pre-tax savings rate of 40% to be low?
willthrill81,

Saving rate is dependent on your goal. If you need risk and return level of 100/0 in order to reach your goal, you do not save enough to reach your goal.

You have 2 choices: adjust your goal or adjust your saving rate.

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

Post by willthrill81 »

Admiral wrote:willthrill81,

What happened to your portfolio in 2008?

If you (like many of us here) lived through that period and actually had a decently sized portfolio, then you know the risks of this type of allocation. Trust me, I was 100% equity at that time, and it was terrible.

You need to understand sequence of return risk to understand that just because, statistically and historically, a 100% stock portfolio recovers its value eventually, this means nothing to the person who has very bad sequencing luck. The portfolio does not have time to recover. As Klang and others noted, you give up very little return and reduce a lot of risk by going from 100/0 to 70/30.
I 'lost' just like everybody else, but I didn't sell. As I have already said, I have more skin in the game now, but considering that I'm not in need of the funds for decades, I'm not really interested in what the market does tomorrow or ten years from now, at least not when it comes to selling. I take solace in knowing that over 130 years, the market has always come back to reach new highs.
“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 onourway »

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

Post by onourway »

I apologize for the duplicate posts here. It seems if I try to make an edit it posts a duplicate.
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Re: Why go with an 80% stock / 20% bond portfolio?

Post by willthrill81 »

onourway wrote:
willthrill81 wrote:
onourway wrote:
Will, you keep saying that you are at 100/0 but in this very thread you have stated that you are aggressively paying down your mortgage (only 3.5 years left) and you have substantial funds in your Roth IRA invested in Wellesley. This is not a 100/0 portfolio. You have a portion of your portfolio at 100/0 but what matters is the entire picture.
As I have already noted, the funds I have in Wellesley are part of my EF which just happens to be stored in a Roth IRA so I can access the contributions when needed. I do not consider those funds part of my retirement assets.
This is simply mental accounting on your part. I don't disagree that we all do this to some extent, but you have to look at the entire picture. By paying down your mortgage and keeping significant assets in cash rather than funneling those funds into equities you are effectively increasing your fixed-income portion of your portfolio.
I do look at the entire picture. So do you ask people whether they own their home outright when you ask their AA? Should they treat a paid-off home as a bond?

This thread is turning into so much semantics, and I'm on my way out.
“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 KlangFool »

onourway wrote:I apologize for the duplicate posts here. It seems if I try to make an edit it posts a duplicate.
You can delete your own post using the "x" button next to the pencil symbol at the top right corner.

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

Post by KlangFool »

willthrill81 wrote:
onourway wrote:
willthrill81 wrote:
onourway wrote:
Will, you keep saying that you are at 100/0 but in this very thread you have stated that you are aggressively paying down your mortgage (only 3.5 years left) and you have substantial funds in your Roth IRA invested in Wellesley. This is not a 100/0 portfolio. You have a portion of your portfolio at 100/0 but what matters is the entire picture.
As I have already noted, the funds I have in Wellesley are part of my EF which just happens to be stored in a Roth IRA so I can access the contributions when needed. I do not consider those funds part of my retirement assets.
This is simply mental accounting on your part. I don't disagree that we all do this to some extent, but you have to look at the entire picture. By paying down your mortgage and keeping significant assets in cash rather than funneling those funds into equities you are effectively increasing your fixed-income portion of your portfolio.
I do look at the entire picture. So do you ask people whether they own their home outright when you ask their AA? Should they treat a paid-off home as a bond?

This thread is turning into so much semantics, and I'm on my way out.
willthrill81,

<<So do you ask people whether they own their home outright when you ask their AA? >>

Most people do not own their own home outright. So, if they say nothing, it is assumed that they carry a mortgage or they rent.

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

Post by onourway »

KlangFool wrote:
onourway wrote:I apologize for the duplicate posts here. It seems if I try to make an edit it posts a duplicate.
You can delete your own post using the "x" button next to the pencil symbol at the top right corner.

KlangFool
I assure you I am no forum newbie but I honestly do not see the button to do this! :)

Edit - I see it for this post I just made but not for any of the others...
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Re: Why go with an 80% stock / 20% bond portfolio?

Post by Admiral »

willthrill81 wrote:
Admiral wrote:willthrill81,

What happened to your portfolio in 2008?

If you (like many of us here) lived through that period and actually had a decently sized portfolio, then you know the risks of this type of allocation. Trust me, I was 100% equity at that time, and it was terrible.

You need to understand sequence of return risk to understand that just because, statistically and historically, a 100% stock portfolio recovers its value eventually, this means nothing to the person who has very bad sequencing luck. The portfolio does not have time to recover. As Klang and others noted, you give up very little return and reduce a lot of risk by going from 100/0 to 70/30.
I 'lost' just like everybody else, but I didn't sell. As I have already said, I have more skin in the game now, but considering that I'm not in need of the funds for decades, I'm not really interested in what the market does tomorrow or ten years from now, at least not when it comes to selling. I take solace in knowing that over 130 years, the market has always come back to reach new highs.
And that's great for you. Now imagine the investor who was 35 (like you are now) in 1988, and who retired at 55 (like you plan to) in early 2008. This person had to continue to work past their expected age of retirement. And that's with a fairly fast market recovery. Now imagine a 10 year or a 12 year recovery period.

You see the problem? If you're ok with that risk--having to postpone retirement for x number of years--then you've answered your own question.
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Re: Why go with an 80% stock / 20% bond portfolio?

Post by KlangFool »

onourway wrote:
KlangFool wrote:
onourway wrote:I apologize for the duplicate posts here. It seems if I try to make an edit it posts a duplicate.
You can delete your own post using the "x" button next to the pencil symbol at the top right corner.

KlangFool
I assure you I am no forum newbie but I honestly do not see the button to do this! :)

Edit - I see it for this post I just made but not for any of the others...
After a while, you can no longer delete it. The button disappeared.

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

Post by onourway »

willthrill81 wrote:
I do look at the entire picture. So do you ask people whether they own their home outright when you ask their AA? Should they treat a paid-off home as a bond?

This thread is turning into so much semantics, and I'm on my way out.
If you are consciously making the decision to 'buy down' your mortgage at an accelerated pace rather than putting more into equities, then, yes, I'd say that is what you are doing.

There is, of course, nothing wrong with this. I consider myself pretty aggressive - I was 100/0 for years, now about 85/15 but I have made the choice to not pay off my mortgage at 2.875% when I can put that money into my other investments instead. Everyone has their own comfort level. Owning my home outright isn't significant to me at this point, in the larger context of my entire portfolio.
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Re: Why go with an 80% stock / 20% bond portfolio?

Post by willthrill81 »

Admiral wrote:And that's great for you. Now imagine the investor who was 35 (like you are now) in 1988, and who retired at 55 (like you plan to) in early 2008. This person had to continue to work past their expected age of retirement. And that's with a fairly fast market recovery. Now imagine a 10 year or a 12 year recovery period.

You see the problem? If you're ok with that risk--having to postpone retirement for x number of years--then you've answered your own question.
When did I advocate being 100% equities at age 55? Not once.

Did I say that I intend to move to a 70/30 allocation at around age 45, ten years before my anticipated retirement? Yes.
“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 Admiral »

willthrill81 wrote:
Admiral wrote:And that's great for you. Now imagine the investor who was 35 (like you are now) in 1988, and who retired at 55 (like you plan to) in early 2008. This person had to continue to work past their expected age of retirement. And that's with a fairly fast market recovery. Now imagine a 10 year or a 12 year recovery period.

You see the problem? If you're ok with that risk--having to postpone retirement for x number of years--then you've answered your own question.
When did I advocate being 100% equities at age 55? Not once.

Did I say that I intend to move to a 70/30 allocation at around age 45, ten years before my anticipated retirement? Yes.
Well you made the point many times (including in your OP) that there's no real difference between 100/80/70 % equities, historically.

For what it's worth, Vanguard's recommendation for those who are 10 years from retirement is 64% equities.
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Re: Why go with an 80% stock / 20% bond portfolio?

Post by willthrill81 »

Admiral wrote:Well you made the point many times (including in your OP) that there's no real difference between 100/80/70 % equities, historically.
I never said that there wasn't a 'real difference' between a 100/0 and a 70/30 portfolio.
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.
And the stated purpose of the OP was to show that for a typical investor (not a BH), the difference in volatility between a 100/0 and an 80/20 portfolio is not sufficient to keep them from panic-selling in a market downturn. I never said that there was no 'real difference' between them, only that there may not be enough of a difference to change many people's behavior, which is a different matter entirely.
Last edited by willthrill81 on Mon Feb 13, 2017 12:07 pm, edited 1 time in total.
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Re: Why go with an 80% stock / 20% bond portfolio?

Post by nps »

Admiral wrote:Well you made the point many times (including in your OP) that there's no real difference between 100/80/70 % equities, historically.
I would say that the OP made the opposite point - that historically there is a substantial dollar difference in ending portfolio value between 80/20 and 100/0. His argument was that the actions of the investor (i.e. decision to sell in a down market) might not be different between 80/20 and 100/0.
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Re: Why go with an 80% stock / 20% bond portfolio?

Post by qwertyjazz »

willthrill81 wrote:
onourway wrote:
willthrill81 wrote:
onourway wrote:
Will, you keep saying that you are at 100/0 but in this very thread you have stated that you are aggressively paying down your mortgage (only 3.5 years left) and you have substantial funds in your Roth IRA invested in Wellesley. This is not a 100/0 portfolio. You have a portion of your portfolio at 100/0 but what matters is the entire picture.
As I have already noted, the funds I have in Wellesley are part of my EF which just happens to be stored in a Roth IRA so I can access the contributions when needed. I do not consider those funds part of my retirement assets.
This is simply mental accounting on your part. I don't disagree that we all do this to some extent, but you have to look at the entire picture. By paying down your mortgage and keeping significant assets in cash rather than funneling those funds into equities you are effectively increasing your fixed-income portion of your portfolio.
I do look at the entire picture. So do you ask people whether they own their home outright when you ask their AA? Should they treat a paid-off home as a bond?

This thread is turning into so much semantics, and I'm on my way out.
Strangely enough - the semantics is what has my fixated on this thread.
Your profile is not that risky. You have a secured job, you sound like you work in a field where you could obtain other employment, you are minimizing even the leverage implicit in owning a house, you have a nice size EF yet you come off as sounding risk seeking with 100 percent equities
I am looking for a good model to conceptualize my own risk and I think semantics matter. I think this is why you and KlangFool are often talking past each other. I think semantics matter as that might be why people consider someone 100 percent equities more likely to leave the market than 80 percent (I agree with Nedsaids point upstream that it is likely absolute amounts instead of percentages).
I think what you are getting at are semantics of risk. The risk you take and the risk you believe you are taking which could both vary in times of crises. The semantics of talking about risk is what IMO your OP was about.
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Re: Why go with an 80% stock / 20% bond portfolio?

Post by siamond »

I have to say I found this thread intriguing (if only because it asked a question very directly related to my own 80/20 AA).

The more I think about it, the more it seems that the primary reason for which one would choose 80/20, or 90/10, instead of 100/0, is really a line of thinking close to an emergency fund. Point being to have reserves that we feel safe about (at least in nominal terms) to deal with unexpected tough and emotional times (e.g. a deep stock crisis, or some very costly medical issue, or a long time without employment, etc).

Personally, I never saw the point of a dedicated emergency fund, bonds are perfectly fine to be used in (the rare) case of emergency, and cash is just a guaranteed money loser. Yeah, bonds value may vary by a few % at the wrong time, so what, overall, it will turn out much better on the long run than cash. Yes, bonds typically belong to tax-sheltered savings vehicles, but some very simple rebalancing tactics across one's various accounts (taxable and/or Roth) will take care of making such funds liquid enough. And credit card(s) should allow to bridge very short-term gaps.

I had not fully realized that my 20% bonds are really a mix of an investment and an emergency fund allowing me to see through several years of deep s***, when I might be emotionally disturbed and really not eager to sell stocks by then (even if it might be more rational to do so). This also explains why such starkly divergent points of view emerged in this thread. Folks who experienced or witnessed long lasting issues are more inclined to have larger reserves. Folks who feel 'safer' by their past experience and current personal situation are less inclined to overload on low-return reserves. To each their own.

OP, based on what you explained of your own situation, you may want to consider a 90/10 allocation, where the "10" part would have such double-semantics of 'safe' investment and emergency fund.
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Re: Why go with an 80% stock / 20% bond portfolio?

Post by willthrill81 »

siamond wrote:I have to say I found this thread intriguing (if only because it asked a question very directly related to my own 80/20 AA).

The more I think about it, the more it seems that the primary reason for which one would choose 80/20, or 90/10, instead of 100/0, is really a line of thinking close to an emergency fund. Point being to have reserves that we feel safe about (at least in nominal terms) to deal with unexpected tough and emotional times (e.g. a deep stock crisis, or some very costly medical issue, or a long time without employment, etc).

Personally, I never saw the point of a dedicated emergency fund, bonds are perfectly fine to be used in (the rare) case of emergency, and cash is just a guaranteed money loser. Yeah, bonds value may vary by a few % at the wrong time, so what, overall, it will turn out much better on the long run than cash. Yes, bonds typically belong to tax-sheltered savings vehicles, but some very simple rebalancing tactics across one's various accounts (taxable and/or Roth) will take care of making such funds liquid enough. And credit card(s) should allow to bridge very short-term gaps.

I had not fully realized that my 20% bonds are really a mix of an investment and an emergency fund allowing me to see through several years of deep s***, when I might be emotionally disturbed and really not eager to sell stocks by then (even if it might be more rational to do so). This also explains why such starkly divergent points of view emerged in this thread. Folks who experienced or witnessed long lasting issues are more inclined to have larger reserves. Folks who feel 'safer' by their past experience and current personal situation are less inclined to overload on low-return reserves. To each their own.
I'm glad that this discussion proved useful to you in evaluating your own position. :beer My goal in starting this thread was to get people to actually think about their AA and not just 'go with the flow'. I haven't put down anyone for having anything different than 100/0, and I haven't recommended it to anyone. It's called personal finance for a reason.
siamond wrote:OP, based on what you explained of your own situation, you may want to consider a 90/10 allocation, where the "10" part would have such double-semantics of 'safe' investment and emergency fund.
I don't really want to do that for two reasons. First, I store most of my EF in a Roth IRA (otherwise, I'm using tax deferred accounts exclusively) so I can pull out contributions anytime they are needed; those funds are invested in Wellesley, and I don't personally consider them part of my retirement assets. Considering that I am a contractual employee who could not be dismissed without over a year's notice, I find that my EF is already adequate, so I see no need for a 90/10 allocation. Doing so would not be worth the risk-adjusted loss of expected returns, in my own personal, subjective assessment. Second, since the lion's share of my assets are in tax deferred accounts, I would get walloped with the early withdrawal penalty and extra income taxes for trying to withdraw those funds if I needed them anyway. But thanks for the suggestion.
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Re: Why go with an 80% stock / 20% bond portfolio?

Post by KlangFool »

willthrill81 wrote: I don't really want to do that for two reasons. First, I store most of my EF in a Roth IRA (otherwise, I'm using tax deferred accounts exclusively) so I can pull out contributions anytime they are needed; those funds are invested in Wellesley, and I don't personally consider them part of my retirement assets. Considering that I am a contractual employee who could not be dismissed without over a year's notice, I find that my EF is already adequate, so I see no need for a 90/10 allocation. Doing so would not be worth the risk-adjusted loss of expected returns, in my own personal, subjective assessment. Second, since the lion's share of my assets are in tax deferred accounts, I would get walloped with the early withdrawal penalty and extra income taxes for trying to withdraw those funds if I needed them anyway. But thanks for the suggestion.
willthrill81,

Just to get a complete picture of your thought process.

1) So, under you current model, if you are unemployed, how long can you last before you have to sell your stock in order to support your family.

2) Or, you consider this scenario is never going to happen, hence, it is not part of your consideration?

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

Post by KlangFool »

siamond wrote:I have to say I found this thread intriguing (if only because it asked a question very directly related to my own 80/20 AA).

The more I think about it, the more it seems that the primary reason for which one would choose 80/20, or 90/10, instead of 100/0, is really a line of thinking close to an emergency fund. Point being to have reserves that we feel safe about (at least in nominal terms) to deal with unexpected tough and emotional times (e.g. a deep stock crisis, or some very costly medical issue, or a long time without employment, etc).
siamond,

My AA (64/36) is designed for my family to survive 5 years of market downturn and unemployment before I need to sell my stock. I have no job security. And, the prospect of long-term underemployment and unemployment is real for me. I intended to be the last survivor if the ship is sinking.

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

Post by siamond »

willthrill81 wrote:First, I store most of my EF in a Roth IRA (otherwise, I'm using tax deferred accounts exclusively) so I can pull out contributions anytime they are needed; those funds are invested in Wellesley, and I don't personally consider them part of my retirement assets. Considering that I am a contractual employee who could not be dismissed without over a year's notice, I find that my EF is already adequate, so I see no need for a 90/10 allocation. Doing so would not be worth the risk-adjusted loss of expected returns, in my own personal, subjective assessment. Second, since the lion's share of my assets are in tax deferred accounts, I would get walloped with the early withdrawal penalty and extra income taxes for trying to withdraw those funds if I needed them anyway. But thanks for the suggestion.
Well, I think you are actually closer to what I suggested than you might realize. Wellesley is quite heavy on bonds. If you were to include your Roth in your AA (and there is really no reason to not do so, it IS an investment), then your AA is definitely not 100/0. Actually, whenever somebody shows up on this forum speaking of a 100/0 allocation, the outcome is almost always the same, there is a sizable separate EF which isn't included in the math.

As to the withdrawal penalty point, this is what I hinted at with the rebalancing point, but I was probably not very clear. Check this wiki page, and you'll see the point I was trying to make. You might be better off using a high-return asset class in the Roth, to maximize its tax-free properties.

This being said, I am splitting hairs a little bit, and given everything you explained, your approach seems quite fine.
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Re: Why go with an 80% stock / 20% bond portfolio?

Post by siamond »

KlangFool wrote:
siamond wrote:I have to say I found this thread intriguing (if only because it asked a question very directly related to my own 80/20 AA).

The more I think about it, the more it seems that the primary reason for which one would choose 80/20, or 90/10, instead of 100/0, is really a line of thinking close to an emergency fund. Point being to have reserves that we feel safe about (at least in nominal terms) to deal with unexpected tough and emotional times (e.g. a deep stock crisis, or some very costly medical issue, or a long time without employment, etc).
siamond,

My AA (64/36) is designed for my family to survive 5 years of market downturn and unemployment before I need to sell my stock. I have no job security. And, the prospect of long-term underemployment and unemployment is real for me. I intended to be the last survivor if the ship is sinking.

KlangFool
Yes, I had you in mind when I wrote what I wrote, I was trying hard to be balanced in the sentences that followed what you quoted. Given your personal situation, you feel the need for much larger 'safe' reserves. I respect that. Just please understand that one's personal situation is always quite different from others.
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Re: Why go with an 80% stock / 20% bond portfolio?

Post by KlangFool »

siamond wrote:
KlangFool wrote:
siamond wrote:I have to say I found this thread intriguing (if only because it asked a question very directly related to my own 80/20 AA).

The more I think about it, the more it seems that the primary reason for which one would choose 80/20, or 90/10, instead of 100/0, is really a line of thinking close to an emergency fund. Point being to have reserves that we feel safe about (at least in nominal terms) to deal with unexpected tough and emotional times (e.g. a deep stock crisis, or some very costly medical issue, or a long time without employment, etc).
siamond,

My AA (64/36) is designed for my family to survive 5 years of market downturn and unemployment before I need to sell my stock. I have no job security. And, the prospect of long-term underemployment and unemployment is real for me. I intended to be the last survivor if the ship is sinking.

KlangFool
Yes, I had you in mind when I wrote what I wrote, I was trying hard to be balanced in the sentences that followed what you quoted. Given your personal situation, you feel the need for much larger 'safe' reserves. I respect that. Just please understand that one's personal situation is always quite different from others.
siamond,

I understand that. But, it really bothers me that when someone is using long-term (20 to 30 years ) return number to justify investing 100/0 for 10 years.

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