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

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

Post by QuietProsperity » Thu Aug 31, 2017 11:44 am

Its actually really simple. There is no pure 100% scientific reason for any portfolio mix. You can choose 100% stocks, I can choose 80%, Bogle chooses 50%. We all ultimately decide on a number that makes us feel good. Factors such as Age, Spending Needs based on Expected Life-Span, Knowledge about Market History, Past Experiences with Investing (Emotional), Peer-Pressure, etc. are all factored into the decision and our brain then picks a number.

The closest we get anyways is probabilities, of which, are based on about 100 years of data (4-5 Generations). We all make the decision to trust this 100 years of data as the be all end all, but in reality, what the hell is 100 years worth of market data? It's certainly the best we have, but anyone who thinks with absolute certainty that it is the ultimate way things will play out (ie The next 100 years will look like the past 100 years) is crazy.

I expect Stocks to beat Bonds based on this data, but there is still a decent likelihood of a scenario where U.S. Stocks earn a 0% real return over a 30 year period. This could happen during my lifetime. None of us really have a clue beyond some simple probabilities.

In the face of that, we come up with a portfolio mix that we *think* we can live with. Most people will either have a life event that changes their assumptions, or they will make the wrong assumptions initially and will change their allocations at some point. Hell, I know I will. There is no way I will keep my current allocation for the next 50+ years of my life.

I am glad you found that 100% Stocks works best for you. Just as I am glad that someone else found that 50% Stocks works for them. Your allocation is not THE best allocation. It's just the best allocation for you at this current time in your life. Nothing more.


And for the record...The difference between 100, 90 or 80 percent to stocks has made such a small difference over the last 45 years that maybe we should ask, why go with a 100% stock allocation over a 80% or 90% allocation? A 0.10-0.25% difference is not worth the discussion imo.
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HomerJ
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Re: Why go with an 80% stock / 20% bond portfolio?

Post by HomerJ » Thu Aug 31, 2017 1:37 pm

willthrill81 wrote:
Thu Mar 16, 2017 12:01 pm
I would add that a Great Depression Part 2 is not likely to sneak up behind us and suddenly come down hard, but you never know.
Dude, it almost just happened less than 10 years ago. And it totally sneaked up on people. Financial institutions failed. Money supply dried up. Emergency sessions by Congress. If the government hadn't acted, Great Depression II was certainly a real possibility.

Besides, the first Great Depression was a surprise. How could you make that statement above?

Every crash happens suddenly and without general warning. Otherwise people would get out first.

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

Post by JustinR » Thu Aug 31, 2017 9:06 pm

I'll save you 7 pages of reading:

  • OP: "Based on nothing but my gut feeling, I assert that people with 80% stocks are just as likely to panic sell in a downturn as someone at 100%. So there's no reason to be 80/20. Might as well be 100/0 like me."

    Someone: "Not necessarily...having a $200k bond safety net can prevent you from panic selling. Also, here are the returns of 100/0 compared to 80/20. As you can see, you only gain a few tenths of a percentage of return, in exchange for a lot more risk."


    OP: "That can add up to a lot in the long run. History has shown us that stocks always eventually go up so risk is irrelevant. Besides, I'll just flip burgers if I have to."

    Someone: "Have you actually lived through a downturn? A lot of people lost their jobs and couldn't find another one."


    OP: "They need more marketable skills then."

    Someone: "Age discrimination is a thing."


    OP: "Based on my anecdotal sample size of two, no it isn't."

    Someone: "Don't you hold some bonds in your Roth IRA? So you're not even 100% stocks."


    OP: "That's my 'emergency fund'. I don't consider those bonds part of my asset allocation."

    Someone: "Also, you own a house. That's an asset that plays the same role as bonds for other investors. So again, you're not actually 100% stocks."


    OP: "I don't consider my house part of my allocation either. Anyways, you're just arguing semantics."

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

Post by pascalwager » Thu Aug 31, 2017 10:19 pm

I was 0/100 (100% T-Bills) until age 53. Then I lump-summed all of it into 90/10. Now I have 50/38/12 at age 75.

It worked out OK, but I would start off at 100% total world stock if I had a second chance and maybe start adding world bonds when nearing retirement.

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willthrill81
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Re: Why go with an 80% stock / 20% bond portfolio?

Post by willthrill81 » Fri Sep 01, 2017 10:07 am

JustinR wrote:
Thu Aug 31, 2017 9:06 pm
I'll save you 7 pages of reading:
...
What you failed to mention is the significant number of people who agreed with my premise. Further, there are well respected experts who agree with my premise as well, including Paul Merriman. You also put words in my mouth out of context, but that's easy for others to see.
“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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willthrill81
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Re: Why go with an 80% stock / 20% bond portfolio?

Post by willthrill81 » Fri Sep 01, 2017 10:21 am

HomerJ wrote:
Thu Aug 31, 2017 1:37 pm
willthrill81 wrote:
Thu Mar 16, 2017 12:01 pm
I would add that a Great Depression Part 2 is not likely to sneak up behind us and suddenly come down hard, but you never know.
Dude, it almost just happened less than 10 years ago. And it totally sneaked up on people. Financial institutions failed. Money supply dried up. Emergency sessions by Congress. If the government hadn't acted, Great Depression II was certainly a real possibility.

Besides, the first Great Depression was a surprise. How could you make that statement above?

Every crash happens suddenly and without general warning. Otherwise people would get out first.
I agree that there isn't a big warning klaxon, but the signs are often there for those who are closely paying attention. Many people prior to 2008 saw the writing on the wall when people who wouldn't qualify to rent were getting mortgages on half million dollar homes with no money down and cash back to boot.
“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

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

Post by CantPassAgain » Fri Sep 01, 2017 10:22 am

JustinR wrote:
Thu Aug 31, 2017 9:06 pm
I'll save you 7 pages of reading:

  • OP: "Based on nothing but my gut feeling, I assert that people with 80% stocks are just as likely to panic sell in a downturn as someone at 100%. So there's no reason to be 80/20. Might as well be 100/0 like me."

    Someone: "Not necessarily...having a $200k bond safety net can prevent you from panic selling. Also, here are the returns of 100/0 compared to 80/20. As you can see, you only gain a few tenths of a percentage of return, in exchange for a lot more risk."


    OP: "That can add up to a lot in the long run. History has shown us that stocks always eventually go up so risk is irrelevant. Besides, I'll just flip burgers if I have to."

    Someone: "Have you actually lived through a downturn? A lot of people lost their jobs and couldn't find another one."


    OP: "They need more marketable skills then."

    Someone: "Age discrimination is a thing."


    OP: "Based on my anecdotal sample size of two, no it isn't."

    Someone: "Don't you hold some bonds in your Roth IRA? So you're not even 100% stocks."


    OP: "That's my 'emergency fund'. I don't consider those bonds part of my asset allocation."

    Someone: "Also, you own a house. That's an asset that plays the same role as bonds for other investors. So again, you're not actually 100% stocks."


    OP: "I don't consider my house part of my allocation either. Anyways, you're just arguing semantics."
Not to pile on WillThrill, he has a lot of great contributions to the forum but this is pretty much how I feel about this thread (and others like it). It is easy to be young with a stable job and say others simply lack the intestinal fortitude to do what you do. Especially if one is employed by a government institution.

It is difficult to describe to such a person what it is to work in the private sector when you are over 40 and/or have grey hair. It is ruthless.

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willthrill81
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Re: Why go with an 80% stock / 20% bond portfolio?

Post by willthrill81 » Fri Sep 01, 2017 10:37 am

CantPassAgain wrote:
Fri Sep 01, 2017 10:22 am
Not to pile on WillThrill, he has a lot of great contributions to the forum but this is pretty much how I feel about this thread (and others like it). It is easy to be young with a stable job and say others simply lack the intestinal fortitude to do what you do. Especially if one is employed by a government institution.
I haven't said that others "simply lack the intestinal fortitude" to go 100% stocks. From the beginning, I've merely stated that I do not believe the reduction in volatility of an 80/20 portfolio, compared to 100% equities, is sufficient to keep the average investor from panic selling in a bear market. I actually believe that the "intestinal fortitude" needed for an 80/20 portfolio is not meaningfully different (from a behavioral perspective) from 100/0 and that those who can handle the former's volatility can probably handle the latter's just fine.
“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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peterinjapan
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Re: Why go with an 80% stock / 20% bond portfolio?

Post by peterinjapan » Fri Sep 01, 2017 11:02 am

My stock portfolio is slightly over 90% equities at age 49, because:

a) I own three investment properties in San Diego, two of which generate more income than the mortgage payment and

b) My wife has investments of her own, mostly corporate or country bonds, to help protect us in a downturn. I consider the two of us as a total unit, even though were considered totally separate, as Japan doesn't have common property between married couples.

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

Post by MnD » Fri Sep 01, 2017 1:25 pm

The 10-20% will still be enough to buy a bunch of guns, ammo, pit bulls, bottled water, armored dune buggy etc.

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willthrill81
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Re: Why go with an 80% stock / 20% bond portfolio?

Post by willthrill81 » Fri Sep 01, 2017 2:02 pm

MnD wrote:
Fri Sep 01, 2017 1:25 pm
The 10-20% will still be enough to buy a bunch of guns, ammo, pit bulls, bottled water, armored dune buggy etc.
What if you own all of that already? :wink:
“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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