Evaluating my lack of jitters

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crit
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Evaluating my lack of jitters

Post by crit » Thu Apr 20, 2017 12:04 pm

Backstory: I am 43, spouse 45. We've only needed to come up with an IPS and/or AA in the last few years. I feel like I'm over on the un-jittery side. Is this true?

When I was ~23, a relative gifted my siblings and I with ~$30k of investments in a taxable account, along with making a first IRA contribution. For a long time, I lived simply -- within my own earnings, but not saving beyond keeping a cushion of cash. This lasted through graduate school and postdoctoral positions, and was also before, during and after the 2008 crash.

When the 2008 crash came, I did exactly nothing to the invested money. My thinking was: well, I'm in the same boat as everyone else, and if the market goes down, I'm still in the same relative position to anyone else and/or the price of life, so there's nothing to be gained or done by changing my positions. The balance went lower, every month, and I just - let it. Read the statements, put them aside. It really didn't bother me much, partially because it was long-term money and so who cares what the balance is today, as long as I don't need to cash it out? But partially because it was gifted money, and I didn't really view it as mine. Another point of data: I bought a condo in 2004. When I had to move in 2007, I could not sell it reasonably, so I rented it out, and sold when conditions improved in 2014. It didn't make sense to me to short sell, as I'd lose my own money (down payment) first.

By now, I've been lucky enough to acquire a faculty position, earnings, a house, a 403b, a Bogleheads account, etc., and have things set up in a reasonable 3-fund portfolio. My understanding of the Bogle, low-cost, indexed approach is that it comes from the same thinking: you (or any Special Advisors) are quite unlikely to beat the market, and the best you can do is track the market, be in the same boat everyone else is (ie, the overall market).

So my understanding is that I am willing to take risk, as I'm unlikely to do anything* in a (and in my opinion, fairly imminent and overdue) crash. I feel that my "age in bonds" is much, much too conservative, based on my fundamental "well, we're all in the same boat anyway!" approach.

My question, and thank you if you've read this far, is: does this read like sound logic to you, behind why I am 15% bonds? It seems that AA-setting is a quite gray area that is ripe for misunderstanding, and especially misunderstanding of your own knowledge of risk or what risk really is.

Thanks for your thoughts, wise members.

*besides TLH, of course.

NiceUnparticularMan
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Re: Evaluating my lack of jitters

Post by NiceUnparticularMan » Thu Apr 20, 2017 12:27 pm

Sure. I think if you aren't close to retirement, have adequate plans for emergency spending, and you know yourself well enough to be confident that a large drop in the present value of your portfolio is not something you will be too concerned about, then only 15% in non-equities is a reasonable allocation.

LukeHeinz57
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Re: Evaluating my lack of jitters

Post by LukeHeinz57 » Thu Apr 20, 2017 12:37 pm

I'm in a very similar position and of a similar mindset. Currently also at 85/15 after spending the vast majority of the last decade in 100% Equities. It certainly sounds like you have the stuff to carry a high equity allocation through thick and thin. I think you will be glad if you stay the course. I just wanted to support your conclusion that Age in bonds is likely too conservative for you and you're on the right path. I know personally if I was 65/35 (Age in Bonds for me) I would lose sleep over the risk premium I was leaving on the table. But I respect and support those who know their own investing limitations and need a smoother but perhaps longer road to Dublin (retirement).

Sincerely,
Luke
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Theoretical
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Re: Evaluating my lack of jitters

Post by Theoretical » Thu Apr 20, 2017 12:44 pm

What's your spouse's take on the jitters? If it was just you, I'd say you're fine at 85-15 if it's just you, but you've got an "other half" that may have a different perspective and risk tolerance.

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Re: Evaluating my lack of jitters

Post by Day9 » Thu Apr 20, 2017 12:47 pm

You have to consider your need, ability, and willingness to take risk. You have the willingness, but do you have the need and ability?
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random_walker_77
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Re: Evaluating my lack of jitters

Post by random_walker_77 » Thu Apr 20, 2017 1:10 pm

NiceUnparticularMan wrote:Sure. I think if you aren't close to retirement, have adequate plans for emergency spending, and you know yourself well enough to be confident that a large drop in the present value of your portfolio is not something you will be too concerned about, then only 15% in non-equities is a reasonable allocation.
And so long as your spouse is on the same page, I also agree the aggressive stance is fine. If you've got tenure, you've got more job security than most and can justify a more aggressive allocation than most.

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Re: Evaluating my lack of jitters

Post by Fallible » Thu Apr 20, 2017 1:11 pm

crit wrote:...
So my understanding is that I am willing to take risk, as I'm unlikely to do anything* in a (and in my opinion, fairly imminent and overdue) crash. I feel that my "age in bonds" is much, much too conservative, based on my fundamental "well, we're all in the same boat anyway!" approach.

My question, and thank you if you've read this far, is: does this read like sound logic to you, behind why I am 15% bonds? It seems that AA-setting is a quite gray area that is ripe for misunderstanding, and especially misunderstanding of your own knowledge of risk or what risk really is. ...
So, I think what you are saying is that you held through the '08 crash and that this means you have a high risk tolerance that justifies increasing equities to maybe 100%?

Have you read our wiki pages on "Asset Allocation" and "Risk Tolerance" and links therein to Larry Swedroe's three blogs on need, willingness, and ability to take risk? An especially pertinent book is by pro Boglehead Rick Ferri, All About Asset Allocation, 2nd ed.

https://www.bogleheads.org/wiki/Asset_allocation
https://www.bogleheads.org/wiki/Risk_tolerance

Also, one thing to know about the '08 crash is that while many investors did not sell out, they also failed to rebalance as they normally would/should. I was one of the latter, spooked not just by the market crash, but by what was becoming a historic global financial crisis and talk of a possible financial meltdown. I never considered selling, but could not manage to rebalance and thus missed out on significant gains.

Can you provide more details on your three-fund and emergency savings?
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Re: Evaluating my lack of jitters

Post by Artsdoctor » Thu Apr 20, 2017 1:25 pm

Nisi,

That is an incredible graph! You need to look into some sort of copyright protection.

Crit,

You're young and your job is secure. You can afford to take risk. That's all well and good for me to say because it's been a very long time since I was 43; I've dealt with three significant bear markets so I know myself reasonably well. But I truly acknowledge that investing through a bear market is very, very different when you're 30, 45, and 60.

Your ability to recoup losses and continue contributing through a bear market are enviable. There's really no problem with an aggressive asset allocation. I would ask you to realize that although you've "lived through" a brutal bear market, you haven't really been tested for all of the reasons you gave. You were also younger then. But if you and your wife are on the same page, feel free to use the forum as much as you need to during the next major downturn in order to not do anything rash.

crit
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Re: Evaluating my lack of jitters

Post by crit » Thu Apr 20, 2017 1:37 pm

Need: I could worm into saying we have need, as we didn't really start accumulating until our 40s, but I still feel we are fortunate overall, and can't justify calling it need. Spouse may not book the 40 social security quarters, but I already have.
Ability: I think so. We do not and will not have children, our parents seem to be set, and we do not have an extravagant life.

Spouse: expresses being more tolerant to risk than me - like 0%; occasionally says "enough with the bonds!" but leaves the portfolio to me.
Tenure: not yet, but looking likely enough.

Losing sleep over having an AA that does not match my fundamental feelings -- that is a good way to put it, Luke.

Portfolio: viewtopic.php?f=1&t=198877&p=3041264#p3041264, though I've tweaked it a bit since, moved to TIAA Traditional where I could instead of VTBLX.

I have read the wiki and several books, but they talk about AA in generalized terms (as they should), so I'm always left wondering whether I'm pulling wool over my own eyes, in my own specific life.

That I did not rebalance in 2008 (I had no idea what that was), and that every time is different and at a different life stage, are very good points.

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Re: Evaluating my lack of jitters

Post by NiceUnparticularMan » Thu Apr 20, 2017 1:39 pm

random_walker_77 wrote:And so long as your spouse is on the same page, I also agree the aggressive stance is fine.
That's a big one. I'd be more aggressive if I wasn't investing for my wife as well.

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Re: Evaluating my lack of jitters

Post by bloom2708 » Thu Apr 20, 2017 1:43 pm

NiceUnparticularMan wrote:
random_walker_77 wrote:And so long as your spouse is on the same page, I also agree the aggressive stance is fine.
That's a big one. I'd be more aggressive if I wasn't investing for my wife as well.
Would your "lack of jitters" change if you had $1,000,000, $2,000,000 or $3,000,000 invested in nearly all stocks?

Going from $50k to $25k is quite manageable. Going from $1,500,000 to $800k is another story. Keep things in perspective.
"We are here not to please but to provoke thoughtfulness" Unknown Boglehead

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Re: Evaluating my lack of jitters

Post by NiceUnparticularMan » Thu Apr 20, 2017 1:45 pm

Fallible wrote:Also, one thing to know about the '08 crash is that while many investors did not sell out, they also failed to rebalance as they normally would/should. I was one of the latter, spooked not just by the market crash, but by what was becoming a historic global financial crisis and talk of a possible financial meltdown. I never considered selling, but could not manage to rebalance and thus missed out on significant gains.
I did rebalance as planned in 2008, so that worked out well for us.

But in a sense, TOO well. I'm not complaining, but that particular sequence of events probably convinced a lot of rebalancers that big market events are no big deal--just rebalance and you make a bunch of money off it!

But what happens next time if there is not such a quick and rapid recovery? Will all those people who got a big rebalancing bonus in 2008 stay the course then?

This is not an argument against being high in equities--I think some people will in fact handle that fine. But 2008 was not really the hardest test we could see, and I am concerned some people might have ended up overconfident.

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Re: Evaluating my lack of jitters

Post by Admiral » Thu Apr 20, 2017 1:47 pm

You have not included your goals: do you plan to work forever, or retire? If the latter, then at what age? What amount will you require to achieve FI, and how close are you to that goal? What are your expenses, and what do you think they will be relative to what they may be in the future? If you do plan to stop working at Age X, then will your portfolio and/or SS payments cover your expected expenses at Age X+25?

If you have no kids and plan on working forever, then by all means go 100% equities. But until you can address what's above, it's hard to know what type of AA to recommend.

I am a few years older than you, but I have children, and hope to be FI in 10-12 years. I am about 70/30, if that makes any difference in your thinking.

And I agree with artsdoctor, living through 2008 when you are 30 and with 30k is not that same as doing it at age 60 with 300k.

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Re: Evaluating my lack of jitters

Post by NiceUnparticularMan » Thu Apr 20, 2017 2:02 pm

bloom2708 wrote:
NiceUnparticularMan wrote:
random_walker_77 wrote:And so long as your spouse is on the same page, I also agree the aggressive stance is fine.
That's a big one. I'd be more aggressive if I wasn't investing for my wife as well.
Would your "lack of jitters" change if you had $1,000,000, $2,000,000 or $3,000,000 invested in nearly all stocks?

Going from $50k to $25k is quite manageable. Going from $1,500,000 to $800k is another story. Keep things in perspective.
I think that certainly could matter to some people. But personally--we are 83/17(ish) at the moment, and 15 of that 17 is in cash-type investments (a stable value fund and a cash-balance pension--the remainder is a small portion of TIPs we get through a Real Return fund). So, at those levels, we would have $150,000, $300,000, and $450,000 that's not going to track a stock market event at all.

To me, that's a lot of money! And even if we rebalance a whole bunch out of it (as we did in 2008), that's still a lot of money! And the more we have, the more we have like that!

So oddly to some, bigger portfolios are making it easier for us to contemplate a big market event.

Now in truth, my perspective on all this is that it is actually the ownership shares of real assets that matter, that what economic production you can get from those real assets in the future is what it is, and how people price those shares at the moment only determines what price I am buying them at. So, in my view when my stock shares drop in price, I haven't lost anything at all, and instead I am just looking at a better buying opportunity. And I have talked about this with my wife and she is broadly on board, but for her it actually does help to have that pot of money taken off the table, which can also be used for "re-balancing," aka making extra use of those better buying opportunities.

Of course everything changes when we are making the transition into withdrawal, and in fact we have begun that transition. I still plan to keep most of our non-equities in cash-type investments (including, after I retire, the G Fund), but we might add some long bonds too, and overall we'll become more sensitive to short-term volatility--probably (it depends on how much we have at that point--given our tastes in lifestyle, there is an amount of money we could end up with where it wouldn't really make much difference).

crit
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Re: Evaluating my lack of jitters

Post by crit » Thu Apr 20, 2017 2:20 pm

bloom2708 wrote:Going from $50k to $25k is quite manageable. Going from $1,500,000 to $800k is another story. Keep things in perspective.
Interesting; I would probably argue the other way, that 50 -> 25 is a big change and may well impact immediate life (what if that was the EF, and it was all you had, and then you lost your job?) while 1.5 -> 0.8, well, that's still well enough to not immediately starve, or end up eating the cat's food in 20 years. I do see your point, though.

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Re: Evaluating my lack of jitters

Post by willthrill81 » Thu Apr 20, 2017 2:24 pm

Based on your age, you seem to be a good 20 years away from retirement, much like me. So if you're emotionally alright with the volatility of 100% equities, I see no good reason not to be. I am currently 100% stocks and will not likely back down from that until I'm around 10 years from retirement, when I'll likely move to 70/30.

Historically speaking, the likelihood of bonds beating stocks over a 20 year period in terms of real returns is virtually zero. Considering that you have a funded EF and stable employment, I think you'll be just fine. :)
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Re: Evaluating my lack of jitters

Post by Lobster » Thu Apr 20, 2017 2:30 pm

crit wrote: My question, and thank you if you've read this far, is: does this read like sound logic to you, behind why I am 15% bonds?
*besides TLH, of course.
The rationale makes sense to me. My advice is to define your bond allocation in terms of a glidepath towards retirement. In this case you might say age - 30. The reason is that unless you have a plan for how you will trend towards a more conservative allocation, you may find yourself at retirement age with a portfolio significantly more risky than intended.

Dr. Bernstein for example suggests having 20 - 25 years worth of living expenses accumulated and kept safe, potentially investing any funds beyond that in a more risky portfolio like equities. source
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Re: Evaluating my lack of jitters

Post by LukeHeinz57 » Thu Apr 20, 2017 2:35 pm

This accumulation of assets referred to a few posts up is what actually prompted my switch from 100/0 to 85/15. When I only had $50k saved for retirement all in a 401k it didn't feel like real money and I knew I wouldn't be touching it for 40 years at that point so continuing to pour new money into stocks through 2008-2009 was no problem. Having over a half million invested now with a substantial portion in after-tax investments I've grown increasingly anxious about my 100% Equities approach now that I had "real money". I was much closer to my retirement number at an earlier age than I had dreamed possible and was more concerned about my new contributions failing to do much purchasing in a bear market relative to the overall size of the portfolio. I pondered these concerns aloud here and received some very good advice:

viewtopic.php?f=1&t=214435

Some of what was said you may find useful as well Crit. :sharebeer

Sincerely,
Luke
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David Jay
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Re: Evaluating my lack of jitters

Post by David Jay » Thu Apr 20, 2017 2:39 pm

Even 90/10 is acceptable, but I would strongly recommend having a Bond position so that you can rebalance in a downturn.

I am saying this as someone who was 100% equities well into my mid-50s but found that there is great emotional benefit from being able to "do something" to take advantage of a market downturn. I know what the numbers say rebalancing doesn't gain you very much, but from experience, the behavioral benefit is well worth it.
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Re: Evaluating my lack of jitters

Post by Fallible » Thu Apr 20, 2017 2:40 pm

NiceUnparticularMan wrote:
Fallible wrote:Also, one thing to know about the '08 crash is that while many investors did not sell out, they also failed to rebalance as they normally would/should. I was one of the latter, spooked not just by the market crash, but by what was becoming a historic global financial crisis and talk of a possible financial meltdown. I never considered selling, but could not manage to rebalance and thus missed out on significant gains.
I did rebalance as planned in 2008, so that worked out well for us.

But in a sense, TOO well. I'm not complaining, but that particular sequence of events probably convinced a lot of rebalancers that big market events are no big deal--just rebalance and you make a bunch of money off it!

But what happens next time if there is not such a quick and rapid recovery? Will all those people who got a big rebalancing bonus in 2008 stay the course then?

This is not an argument against being high in equities--I think some people will in fact handle that fine. But 2008 was not really the hardest test we could see, and I am concerned some people might have ended up overconfident.
Yes, these are important points for all investors to remember. Market crashes differ greatly in depth, nature, and length and can be accompanied by recessions, job losses, etc. I've often wondered how investors, including me, would've reacted had recovery from '08' - with its Great Recession, job losses in the millions, and severe credit crunch - not begun in March '09 and gone on to become a historic bull market. Rather then confidence or overconfidence in one's tolerance for risk, these differing crashes, these unknowns and surprises on top of uncertainties, should make investors more aware than ever of the risks and more realistic about how well they can handle them.
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Re: Evaluating my lack of jitters

Post by bloom2708 » Thu Apr 20, 2017 2:40 pm

crit wrote:
bloom2708 wrote:Going from $50k to $25k is quite manageable. Going from $1,500,000 to $800k is another story. Keep things in perspective.
Interesting; I would probably argue the other way, that 50 -> 25 is a big change and may well impact immediate life (what if that was the EF, and it was all you had, and then you lost your job?) while 1.5 -> 0.8, well, that's still well enough to not immediately starve, or end up eating the cat's food in 20 years. I do see your point, though.
"out" = financial independence or retirements (self or no choice).

If you are 20 years out and have $50k or $1.5 million, you are still 20 years out. Staying 80/20 in either can make sense.

If you have $1.5 million and 5 years to "out". Different.

If you have $1.5 million and $2 million is your "out" number. Different.

Many different scenarios to ponder.
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Re: Evaluating my lack of jitters

Post by harvestbook » Thu Apr 20, 2017 3:28 pm

My wife is your age and she is 100 percent equities. i asked her if she was prepared for a 50 percent loss and she shrugged and said, "Whatever."
I'm not smart enough to know, and I can't afford to guess.

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Re: Evaluating my lack of jitters

Post by Fallible » Thu Apr 20, 2017 3:58 pm

crit wrote:...
I have read the wiki and several books, but they talk about AA in generalized terms (as they should), so I'm always left wondering whether I'm pulling wool over my own eyes, in my own specific life.

That I did not rebalance in 2008 (I had no idea what that was)
, and that every time is different and at a different life stage, are very good points.
Yes, the wiki and books provide general advice, but the takeaway is always the investor's. An asset allocation must be right only for you and your wife. That's where knowing yourself comes in and what AA and risk tolerance in particular are all about, i.e., knowing how much money you can afford to lose before you'll need it, knowing your (and your wife's) goals, time horizon, financial capacity, and emotional tolerance for risk. The test in the next market crash won't just be whether you sell, hold, or rebalance, but also whether you can manage worry and sleep well without that 15% buffer.

As you may have read in The Bogleheads' Guide to Investing, "no investment is worth worrying about and losing sleep over."
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Re: Evaluating my lack of jitters

Post by perl » Thu Apr 20, 2017 4:27 pm

I'm also an academic. We are in a very unusual position of having (post-tenure) true job security. In my opinion, this makes taking more investing risk rational because we know (post-tenure) that if there is a market crash near retirement we have a job that can allow us to work for a couple more years (barring disability, of course). We also often love the work we do and aren't in a hurry to retire, and can spent our last couple years of employment winding down our academic life to have a bit slower pace while still being employed. Many of us also have access to TIAA Traditional, which is great for peace of mind. Compared to other professions, most academics are not extraordinarily highly paid and so taking a bit more risk to have a more comfortable retirement is also reasonable in my mind.

After thinking about all of this, I also have a relatively high equity allocation. And I also have chosen to do a logarithmic glide path to stay higher in equities closer to retirement (wiki: https://www.bogleheads.org/wiki/Glide_p ... lide_paths). You might want to consider that.

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Re: Evaluating my lack of jitters

Post by Vanguard Fan 1367 » Thu Apr 20, 2017 4:50 pm

I have trouble getting excited about 3 percent bonds when I can invest in Vanguard's High Dividend Index Fund for almost nothing in expense ratio and it has a 3 percent APR.

So I have about 12 percent of my portfolio in bonds. In addition to that 12 percent I have another 25 percent in some things that have been called bond substitutes in this era of low interest rates: High Dividend Stock Funds and Vanguard's Reit.

I used to be "jittery" about the market and missed out on a lot of opportunity. Finally I invested, and fairly recently found Bogle and Bogleheads. I made it like you through the 2008 correction and completely expect another and I hope that I can react the same way through the next correction. I love John Bogle saying: "Don't do something, just stand there."

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Re: Evaluating my lack of jitters

Post by Theoretical » Thu Apr 20, 2017 5:16 pm

I have trouble getting excited about 3 percent bonds when I can invest in Vanguard's High Dividend Index Fund for almost nothing in expense ratio and it has a 3 percent APR.
I'm afraid you have it backwards. 3% bonds>3% High Dividend Yield stocks. High Dividend Yield targeting often targets companies with lower upside (like utilities, banks, and REITs) and more current income. That means the expected earnings growth is lower. 3% returns from bonds is actually pretty normal historically. 3% returns from high dividend yield is not positive at all for prospective returns - it's reaching for yield without enough upside to justify the risk.

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Re: Evaluating my lack of jitters

Post by NiceUnparticularMan » Thu Apr 20, 2017 7:40 pm

David Jay wrote:I am saying this as someone who was 100% equities well into my mid-50s but found that there is great emotional benefit from being able to "do something" to take advantage of a market downturn. I know what the numbers say rebalancing doesn't gain you very much, but from experience, the behavioral benefit is well worth it.
I am willing to admit there is zero expected financial benefit to rebalancing, and yet I still agree the behavioral benefit of a small non-equity allocation could be well worth it.

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