90:10 AA - what don't you believe about it?

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3spots
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90:10 AA - what don't you believe about it?

Post by 3spots » Thu Jul 13, 2017 11:11 pm

I wish I could find the thread that originally pointed to this article and thank that poster. The logic seems sound to me. It is a re-look at Buffet's AA advice of 90:10. If I understood it correctly, there was only a 2-3% failure rate of a 90:10 AA, but a 0% failure rate for 60:40 during the 30 year periods that included 1929, 2008, etc.

So that means that 97-98% of the time a 90:10 works just fine -- and 60:40 is protecting against that 2-3% chance.

I have never looked at it that way -- but wouldn't most people be okay with a 97% success rate? And then I read about folks wanting to keep 15 years of expenses in something safe...yikes, what a different approach.

Is there something inherently wrong with the study that makes people not believe, or are folks in agreement, but not wanting to accept that small risk?

http://web.iese.edu/JEstrada/PDF/Resear ... ett-AA.pdf

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Re: 90:10 AA - what don't you believe about it?

Post by sport » Thu Jul 13, 2017 11:15 pm

Just keep in mind that all your statistics and analysis apply to historic results. Will they apply in the future? Probably? Maybe? Maybe not?

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Re: 90:10 AA - what don't you believe about it?

Post by John Doe 123 » Thu Jul 13, 2017 11:31 pm

3spots wrote:I wish I could find the thread that originally pointed to this article and thank that poster. The logic seems sound to me. It is a re-look at Buffet's AA advice of 90:10. If I understood it correctly, there was only a 2-3% failure rate of a 90:10 AA, but a 0% failure rate for 60:40 during the 30 year periods that included 1929, 2008, etc.

So that means that 97-98% of the time a 90:10 works just fine -- and 60:40 is protecting against that 2-3% chance.

I have never looked at it that way -- but wouldn't most people be okay with a 97% success rate? And then I read about folks wanting to keep 15 years of expenses in something safe...yikes, what a different approach.

Is there something inherently wrong with the study that makes people not believe, or are folks in agreement, but not wanting to accept that small risk?

http://web.iese.edu/JEstrada/PDF/Resear ... ett-AA.pdf
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Re: 90:10 AA - what don't you believe about it?

Post by tibbitts » Thu Jul 13, 2017 11:40 pm

What I don't believe is that anybody (well, almost) was talking about 90/10 in the depths of the 2008/2009 downturn.

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Re: 90:10 AA - what don't you believe about it?

Post by saltycaper » Thu Jul 13, 2017 11:49 pm

3spots wrote:
Is there something inherently wrong with the study that makes people not believe, or are folks in agreement, but not wanting to accept that small risk?
The risk isn't so small if you suddenly need to take more than 4%.
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Re: 90:10 AA - what don't you believe about it?

Post by stemikger » Fri Jul 14, 2017 12:04 am

tibbitts wrote:What I don't believe is that anybody (well, almost) was talking about 90/10 in the depths of the 2008/2009 downturn.
That is when they should have been 90/10.
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Re: 90:10 AA - what don't you believe about it?

Post by aegis965 » Fri Jul 14, 2017 12:07 am

Buffett's concept of risk is different from folks like us who don't have that long a timeframe and, as many in this thread have pointed out, the behavioral disposition. Here's an excellent article on this issue: Contradicting Warren Buffett: When Volatility is Risk.
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Re: 90:10 AA - what don't you believe about it?

Post by Tyler Aspect » Fri Jul 14, 2017 12:08 am

Some of the 90/10 people will sell out during a downturn and be in cash for a long time. Most of it will probably occur in 401k accounts with "pick a retirement date" funds.
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Re: 90:10 AA - what don't you believe about it?

Post by stemikger » Fri Jul 14, 2017 12:09 am

I think if you can handle 90/10 then you would probably leave a lot of money to your heirs.

I don't think many people in their 50s, 60s and 70s can. I am pretty sure that I cannot which is why I hold 60/40 and save more.

But yes, if you can handle the short term volatility, 90/10 could be right for any age.

I think a problem many Bogleheads have, including myself is they don't look at the risk of losing their purchasing power in the long term when investing in bonds. Warren Buffett thinks that that is a much bigger risk than losing 20% in a stock portfolio in any one given year.

I think more like John Bogle and stay on the conservative side and be happy when I have Enough. Am I betting against Warren Buffett. NO WAY! I am just doing what I know I can handle.
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Re: 90:10 AA - what don't you believe about it?

Post by Portfolio7 » Fri Jul 14, 2017 12:49 am

1929 and 1965. Ponder the decades that followed; I can say it's enough to give me religion.

I was 100% equities mostly from 1995 to 2007. Unsettled in 2007, I was shifting AA all year, was about 50/50 when the big drop came in August 2008. Was very happy about that, but I had realized I had no idea what I was doing with respect to risk, and the decline drove that home :shock: . I went to 60/40 and rode it for several years while I spent a lot of time looking at potential AA's, risk and return, thinking about trade-offs, looking at Sharpe and Sortino ratios, max declines, etc. That pretty well convinced me I wanted to be at least 60% equity, but no more than 80%. I set a maximum drawdown I wanted to ever have to endure, and that got me to a 65/35 portfolio. I looked at the returns, and realized my need might be for a little more return if I were to retire per my schedule, so I tweaked it a little with min-volatility and some potentially optimized correlations, and decided I could go to 70/30.

When I get greedy and think of going 90/10 or thereabouts, as I have done frequently in the past 5 years (I've long been convinced that this recovery is a lot stronger than most people think); well, I ponder 1929 and 1965 and how long stocks took to recover, and realize just how slim a margin-of-safety 30% Fixed Income represents. I usually reconsider 60/40 at that point, but then I redirect to the overall plan and what I'm trying to achieve. I don't have an IPS per se, because I know I won't follow it, it's not in my nature, but I do have a plan with lots of calculations and triangulation behind it. Because I'm getting closer to retirement, I recently backed off on AA to 67/33, and I'm pretty happy right there.
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Re: 90:10 AA - what don't you believe about it?

Post by smesman » Fri Jul 14, 2017 1:00 am

3spots wrote:So that means that 97-98% of the time a 90:10 works just fine -- and 60:40 is protecting against that 2-3% chance.

I have never looked at it that way -- but wouldn't most people be okay with a 97% success rate? And then I read about folks wanting to keep 15 years of expenses in something safe...yikes, what a different approach.
The thing is that the relative value of money diminishes the more you have of it. It is far more important for people to be able for their car and living expenses than to be able to afford luxuries.

Also 2-3% is quite a lot if it means not having enough money (and you're not able to scale back). Would you ride an airplane if it had a chance of 1 in 50 of crashing?

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Re: 90:10 AA - what don't you believe about it?

Post by FIREchief » Fri Jul 14, 2017 1:11 am

I don't believe 90/10 is aggressive enough for somebody in their twenties or thirties.

I don't believe it is conservative enough for somebody who has quit working and will never earn another buck.

Everybody's situation is unique, so I wouldn't blindly recommend any AA to anybody.

I was 100% equities up until the day my pension benefit fully vested. After that, I had options.....
Last edited by FIREchief on Fri Jul 14, 2017 1:18 am, edited 1 time in total.
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Re: 90:10 AA - what don't you believe about it?

Post by aceoperations » Fri Jul 14, 2017 1:13 am

Interesting article! Based on the last 115 years, the 90/10 portfolio works 97-98% of the time. However, the article also states that 60/40 provides the highest terminal wealth in the worst 5% of those rolling 30 year periods (what is called tail risks in the article), and 70/30, in the worst 10%. That coupled with the fact that the 60/40 has the lowest overall failure rate, makes it suitable to most investors.

Additionally, the behavioral aspect of maintaining a static 90/10 AA in market downturns is not considered. It is not for everybody. Changing course during market crashes can have a significant negative impact on long term portfolio returns. If any asset allocation with over 40% in stocks provides a very high chance of success, just pick what you can sleep comfortably with. Then just save, invest and win the game. :beer

Edited for typos.

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Re: 90:10 AA - what don't you believe about it?

Post by FIREchief » Fri Jul 14, 2017 1:22 am

aceoperations wrote:Based on the last 115 years, the 90/10 portfolio works 97-98% of the time. However, the article also states that 60/40 provides the highest terminal wealth in the worst 5% of those rolling 30 year periods (what is called tail risks in the article), and 70/30, in the worst 10%. That coupled with the fact that the 60/40 has the lowest overall failure rate, makes it suitable to most investors.
Unfortunately, these types of statistics imply that somebody is determining an asset allocation upon retirement and seeking an approach that will allow their dollars to live longer than they do.

I would really like to see a study for twenty year olds, where success is defined as having enough money to safely retire at 55, 60 or SS FRA. I am absolutely certain that a 100/0 AA would be the clear winner! :twisted:
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Re: 90:10 AA - what don't you believe about it?

Post by Ari » Fri Jul 14, 2017 1:27 am

Tyler Aspect wrote:Some of the 90/10 people will sell out during a downturn and be in cash for a long time.
Anyone know of any studies on this? It's often touted around as an established fact on these forums, but have anyone seen numbers on how many people sell off during downturns, preferrably with data for different allocations?
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Re: 90:10 AA - what don't you believe about it?

Post by aceoperations » Fri Jul 14, 2017 1:35 am

FIREchief wrote:
aceoperations wrote:Based on the last 115 years, the 90/10 portfolio works 97-98% of the time. However, the article also states that 60/40 provides the highest terminal wealth in the worst 5% of those rolling 30 year periods (what is called tail risks in the article), and 70/30, in the worst 10%. That coupled with the fact that the 60/40 has the lowest overall failure rate, makes it suitable to most investors.
Unfortunately, these types of statistics imply that somebody is determining an asset allocation upon retirement and seeking an approach that will allow their dollars to live longer than they do.

I would really like to see a study for twenty year olds, where success is defined as having enough money to safely retire at 55, 60 or SS FRA. I am absolutely certain that a 100/0 AA would be the clear winner! :twisted:
True. The article says nothing about what the 90/10 AA does to actually get you to retirement. Only after. Up until retirement, savings rate would be a major factor.

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Re: 90:10 AA - what don't you believe about it?

Post by CurlyDave » Fri Jul 14, 2017 2:01 am

stemikger wrote:...I think more like John Bogle and stay on the conservative side and be happy when I have Enough. Am I betting against Warren Buffett. NO WAY! I am just doing what I know I can handle.
Do you really think more like John Bogle? Bogle says to treat pensions and SS as equivalent to fixed income investments, i.e. bonds.

Personally, I do that, but I am part of a very small minority on this board.

As a practical matter it means that 100% of our investable portfolio is in equities. If I consider SS and pensions as equal to 4% bonds, only about half of our finial assets are in stocks. (There is also a brick and mortar real estate component that I leave out for AA purposes.)

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Re: 90:10 AA - what don't you believe about it?

Post by stemikger » Fri Jul 14, 2017 2:08 am

Posted by CurlyDave
Do you really think more like John Bogle? Bogle says to treat pensions and SS as equivalent to fixed income investments, i.e. bonds.
In a rough way I am. I'm 53 with an asset allocation of 60/40 and plan to remain with that AA for life.

Many here will say that 60/40 in retirement is too aggressive, but if you include social security, it may be a bit on the conservative side.

Below is a thread I started about this idea of holding Vanguard's Balanced Index Fund for life.

viewtopic.php?t=164521
Last edited by stemikger on Fri Jul 14, 2017 2:47 am, edited 1 time in total.
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Re: 90:10 AA - what don't you believe about it?

Post by ThrustVectoring » Fri Jul 14, 2017 2:22 am

aegis965 wrote:Buffett's concept of risk is different from folks like us who don't have that long a timeframe and, as many in this thread have pointed out, the behavioral disposition. Here's an excellent article on this issue: Contradicting Warren Buffett: When Volatility is Risk.
Technical nitpick on the link: volatility will drive down your overall returns. It is risk in an of itself - excesses of it will wipe out your ability to fully capitalize on future investment opportunities. There's an amount of cash holding that will give you the optimal long-run return. In the case of broad-market equity indexes, it's something like negative 15%.

Anyhow, if you have a long enough time horizon, the magic of compounding returns means that basically the only thing that matters is long-run return. You can weather your portfolio halving if it's three times as big as it'd be if you avoided that risk.
FIREchief wrote: Unfortunately, these types of statistics imply that somebody is determining an asset allocation upon retirement and seeking an approach that will allow their dollars to live longer than they do.

I would really like to see a study for twenty year olds, where success is defined as having enough money to safely retire at 55, 60 or SS FRA. I am absolutely certain that a 100/0 AA would be the clear winner! :twisted:
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Re: 90:10 AA - what don't you believe about it?

Post by B. Wellington » Fri Jul 14, 2017 9:32 am

stemikger wrote:I think if you can handle 90/10 then you would probably leave a lot of money to your heirs.

I don't think many people in their 50s, 60s and 70s can. I am pretty sure that I cannot which is why I hold 60/40 and save more.

But yes, if you can handle the short term volatility, 90/10 could be right for any age.

I think a problem many Bogleheads have, including myself is they don't look at the risk of losing their purchasing power in the long term when investing in bonds. Warren Buffett thinks that that is a much bigger risk than losing 20% in a stock portfolio in any one given year.

I think more like John Bogle and stay on the conservative side and be happy when I have Enough. Am I betting against Warren Buffett. NO WAY! I am just doing what I know I can handle.
^^^ I too take a cautious approach like Bogle. As always YMMV.

The DW and I are fast approaching 60, with "early" semi-retirement a real possibility. We also earn "modest" average incomes. The ability, willingness, and need to take on more risk comes into play here. I feel as Mr. Bogle does, "to have an anchor to windward." AKA= % in bonds. is a good fit in our situation. 60/40 ish from now on. And yes, I also view SS as part of the bond AA.

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Re: 90:10 AA - what don't you believe about it?

Post by willthrill81 » Fri Jul 14, 2017 11:54 am

3spots wrote:I wish I could find the thread that originally pointed to this article and thank that poster. The logic seems sound to me. It is a re-look at Buffet's AA advice of 90:10. If I understood it correctly, there was only a 2-3% failure rate of a 90:10 AA, but a 0% failure rate for 60:40 during the 30 year periods that included 1929, 2008, etc.

So that means that 97-98% of the time a 90:10 works just fine -- and 60:40 is protecting against that 2-3% chance.

I have never looked at it that way -- but wouldn't most people be okay with a 97% success rate? And then I read about folks wanting to keep 15 years of expenses in something safe...yikes, what a different approach.

Is there something inherently wrong with the study that makes people not believe, or are folks in agreement, but not wanting to accept that small risk?

http://web.iese.edu/JEstrada/PDF/Resear ... ett-AA.pdf
From the data analysis I've conducted, there is virtually no difference in the failure rate of a 60/40 portfolio or a 75/25. On average, the higher the equity portion of the portfolio, the more money that can be withdrawn from the portfolio and/or more can be left to heirs. But outside of the 60/40 to 75/25 range, as with a 90/10, that comes at the expense of volatility and a higher, though still very small, failure rate.

Volatility seems to be something that seems to be harder to handle as one ages, and this is not to be underestimated. On the flip side, "failure rates" are far overblown by many on this forum, as Kitces has pointed out that it should be interpreted as "chance of changing your spending" rather than "chance of going broke."

If you can handle the volatility, I think 90/10 through retirement is perfectly acceptable. A 95% or higher historical likelihood of success is great.
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Re: 90:10 AA - what don't you believe about it?

Post by FelixTheCat » Fri Jul 14, 2017 11:58 am

Here's my Buffett answer. Warren is one of the most successful investors of all time and 2nd richest man on the planet. If you believe in him, commit to his plan. :D
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Re: 90:10 AA - what don't you believe about it?

Post by rattlenap » Fri Jul 14, 2017 12:16 pm

stemikger wrote:I think if you can handle 90/10 then you would probably leave a lot of money to your heirs.

I don't think many people in their 50s, 60s and 70s can. I am pretty sure that I cannot which is why I hold 60/40 and save more.

But yes, if you can handle the short term volatility, 90/10 could be right for any age.

I think a problem many Bogleheads have, including myself is they don't look at the risk of losing their purchasing power in the long term when investing in bonds. Warren Buffett thinks that that is a much bigger risk than losing 20% in a stock portfolio in any one given year.

I think more like John Bogle and stay on the conservative side and be happy when I have Enough. Am I betting against Warren Buffett. NO WAY! I am just doing what I know I can handle.
My sentiment exactly! I was doing something similar to the WB 90/10 and then decided to switch to a 60/40. If anything, more to protect me from myself (i.e. behavioral mistakes). The 60/40 just seems to work.

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Re: 90:10 AA - what don't you believe about it?

Post by azanon » Fri Jul 14, 2017 12:28 pm

A Buffett 90/10 is a very weak, risk-adjusted return portfolio. Head over to portfoliocharts.com (or portfoliovisualizer, etc.), fool around with the tools, and find out how easy it is to build a better risk-adjusted portfolio. By far, the better question is, what's good about it, not the converse that you asked.

Buffett is (was) a great stock picker and seems to be a swell guy too. It's probably better to leave it at that. I don't think he's as well known for asset allocation.

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Re: 90:10 AA - what don't you believe about it?

Post by EyeYield » Fri Jul 14, 2017 12:32 pm

CurlyDave wrote:
stemikger wrote:...I think more like John Bogle and stay on the conservative side and be happy when I have Enough. Am I betting against Warren Buffett. NO WAY! I am just doing what I know I can handle.
Do you really think more like John Bogle? Bogle says to treat pensions and SS as equivalent to fixed income investments, i.e. bonds.

Personally, I do that, but I am part of a very small minority on this board.

As a practical matter it means that 100% of our investable portfolio is in equities. If I consider SS and pensions as equal to 4% bonds, only about half of our finial assets are in stocks. (There is also a brick and mortar real estate component that I leave out for AA purposes.)
I guess I'm part of that minority also. SS probably represents my largest bond holding and at this point is growing about 8%.
Buffett is part of a very small minority on the planet since he doesn't need a pension or SS.
I wouldn't invest like Buffett unless I had assets like Buffett.
Everybody's different though.
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Re: 90:10 AA - what don't you believe about it?

Post by David Jay » Fri Jul 14, 2017 12:43 pm

willthrill81 wrote:On the flip side, "failure rates" are far overblown by many on this forum, as Kitces has pointed out that it should be interpreted as "chance of changing your spending" rather than "chance of going broke."
Which is why the "fly on an airplane with a 1-in-50 chance of crashing" analogy is not particularly apt. Spending 5% or 10% less than projected for a few years of your retirement is not the same dying in a plane crash.
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Re: 90:10 AA - what don't you believe about it?

Post by sperry8 » Fri Jul 14, 2017 12:59 pm

FIREchief wrote:I don't believe 90/10 is aggressive enough for somebody in their twenties or thirties.

I don't believe it is conservative enough for somebody who has quit working and will never earn another buck.

Everybody's situation is unique, so I wouldn't blindly recommend any AA to anybody.

I was 100% equities up until the day my pension benefit fully vested. After that, I had options.....
I'm an early retiree at 70/30. Was higher pre-2009. Lowered it to sleep at night. Left lots of :moneybag on the table by lowering it but hey, sleep is important too. 90/10 definitely would have been better in hindsight... but one never knows about the future. Be sure your AA is set where you are 100% positive you won't sell at next crash. Of course, next crash may prove a buying oppty (if I can identify it as such). Anyway, can't complain... markets are up and life is good. :sharebeer
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Re: 90:10 AA - what don't you believe about it?

Post by TropikThunder » Fri Jul 14, 2017 1:01 pm

FelixTheCat wrote:Here's my Buffett answer. Warren is one of the most successful investors of all time and 2nd richest man on the planet. If you believe in him, commit to his plan. :D
This is not directed at you, but I get tired of the guru worship on here sometimes. If Warren Buffet had become one of the richest men on the planet by following his own advice, then maybe his asset allocation recommendation would have more value. The fact is, he's a billionaire by virtue of business and investment practices that have absolutely nothing to do with the common retirement investor. His 90/10 recommendation was how he would keep his wife from running out of money after he was gone, after he had accumulated his billions in other ways. When you start with a billion dollars, pretty much any allocation has a high chance of survival. Except maybe bitcoin. :twisted:

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Re: 90:10 AA - what don't you believe about it?

Post by Tyler Aspect » Fri Jul 14, 2017 1:21 pm

Ari wrote:
Tyler Aspect wrote:Some of the 90/10 people will sell out during a downturn and be in cash for a long time.
Anyone know of any studies on this? It's often touted around as an established fact on these forums, but have anyone seen numbers on how many people sell off during downturns, preferrably with data for different allocations?
I looked at Target Retirement 2050's annual report for year 2008. It appeared that 24% of the fund's asset were redeemed in 2008. The inflows were a different story. The Target Retirement concept was a smashing success with good inflow, so that the fund size doubled even with the redemption.

https://www.sec.gov/Archives/edgar/data ... sfinal.htm
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Re: 90:10 AA - what don't you believe about it?

Post by FelixTheCat » Fri Jul 14, 2017 3:53 pm

TropikThunder wrote:
FelixTheCat wrote:Here's my Buffett answer. Warren is one of the most successful investors of all time and 2nd richest man on the planet. If you believe in him, commit to his plan. :D
This is not directed at you, but I get tired of the guru worship on here sometimes. If Warren Buffet had become one of the richest men on the planet by following his own advice, then maybe his asset allocation recommendation would have more value. The fact is, he's a billionaire by virtue of business and investment practices that have absolutely nothing to do with the common retirement investor. His 90/10 recommendation was how he would keep his wife from running out of money after he was gone, after he had accumulated his billions in other ways. When you start with a billion dollars, pretty much any allocation has a high chance of survival. Except maybe bitcoin. :twisted:
He is quoted as saying that his recommendation would work well for anyone.
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Re: 90:10 AA - what don't you believe about it?

Post by itstoomuch » Fri Jul 14, 2017 6:07 pm

Buffett and BK have a very, very long time horizon and they got a lot of cash to weather take advantage of opportunities.
the average investor has a short time horizon (their expected remaining life time) and not enough cash to make it through a Market correction or recession.

a 90:10 for us is difficult to maintain for more than a few months. 1) I made profits; 2) Finding replacements to what was sold is difficult and entails more risk.
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Re: 90:10 AA - what don't you believe about it?

Post by Top99% » Fri Jul 14, 2017 6:44 pm

I think 90/10 might be too risky even for people in the early accumulation phase if that 10% includes the assets they might need to live on for a while if stocks crash and they lose their job (two events that are often correlated). If the 90/10 excludes an emergency fund the person is comfortable will sustain them through potentially extended unemployment or they have one of those very rare "secure" jobs that would be different. Some of us who work in tech are jumpy about stock market crashes being strongly correlated with job losses. :shock:
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Re: 90:10 AA - what don't you believe about it?

Post by willthrill81 » Fri Jul 14, 2017 7:37 pm

Top99% wrote:I think 90/10 might be too risky even for people in the early accumulation phase if that 10% includes the assets they might need to live on for a while if stocks crash and they lose their job (two events that are often correlated). If the 90/10 excludes an emergency fund the person is comfortable will sustain them through potentially extended unemployment or they have one of those very rare "secure" jobs that would be different. Some of us who work in tech are jumpy about stock market crashes being strongly correlated with job losses. :shock:
Thing is, most ordinary folks have the majority of their savings in tax advantaged accounts that aren't easily accessed without penalties even in the event of an extended job loss. So that money might as well be as aggressive as you can tolerate. Further, I doubt many Bogleheads would be willing to raid their retirement accounts unless in the direst of circumstances. Depending on the state you live in and other factors, I would personally consider bankruptcy first.

If a six month EF plus unemployment (once our mortgage is paid off in a few years, we could easily live on that alone) would be insufficient, then frankly I would strongly consider either changing vocation or finding a way to drastically reduce living expenses temporarily.
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Re: 90:10 AA - what don't you believe about it?

Post by tibbitts » Fri Jul 14, 2017 7:56 pm

FelixTheCat wrote:Here's my Buffett answer. Warren is one of the most successful investors of all time and 2nd richest man on the planet. If you believe in him, commit to his plan. :D
Yes but you have to commit to the entire plan. First, earn billions of dollars. Then, invest at 90/10. If I'd accomplished part one, I don't think I'd have a problem with part two.

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Re: 90:10 AA - what don't you believe about it?

Post by rhornback » Fri Jul 14, 2017 8:17 pm

One thing that I under emphasized in this discussion is the question about how much capital do you have.

For example, for Warren Buffet. If he gives his wife 50 mil upon his death and them does a 90/10 split. That is 45 mil S&P 500 and 5 mil short term securities. The 5 mil is short term securities is enough to tide his wife over during a market downturn.

Now if the amount for retirement is only 1 million with 90/10 that is only 100K to tide you over during a market downturn. This is unlikely to be enough.

So what I want to add to this discussion is that it partially depends IMO on the amount of capital, the amount of savings. The amount in bonds and/or short term securities combined with either working or social security should be enough to allow for a market recovery without large scale reductions in stocks (ie selling low).

So if I had 1 mil I would be at 60/40, at 2 million I might be 70/30, etc. And I also think it depends on whether or not you are working.

The last market downturn in 2008 I did... nothing. Not because I am super smart. But because I was working, my wife continued to work, and I had young kids to raise. I just didn't think about it much.

So while my wife and I are working I plan to maintain a more aggressive allocation.

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Re: 90:10 AA - what don't you believe about it?

Post by FIREchief » Fri Jul 14, 2017 10:02 pm

rhornback wrote:One thing that I under emphasized in this discussion is the question about how much capital do you have.

For example, for Warren Buffet. If he gives his wife 50 mil upon his death and them does a 90/10 split. That is 45 mil S&P 500 and 5 mil short term securities. The 5 mil is short term securities is enough to tide his wife over during a market downturn.

Now if the amount for retirement is only 1 million with 90/10 that is only 100K to tide you over during a market downturn. This is unlikely to be enough.

So what I want to add to this discussion is that it partially depends IMO on the amount of capital, the amount of savings. The amount in bonds and/or short term securities combined with either working or social security should be enough to allow for a market recovery without large scale reductions in stocks (ie selling low).

So if I had 1 mil I would be at 60/40, at 2 million I might be 70/30, etc. And I also think it depends on whether or not you are working.

The last market downturn in 2008 I did... nothing. Not because I am super smart. But because I was working, my wife continued to work, and I had young kids to raise. I just didn't think about it much.

So while my wife and I are working I plan to maintain a more aggressive allocation.
This is why a lot of us don't use a percentage based AA, but instead approach this as an LMP/RP scenario.
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Re: 90:10 AA - what don't you believe about it?

Post by KlangFool » Fri Jul 14, 2017 10:07 pm

3spots wrote:I wish I could find the thread that originally pointed to this article and thank that poster. The logic seems sound to me. It is a re-look at Buffet's AA advice of 90:10. If I understood it correctly, there was only a 2-3% failure rate of a 90:10 AA, but a 0% failure rate for 60:40 during the 30 year periods that included 1929, 2008, etc.

So that means that 97-98% of the time a 90:10 works just fine -- and 60:40 is protecting against that 2-3% chance.

I have never looked at it that way -- but wouldn't most people be okay with a 97% success rate? And then I read about folks wanting to keep 15 years of expenses in something safe...yikes, what a different approach.

Is there something inherently wrong with the study that makes people not believe, or are folks in agreement, but not wanting to accept that small risk?

http://web.iese.edu/JEstrada/PDF/Resear ... ett-AA.pdf
3spots,

1) You are not WB. He could retire on less than 1% of his portfolio. You cannot.

2) 90/10 is a lousy combination in term of risk adjusted return. You are taking a lot of risk for very little extra return. Any AA between 75/25 and 25/75 has a better trade off.

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Re: 90:10 AA - what don't you believe about it?

Post by WildBill » Fri Jul 14, 2017 10:25 pm

Howdy

I agree with the idea of a LMP portfolio. To me it is a sensible approach for retirees to have x (circa 20+ years) years of expenses in (hopefully) safe assets - bonds, treasuries, CDs etc --and the rest in risk assets, mostly equities. I got this idea from an article by Dr. Bernstein, and it resonated with me.

Mr. Larimore expressed the same idea a bit differently, as usual cutting to the core - "Put the money you cannot afford to lose in bonds".

Happy LMPing

W B
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Re: 90:10 AA - what don't you believe about it?

Post by MathWizard » Fri Jul 14, 2017 10:37 pm

Top99% wrote:I think 90/10 might be too risky even for people in the early accumulation phase if that 10% includes the assets they might need to live on for a while if stocks crash and they lose their job (two events that are often correlated). If the 90/10 excludes an emergency fund the person is comfortable will sustain them through potentially extended unemployment or they have one of those very rare "secure" jobs that would be different. Some of us who work in tech are jumpy about stock market crashes being strongly correlated with job losses. :shock:
Most people do not consider their EF as part of their asset allocation. I did not count my first tier EF (about 3-6 months salary),
but did count my 2nd tier.

Unless you are leveraging, you always are less than 100%, since you have something in your checking account to pay bills.

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Re: 90:10 AA - what don't you believe about it?

Post by Crushtheturtle » Fri Jul 14, 2017 11:43 pm

3spots wrote:I wish I could find the thread that originally pointed to this article and thank that poster. The logic seems sound to me. It is a re-look at Buffet's AA advice of 90:10. If I understood it correctly, there was only a 2-3% failure rate of a 90:10 AA, but a 0% failure rate for 60:40 during the 30 year periods that included 1929, 2008, etc.

So that means that 97-98% of the time a 90:10 works just fine -- and 60:40 is protecting against that 2-3% chance.

I have never looked at it that way -- but wouldn't most people be okay with a 97% success rate? And then I read about folks wanting to keep 15 years of expenses in something safe...yikes, what a different approach.

Is there something inherently wrong with the study that makes people not believe, or are folks in agreement, but not wanting to accept that small risk?

http://web.iese.edu/JEstrada/PDF/Resear ... ett-AA.pdf
3spots,

The thread you are referencing is likely "Roll call Warren Buffet 90/10 portfolio." The Estrada research paper you linked was introduced by user "JoMoney."

I am glad to have read it as well. It makes a compelling case for 90/10, citing historical data. The 90/10 allocation achieved obviously greater long-term upside than any more bond heavy allocations, but with greater downside protection as well, assuming one treats the 10% as a bucket during market crashes (no rebalancing into stocks).

Selecting a bond allocation is certainly a matter of personal circumstances, however Mr. Buffett seems to have considered a withdrawal rate as high as 4% when recommending 90/10. I find it very interesting.

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Re: 90:10 AA - what don't you believe about it?

Post by FIREchief » Fri Jul 14, 2017 11:46 pm

KlangFool wrote:

2) 90/10 is a lousy combination in term of risk adjusted return. You are taking a lot of risk for very little extra return. Any AA between 75/25 and 25/75 has a better trade off.

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Over which 20 year period??????
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Re: 90:10 AA - what don't you believe about it?

Post by North Texas Cajun » Fri Jul 14, 2017 11:59 pm

IMO, there is very little risk to holding a 90/10 portfolio for a retiree in this situation:

1. SS and/or pension which meets 100% of his non-discretionary expenses;
2. An emergency fund equal to 3-6 months of non-discretionary expenses;
3. Medicare and medicare supplement insurance;
4. Long term care insurance;
5. The ability to flex down discretionary spending significantly during a market downturn.

The models I've seen which predict any failure for a 90/10 portfolio assume constant spending levels throughout 30+ retirement years. That assumption is not realistic. Most retirees will get frugal upon seeing their nest egg temporarily drop in value. Further, and perhaps most important, retirees above age 80 simply do not spend as much as 65-75 year old retirees. Even though medical spending generally increases, that increase is more than offset by reductions in discretionary spending.

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Re: 90:10 AA - what don't you believe about it?

Post by KlangFool » Sat Jul 15, 2017 8:19 am

FIREchief wrote:
KlangFool wrote:

2) 90/10 is a lousy combination in term of risk adjusted return. You are taking a lot of risk for very little extra return. Any AA between 75/25 and 25/75 has a better trade off.

KlangFool
Over which 20 year period??????
FIREchief,

Do you believe the next 20 years will be exactly like any previous 20 years period?

KlangFool

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Re: 90:10 AA - what don't you believe about it?

Post by pkcrafter » Sat Jul 15, 2017 9:06 am

Clarification on the Buffet remark.
The strategy you mention comes out of a section of Warren Buffett's 2013 letter to Berkshire Hathaway shareholders where he says his will stipulates that cash be delivered to a trustee for his wife's benefit and that 90% of that cash go into a "very low cost" Standard & Poor's 500 index fund and 10% into short-term government bonds.
https://www.google.com/search?q=Buffett ... 8&oe=utf-8

The fact is that Buffett's wife could lose 90% of that portfolio and still have plenty to live on. So, the question is can you do that too?

Stocks are risky, and I don't mean volatility, I mean there is no net down below. It is possible to lose your invested money. What are you going to say, yeah, but that's such a small chance... If you can say, I can handle a 90% loss, then OK go 90%.

Paul
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Re: 90:10 AA - what don't you believe about it?

Post by core4portfolio » Sat Jul 15, 2017 9:37 am

90:10 works great when market is rising like for the past few years.
On 2010 and in Oct 2016, I remember seeing the SP 500 went down very sharply following the brexit and election time.
Biotech XBI went down almost 20% at that time...
Many were screaming in the forums..

Once market went down, people will be watching their portfolio every often mostly once a day.
Though many says they wont watch now. If you can sleep well at Night then you are good with that.
You can see an example in this forum itself... there is a thread called "US stocks free fall" which will
come to top of threads whenever market turns RED like losing 0.85% for next 3 or 4 days in a row

If you are close to retirement then you shouldn't be since you will lose 50% of the money with 90:10
Also, if you are in a position to spend the left out then chance of recovery is minimized...
so not a great choice for retirees.
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Re: 90:10 AA - what don't you believe about it?

Post by willthrill81 » Sat Jul 15, 2017 10:15 am

pkcrafter wrote:The fact is that Buffett's wife could lose 90% of that portfolio and still have plenty to live on. So, the question is can you do that too?

Stocks are risky, and I don't mean volatility, I mean there is no net down below. It is possible to lose your invested money. What are you going to say, yeah, but that's such a small chance... If you can say, I can handle a 90% loss, then OK go 90%.
So are you saying that retirees should have enough of their portfolio in bonds that they could handle their stocks being completely wiped out?
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Re: 90:10 AA - what don't you believe about it?

Post by pkcrafter » Sat Jul 15, 2017 10:41 am

willthrill81 wrote:
pkcrafter wrote:The fact is that Buffett's wife could lose 90% of that portfolio and still have plenty to live on. So, the question is can you do that too?

Stocks are risky, and I don't mean volatility, I mean there is no net down below. It is possible to lose your invested money. What are you going to say, yeah, but that's such a small chance... If you can say, I can handle a 90% loss, then OK go 90%.
So are you saying that retirees should have enough of their portfolio in bonds that they could handle their stocks being completely wiped out?
They probably should, but we know that in most cases that isn't possible. These kinds of decisions involve compromise. In the case you mention, retirees need some growth to sustain the portfolio vs the need to protect assets. SPIAs is another way to compromise. I'm just saying it isn't a good idea to pretend risk of loss does not exist.

Don't forget Wade Pfau has suggested AA can be increased as the investor ages, but Pfau, a few years ago, also said the safe withdrawal rate was 2%.


Paul
Last edited by pkcrafter on Sat Jul 15, 2017 10:49 am, edited 1 time in total.
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Re: 90:10 AA - what don't you believe about it?

Post by willthrill81 » Sat Jul 15, 2017 10:44 am

pkcrafter wrote:
willthrill81 wrote:
pkcrafter wrote:The fact is that Buffett's wife could lose 90% of that portfolio and still have plenty to live on. So, the question is can you do that too?

Stocks are risky, and I don't mean volatility, I mean there is no net down below. It is possible to lose your invested money. What are you going to say, yeah, but that's such a small chance... If you can say, I can handle a 90% loss, then OK go 90%.
So are you saying that retirees should have enough of their portfolio in bonds that they could handle their stocks being completely wiped out?
They probably should, but we know that in most cases that isn't possible. These kinds of decisions involve compromise. In the case you mention, retirees need some growth to sustain the portfolio vs the need to protect assets. SPIAs is another way to compromise. I'm just saying it isn't a good idea to pretend risk of loss does not exist.

Don't forget Wade Pfau has suggested AA can be increased as the investor ages, but Pfau, a few years ago, also said the safe withdrawal rate was 2%.


Paul



Paul
If stocks go down to zero, there are probably bigger problems than retirement income to deal with.

And considering the methods Pfau used to arrive at the 2% figure (just amortize your portfolio with TIPS and get a 2.5% WR for 40 years or 3.33% for 30 years), I put no stock in that at all (pun intended).
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Re: 90:10 AA - what don't you believe about it?

Post by pkcrafter » Sat Jul 15, 2017 10:58 am

willthrill81 wrote:
pkcrafter wrote:
willthrill81 wrote:
pkcrafter wrote:The fact is that Buffett's wife could lose 90% of that portfolio and still have plenty to live on. So, the question is can you do that too?

Stocks are risky, and I don't mean volatility, I mean there is no net down below. It is possible to lose your invested money. What are you going to say, yeah, but that's such a small chance... If you can say, I can handle a 90% loss, then OK go 90%.
So are you saying that retirees should have enough of their portfolio in bonds that they could handle their stocks being completely wiped out?
They probably should, but we know that in most cases that isn't possible. These kinds of decisions involve compromise. In the case you mention, retirees need some growth to sustain the portfolio vs the need to protect assets. SPIAs is another way to compromise. I'm just saying it isn't a good idea to pretend risk of loss does not exist.

Don't forget Wade Pfau has suggested AA can be increased as the investor ages, but Pfau, a few years ago, also said the safe withdrawal rate was 2%.


Paul
If stocks go down to zero, there are probably bigger problems than retirement income to deal with.

That is true. And, of course, if something catastrophic happened, bonds might also be worthless. You've almost got me convinced by guarded concerns aren't useful, but I'm not a risk-seeker, so I'll diversify my risk and continue to have respect for the idea that stocks are actually risky in ways we have not considered.

And considering the methods Pfau used to arrive at the 2% figure (just amortize your portfolio with TIPS and get a 2.5% WR for 40 years or 3.33% for 30 years), I put no stock in that at all (pun intended).

:thumbsup

Paul
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Re: 90:10 AA - what don't you believe about it?

Post by dharrythomas » Sat Jul 15, 2017 12:07 pm

Based on what he says he pays in taxes, the fact that only $100,000 in income came from Salary, and the fact that he didn't get any dividends or capital gains from BKR, my rough estimate is that he has at least $100M in other funds.

If you have enough money so that with 10% in bonds, if all your stocks go to zero it will have no significant impact on your lifestyle, you are a candidate for 90:10. Ben Graham said the rest of us should anchor on 50:50 and should in no case be outside of the 25:75 to 75-25 range.

Of course, it's different this time and we're as good at investing as Warren Buffett, will keep our heads when all about us are losing theirs, and are wiser than Ben Graham and Jack Bogle! :twisted:

Good luck.

Harry

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