Customizing The Glidepath

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Random Walker
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Customizing The Glidepath

Post by Random Walker »

This post is strongly influenced by Nedsaids post “Hitting The Sell Button”. I saw lots of us 50ish year olds responding, and I think they are on target.
I think most of us assume that as we approach retirement, we should cool off the asset allocation. Target date funds define a glide path towards the retirement portfolio based on age alone, and might decrease the equity allocation 1-2% a year or so. We can’t control what the markets will give us, but we can control how we respond to them. I think it makes great sense to periodically evaluate one's position in life, where they are financially relative to their goals, and perhaps with an eye towards current equity valuations, tweak the portfolio towards the retirement portfolio in a more aggressive opportunistic fashion than what a target date fund might do. I highly recommend William Bernstein’s e-book The Ages of the Investor: Life Cycle Guide To Investing. Near the very end of the book he makes this sort of recommendation for people within sight of retirement. I don’t view this really as market timing because this is not moving in and out of equities. Rather it is only moving in one direction towards a less aggressive portfolio in a stepwise opportunistic fashion. To me this makes much more sense than using only one’s age to determine the asset allocation. Given today’s lofty valuations, many people may be closer to their financial goals than they expected to be. Future expected returns are modest and may not be worth the risk. Could well make great sense to make a strong move towards the retirement portfolio rather than just modest 1-2% changes per year that one may have defined in an investment policy statement years ago. Behavioral finance shows the pain of a loss is twice as much as the happiness of an equal sized gain. As one’s net worth increases, this 2:1 ratio increases. When one is in or approaching retirement and there’s not much more new income to replace losses, there’s probably some sort of exponent involved in determining that ratio. Read Bernstein’s book!

Dave
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Re: Customizing The Glidepath

Post by 2015 »

Random Walker wrote: Fri Jan 05, 2018 3:22 pm This post is strongly influenced by Nedsaids post “Hitting The Sell Button”. I saw lots of us 50ish year olds responding, and I think they are on target.
I think most of us assume that as we approach retirement, we should cool off the asset allocation. Target date funds define a glide path towards the retirement portfolio based on age alone, and might decrease the equity allocation 1-2% a year or so. We can’t control what the markets will give us, but we can control how we respond to them. I think it makes great sense to periodically evaluate one's position in life, where they are financially relative to their goals, and perhaps with an eye towards current equity valuations, tweak the portfolio towards the retirement portfolio in a more aggressive opportunistic fashion than what a target date fund might do. I highly recommend William Bernstein’s e-book The Ages of the Investor: Life Cycle Guide To Investing. Near the very end of the book he makes this sort of recommendation for people within sight of retirement. I don’t view this really as market timing because this is not moving in and out of equities. Rather it is only moving in one direction towards a less aggressive portfolio in a stepwise opportunistic fashion. To me this makes much more sense than using only one’s age to determine the asset allocation. Given today’s lofty valuations, many people may be closer to their financial goals than they expected to be. Future expected returns are modest and may not be worth the risk. Could well make great sense to make a strong move towards the retirement portfolio rather than just modest 1-2% changes per year that one may have defined in an investment policy statement years ago. Behavioral finance shows the pain of a loss is twice as much as the happiness of an equal sized gain. As one’s net worth increases, this 2:1 ratio increases. When one is in or approaching retirement and there’s not much more new income to replace losses, there’s probably some sort of exponent involved in determining that ratio. Read Bernstein’s book!

Dave
+1
Had dinner with a mid-50's friend last Friday who told me for the first time he's 85% equities. After getting back up on my chair after having fallen off, I practically begged him to reduce his equity exposure. I think it was Scott Burns where I first read one's fifties being referred to as the "fifties minefield". That's because one has a greater propensity for either suffering a serious health condition or loss of a job, both of which one might not recover from. The SHC could even preclude one from ever working again. Couple either of those with a major market crash and one's retirement has suddenly taken a ninety degree turn for the worse.
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Random Walker
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Re: Customizing The Glidepath

Post by Random Walker »

In Bernstein’s book he shows a “waterfall chart” where he basically shows that the number of years to being able to retire is strongly related to where the markets were when one started investing, and if they are on the verge of being where they want to be as a result of a strong bull, they can really screw things up by not acting before the market drops. He refers to “Murphy’s Law Of Retirement”. (Think I have a post by that name here on Bogleheads). Murphy’s Law Of Retirement is as follows. People ride a bull market up, and are closer to retirement than they expected. After the bull ride up though, valuations are high, future expected returns lower, and the whole dispersion of future potential returns shifts left. So people can easily retire right into a bear market when they begin withdrawl phase: major league sequence of returns risk.

Dave
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AtlasShrugged?
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Re: Customizing The Glidepath

Post by AtlasShrugged? »

Random....A question for you. And BTW, thank you for continuing to post articles from Larry Swedroe.

My father is 82 years young. He is in the 'Silent Generation'. I have noticed that he, and many of his friends are 100% invested in stocks. No bonds at all. What I have observed is they pick a few strong horses, let them ride, set a target price in their minds....and then completely sell out of the market when they hit their target. Example....One friend has a boatload of Apple. That person bought in at the 7:1 split. This guy is going to bail out at 200, and sell everything. Another has a huge concentration in AbbVie and AT&T. When his target prices are hit, he is selling out completely.

Have you observed the same phenomenon? Namely, people in this age bracket (80+) are unusually heavy into stocks? Not mutual funds - stocks. And their behavior is primarily driven by meeting a target number and then bailing out completely?
“If you don't know, the thing to do is not to get scared, but to learn.”
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Re: Customizing The Glidepath

Post by Sandi_k »

Random Walker wrote: Fri Jan 05, 2018 3:22 pm This post is strongly influenced by Nedsaids post “Hitting The Sell Button”. I saw lots of us 50ish year olds responding, and I think they are on target.

I think most of us assume that as we approach retirement, we should cool off the asset allocation. Target date funds define a glide path towards the retirement portfolio based on age alone, and might decrease the equity allocation 1-2% a year or so. We can’t control what the markets will give us, but we can control how we respond to them. I think it makes great sense to periodically evaluate one's position in life, where they are financially relative to their goals, and perhaps with an eye towards current equity valuations, tweak the portfolio towards the retirement portfolio in a more aggressive opportunistic fashion than what a target date fund might do.
Keep in mind that some of us in that age cohort still have pensions. It's one reason our portfolio is so heavy on stocks - my lump sum pension is 45% of our total portfolio. As a result, heavy in bonds is NOT something I've found to be necessary or advisable.

That said, for our investment portfolio, I'm beginning to tinker with a customized glidepath, because I do not want to lose 50% of it overnight. We have been saving too long for that to be taken entirely in stride. So this morning, I'm contemplating the idea of LMP vs. restructuring the glidepath, or a hybrid approach.

We're currently 54/52, and at 85%/15%. We have 1.5 years of cash/FI available, as we begin to construct a bucket of 5 years of expenses. So, the question is:

Do we rebalance each year to reduce exposure? Or do we move 50% of a year's need to cash/bonds within the portfolio per year, so that upon retirement in 8 years, we have 5 years set aside as a rolling "withdrawal account" if stocks are down? Or both?

Option 1: If we move to a 50/50 portfolio by 2026, when and how to we construct it? Like this?

By Jan 2018: 85/15
By Jan 2019: 75/25
By Jan 2020: 70/30
By Jan 2021: 70/30
By Jan 2022: 70/30
By Jan 2023: 65/35
By Jan 2024: 60/40
By Jan 2025: 55/45
By Jan 2026: 50/50

Options 2:Or do we just go with the "5 years in cash/FI?" Which would mean that in Jan 2026, we'd be at ~ $250k cash, $1M stocks, so we'd be effectively 80/20, plus a pension?

Option 3:Or do we do the hybrid approach? Assume $250k in cash/bonds for the "withdrawal account" and then the portfolio outside of that would also be 80/20? That would mean $250k in the withdrawal account, $250k in bonds/FI in the portfolio, and $800k in stocks - for an overall AA of 60/40? And then a pension that would cover 75% of our generous budget, with 25% from the withdrawal portfolio.

I'm currently leaning to Option 3. Thoughts?
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Re: Customizing The Glidepath

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Random Walker wrote: Fri Jan 05, 2018 5:07 pm In Bernstein’s book he shows a “waterfall chart” where he basically shows that the number of years to being able to retire is strongly related to where the markets were when one started investing, and if they are on the verge of being where they want to be as a result of a strong bull, they can really screw things up by not acting before the market drops. He refers to “Murphy’s Law Of Retirement”. (Think I have a post by that name here on Bogleheads). Murphy’s Law Of Retirement is as follows. People ride a bull market up, and are closer to retirement than they expected. After the bull ride up though, valuations are high, future expected returns lower, and the whole dispersion of future potential returns shifts left. So people can easily retire right into a bear market when they begin withdrawl phase: major league sequence of returns risk.

Dave
Yes!
That's exactly my concern.

Great post.
Thanks for the education.
j :D
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Re: Customizing The Glidepath

Post by Sandtrap »

JCE66 wrote: Sat Jan 06, 2018 8:59 am Random....A question for you. And BTW, thank you for continuing to post articles from Larry Swedroe.

My father is 82 years young. He is in the 'Silent Generation'. I have noticed that he, and many of his friends are 100% invested in stocks. No bonds at all. What I have observed is they pick a few strong horses, let them ride, set a target price in their minds....and then completely sell out of the market when they hit their target. Example....One friend has a boatload of Apple. That person bought in at the 7:1 split. This guy is going to bail out at 200, and sell everything. Another has a huge concentration in AbbVie and AT&T. When his target prices are hit, he is selling out completely.

Have you observed the same phenomenon? Namely, people in this age bracket (80+) are unusually heavy into stocks? Not mutual funds - stocks. And their behavior is primarily driven by meeting a target number and then bailing out completely?
FIL recently deceased, age 94 WWII career military. 100% in equities, communication, media, and tech, since day one. Had a great gov't pension so let everything ride, auto reinvest. His portfolio is enormous compared to his original value.
j
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Random Walker
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Re: Customizing The Glidepath

Post by Random Walker »

Sandtrap,
If that post got your interest, I can’t recommend William Bernstein’s short e-book highly enough. The most difficult investment decisions are in that near retirement period, and that’s why he saves that subject for the end. If you’re really cramped for time, just read the last few pages. But I promise, it’s time very well spent!

Dave
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Re: Customizing The Glidepath

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Random Walker wrote: Sun Jan 07, 2018 12:52 pm Sandtrap,
If that post got your interest, I can’t recommend William Bernstein’s short e-book highly enough. The most difficult investment decisions are in that near retirement period, and that’s why he saves that subject for the end. If you’re really cramped for time, just read the last few pages. But I promise, it’s time very well spent!

Dave
Thanks, Dave.
Have it. Devout Bernstein fan and advocate.
mahalo,
j :D
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Re: Customizing The Glidepath

Post by rkhusky »

Sandtrap wrote: Sun Jan 07, 2018 12:49 pm
JCE66 wrote: Sat Jan 06, 2018 8:59 am Random....A question for you. And BTW, thank you for continuing to post articles from Larry Swedroe.

My father is 82 years young. He is in the 'Silent Generation'. I have noticed that he, and many of his friends are 100% invested in stocks. No bonds at all. What I have observed is they pick a few strong horses, let them ride, set a target price in their minds....and then completely sell out of the market when they hit their target. Example....One friend has a boatload of Apple. That person bought in at the 7:1 split. This guy is going to bail out at 200, and sell everything. Another has a huge concentration in AbbVie and AT&T. When his target prices are hit, he is selling out completely.

Have you observed the same phenomenon? Namely, people in this age bracket (80+) are unusually heavy into stocks? Not mutual funds - stocks. And their behavior is primarily driven by meeting a target number and then bailing out completely?
FIL recently deceased, age 94 WWII career military. 100% in equities, communication, media, and tech, since day one. Had a great gov't pension so let everything ride, auto reinvest. His portfolio is enormous compared to his original value.
j
I don't know if my FIL is 100% stocks but the few times he's mentioned investments it's been about individual stocks or a pool of mortgages that he invested in long ago, some of which have never been refinanced and so continue to pay a high rate. Perhaps that is how they grew up investing and never saw the value in mutual funds.
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Re: Customizing The Glidepath

Post by nedsaid »

Dave, I am honored that my "Hitting the Sell Button" thread inspired your thread here. Good to know that people read my stuff.

A couple of thoughts here. As I have approached 60, I realize that I did not take the task of de-risking my portfolio seriously enough. My portfolio was 72% stocks before the 2008-2009 bear market, after the bear hit I regretted not rebalancing near market highs. After the bear, my portfolio drifted back up to 69% and I started my program of mild rebalancing from stocks to bonds in July 2013 when the "taper tantrum" hit. Pretty much, I would rebalance from stocks to bonds every time the market hit new highs. Typically, my rebalance would be 0.50% to 1.00% of my portfolio each time. Not much but cumulatively, it was a lot. Had I not done that, my stock allocation would have drifted back to probably 75% or so. My last rebalance event was December 2017, which brought me to about 66% stocks.

So over a decade or so, I only de-risked from 72% stocks down to 66% stocks. Not much de-risking. So now the mini-bear/correction hit and I have about 60% stocks now. So the market de-risked for me while shrinking the portfolio at the same time. The volatility of my portfolio was more than would have liked which means I have too many stocks. I might also be semi-retired and not realizing it yet. Another reason to reduce my stock allocation.

My next project is to reduce my stock allocation even further, that is, after the market hits new highs. That might be a while.
A fool and his money are good for business.
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Re: Customizing The Glidepath

Post by WoodSpinner »

All,

Interesting thread! Sequence of Return Risks are one of my most significant concerns.

I entered retirement in 2018 well positioned in a 50/50 portfolio.

I am using an upward glide path towards 60/40 (1% per year) with a plan to hold at that asset level. This is also a good match for a 10 year LMP structure based on a rolling 10 year anticipated expenses, Roth Conversions, taxes, and start of SS.

Is anyone else pursuing a similar approach?

Here are some of the sources which brought this idea to my attention:

https://www.kitces.com/blog/should-equi ... ly-better/

viewtopic.php?t=210476

https://earlyretirementnow.com/2017/09/ ... lidepaths/
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Re: Customizing The Glidepath

Post by ionball »

WoodSpinner wrote: Sat Dec 29, 2018 9:32 pm Is anyone else pursuing a similar approach?
I appreciate this thread and yes I am pursuing a similar approach. The Kitces article addressing sequence of returns risk convinced me to ratchet down my AA to 40/60 a few years ago. Last month I went further and converted to a LMP/RP approach where projected liabilites will be matched until age 70 social security benefits begin. Withdrawals from the Risk Portfolio will trigger at age 70 with a smaller load to carry. An added benefit that I anticipate to this approach will be simplification of portfolio management after dropping the LMP at age 70. Cognitive decline is a concern that I want to address after age 70. At that point I intend to transition to greater simplification and as close to auto-pilot as possible.

Because of the switch to LMP/RP, the recent market declines haven't bothered me so much. I guess I'll need to find something new to worry about.
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Re: Customizing The Glidepath

Post by Peter Foley »

I've been a proponent of a rising equity glide path since reading about it a few years ago. It was basically my approach as I neared retirement. I wanted to reduce risk so that I would not have to delay retirement. Had I not reduced my equities in 2011 I certainly would be ahead of where I am today. But I have no regrets. I've done okay and I've slept well.

I'll recalculate my AA early next week. I'm probably within a couple percentage points of my plan after the December correction.
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Re: Customizing The Glidepath

Post by Random Walker »

Thought I’d bring this thread back to life in light of some great returns lately. Can’t time a market, but we do know where we are in relation to goals, changing risk tolerance, size of portfolio, future expected returns, and the dispersion of potential future expected returns.

Dave
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Re: Customizing The Glidepath

Post by garlandwhizzer »

Excellent post, Dave, thanks for posting. These are issues we should all think about especially as we approach or reach retirement. I'm 72 and have been retired for 22 years. Bonds which I used to avoid completely look better to me every year now. In this latest 10+ year bull market I've been annually rebalancing moving money from stocks to bonds annually, plus slowly increasing my bond exposure relative to stock exposure. I'm still not risk averse and still heavily tilted to very widely diversified equity, about 60%, but that's a lot less than it used to be. As the investing time horizon narrows in retirement, stable non-volatile bond assets look more and more attractive every year. As one approaches or reaches retirement, titrating a balanced portfolio's risk/reward tradeoff to one's personal goals, risk tolerance, and financial circumstances should be done on a regular basis IMO. I do it every year and try to adjust according to what's going on in the equity and bond markets as well as in my own life.

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Re: Customizing The Glidepath

Post by nedsaid »

To update, at age 60 I am down to 62/63% stocks now. So I have continued to gradually work down the percentage of the portfolio allocated to stocks.
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Re: Customizing The Glidepath

Post by Random Walker »

Really gets my attention that in a typical 60/40 portfolio about 85-90% of the portfolio risk is wrapped up in the equity side.

Dave
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Re: Customizing The Glidepath

Post by goblue100 »

nedsaid wrote: Fri Dec 13, 2019 1:45 pm To update, at age 60 I am down to 62/63% stocks now. So I have continued to gradually work down the percentage of the portfolio allocated to stocks.
I'm 58 10 months. I'm thinking of retiring at 60. My portfolio is 61/29 and 10% percent "cash", but mostly that is CD's. That is down from 80/20 in 2010. Of course, I would have been better off not taking anything off the table, but my crystal ball was extremely cloudy over the last 8 or 9 years, and I often thought we were on the edge of the next "big one". I'm very conflicted about whether I should move closer to 50/50 or if 60/40 is as low as I want to go. On the side to go to 50/50 is the long bull market, and the idea it seems like we are due for some bad years. On the 60/40 side is I generally am more aggressive, and I'm actually surprised I'm 60/40 as it is. As I said, conflicted.
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Re: Customizing The Glidepath

Post by nedsaid »

goblue100 wrote: Fri Dec 13, 2019 3:03 pm
nedsaid wrote: Fri Dec 13, 2019 1:45 pm To update, at age 60 I am down to 62/63% stocks now. So I have continued to gradually work down the percentage of the portfolio allocated to stocks.
I'm 58 10 months. I'm thinking of retiring at 60. My portfolio is 61/29 and 10% percent "cash", but mostly that is CD's. That is down from 80/20 in 2010. Of course, I would have been better off not taking anything off the table, but my crystal ball was extremely cloudy over the last 8 or 9 years, and I often thought we were on the edge of the next "big one". I'm very conflicted about whether I should move closer to 50/50 or if 60/40 is as low as I want to go. On the side to go to 50/50 is the long bull market, and the idea it seems like we are due for some bad years. On the 60/40 side is I generally am more aggressive, and I'm actually surprised I'm 60/40 as it is. As I said, conflicted.
Yes, I am conflicted too but for another reason, yields on investment grade bonds are so darned low. Hard to get excited about 2% to 3% returns on the fixed income side of my portfolio, inflation historically runs 2% to 2.5% and this means that fixed income will have very little if any real return. Better than money stuffed under my mattress, which has no protection against inflation, but still just keeps you even. One reason I have been a bit stock heavy for years. In fact, my Investment Policy Statement has an asset allocation of 60% stocks/40% bonds and cash, an allocation I have ignored for years because of the very low interest rates. Still, I am getting older and de-risk I must but I don't like it very much.
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Re: Customizing The Glidepath

Post by Random Walker »

goblue100 wrote: Fri Dec 13, 2019 3:03 pm
nedsaid wrote: Fri Dec 13, 2019 1:45 pm To update, at age 60 I am down to 62/63% stocks now. So I have continued to gradually work down the percentage of the portfolio allocated to stocks.
I'm 58 10 months. I'm thinking of retiring at 60. My portfolio is 61/29 and 10% percent "cash", but mostly that is CD's. That is down from 80/20 in 2010. Of course, I would have been better off not taking anything off the table, but my crystal ball was extremely cloudy over the last 8 or 9 years, and I often thought we were on the edge of the next "big one". I'm very conflicted about whether I should move closer to 50/50 or if 60/40 is as low as I want to go. On the side to go to 50/50 is the long bull market, and the idea it seems like we are due for some bad years. On the 60/40 side is I generally am more aggressive, and I'm actually surprised I'm 60/40 as it is. As I said, conflicted.
I’m 57. Sometimes I wonder if people in our age group are possibly over influenced (traumatized?) by our personal investing history. We likely started investing somewhere in the late 1980’s or early 1990’s. In a single decade I think we got a lifetime’s worth of experience: 2000-2002 bubble and burst, real estate bubble/ burst 2006-2007, financial crisis 2007-2008. Personally I’m down to 40% equities. One of those experiences would hurt a lot more now than a decade ago.

Bogle said something like “I’m 50/50, and about half the time I think I have too little in equities and half the time too much”. I feel the same way about my 40% equities portfolio. I figure feeling that way means I’m in the right AA neighborhood. I’ve been impressed at the relative lack of sensitivity Monte Carlo results show due to changes in AA. The difference between 40/60 and 60/40 in achieving realistic goals can be surprisingly small.

Dave
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Re: Customizing The Glidepath

Post by goblue100 »

Random Walker wrote: Fri Dec 13, 2019 4:48 pm I’m 57. Sometimes I wonder if people in our age group are possibly over influenced (traumatized?) by our personal investing history. We likely started investing somewhere in the late 1980’s or early 1990’s. In a single decade I think we got a lifetime’s worth of experience: 2000-2002 bubble and burst, real estate bubble/ burst 2006-2007, financial crisis 2007-2008. Personally I’m down to 40% equities. One of those experiences would hurt a lot more now than a decade ago.

Bogle said something like “I’m 50/50, and about half the time I think I have too little in equities and half the time too much”. I feel the same way about my 40% equities portfolio. I figure feeling that way means I’m in the right AA neighborhood. I’ve been impressed at the relative lack of sensitivity Monte Carlo results show due to changes in AA. The difference between 40/60 and 60/40 in achieving realistic goals can be surprisingly small.

Dave
Well, we certainly know what can happen. Some of us may have become desensitized. :)
I've certainly run the Monte Carlo projections. I've been a little reluctant to believe them in this interest rate environment. In his post above, nedsaid put into words some of my own feelings. Hard to get excited about putting money into an asset with no real return. I was hopeful the Fed would "normalize" interest rates, but that hope was fleeting.
I'm at that point where my portfolio should be large enough to support my retirement plans, but not so large I'm immune to "whatever".
Financial planners are savers. They want us to be 95 percent confident we can finance a 30-year retirement even though there is an 82 percent probability of being dead by then. - Scott Burns
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Re: Customizing The Glidepath

Post by J295 »

Good thread. I’m giving it a bump for further dialogue in this new environment.
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Re: Customizing The Glidepath

Post by J295 »

Bumping in case any retirees or near retirees that have commented above want to follow up, or anyone else wants to post.
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Re: Customizing The Glidepath

Post by nedsaid »

At age 61, I am now at 63.5% of stocks. It feels like I have been selling like crazy and yet the market has been so powerful that I feel like I have been running in place. So much for de-risking.
A fool and his money are good for business.
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Re: Customizing The Glidepath

Post by J295 »

nedsaid wrote: Sun May 02, 2021 6:28 pm At age 61, I am now at 63.5% of stocks. It feels like I have been selling like crazy and yet the market has been so powerful that I feel like I have been running in place. So much for de-risking.

Thanks for update!!
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Re: Customizing The Glidepath

Post by Peter Foley »

An aspect of this topic that has not been explored is the ratio of US to International. US hs far outperformed for a number of years. Is there a glidepath approach within equities?
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Re: Customizing The Glidepath

Post by vineviz »

Peter Foley wrote: Mon May 03, 2021 12:23 pm An aspect of this topic that has not been explored is the ratio of US to International. US hs far outperformed for a number of years. Is there a glidepath approach within equities?
Usually not. For the most part, the allocation within equities should remain fairly constant throughout life.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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