When does purchasing equities lose its marginal utility?

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TheTimeLord
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When does purchasing equities lose its marginal utility?

Post by TheTimeLord » Wed Jun 27, 2018 9:09 am

If you have no interest in how large a legacy you are leaving and are confident you already have enough to last for the remainder of your life and fund your lifestyle at what point does investing in additional equities lose its marginal utility. Is it 35 years before death, 30, 20, 10 or never?
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ralph124cf
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Re: When does purchasing equities lose its marginal utility?

Post by ralph124cf » Wed Jun 27, 2018 9:28 am

If you know when you will die, the answer is easy. Not knowing when I will die, the answer is much harder.

Ralph

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TheTimeLord
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Re: When does purchasing equities lose its marginal utility?

Post by TheTimeLord » Wed Jun 27, 2018 9:32 am

ralph124cf wrote:
Wed Jun 27, 2018 9:28 am
If you know when you will die, the answer is easy. Not knowing when I will die, the answer is much harder.

Ralph
Very true, I am not saying at what point do you sell off all your equities, I assume the answer to that is never, I am asking at what point is there no practical purpose to adding if you feel you are FI and disinterested in the size of your legacy.
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Re: When does purchasing equities lose its marginal utility?

Post by willthrill81 » Wed Jun 27, 2018 9:55 am

If you're confident that you have enough to last the rest of your life, then equities appear to only have the ability to increase your ability to spend over time, which is rarely a complaint. But the real crux of the issue is your confidence that you have enough. We don't know the future, including all of our financial needs, nor do we know how long we have left on this earth, as pointed out above. Consequently, I think that the assumption you're making is an impossible one.
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dbr
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Re: When does purchasing equities lose its marginal utility?

Post by dbr » Wed Jun 27, 2018 10:01 am

TheTimeLord wrote:
Wed Jun 27, 2018 9:32 am
ralph124cf wrote:
Wed Jun 27, 2018 9:28 am
If you know when you will die, the answer is easy. Not knowing when I will die, the answer is much harder.

Ralph
Very true, I am not saying at what point do you sell off all your equities, I assume the answer to that is never, I am asking at what point is there no practical purpose to adding if you feel you are FI and disinterested in the size of your legacy.
Probably now based on feeling that you are FI and disinterested in the size of your legacy. The technical answer is what is your definition of utility and what function of % equity is it? In the case that marginal utility of increased legacy is zero and there is no effect on FI, then you answer your own question.

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TheTimeLord
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Re: When does purchasing equities lose its marginal utility?

Post by TheTimeLord » Wed Jun 27, 2018 10:06 am

willthrill81 wrote:
Wed Jun 27, 2018 9:55 am
If you're confident that you have enough to last the rest of your life, then equities appear to only have the ability to increase your ability to spend over time, which is rarely a complaint. But the real crux of the issue is your confidence that you have enough. We don't know the future, including all of our financial needs, nor do we know how long we have left on this earth, as pointed out above. Consequently, I think that the assumption you're making is an impossible one.
I don't. When I look at something like the Trinity Study that tells you not only is a 4% withdrawal rate sustainable for 30 years but in a high percentage of cases you will have significant funds remaining I don't see the problem considering tis as long as you use a reasonable lifespan. If I was 55 I would have no problem with considering a remaining lifespan of 40 years as good enough.
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TheTimeLord
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Re: When does purchasing equities lose its marginal utility?

Post by TheTimeLord » Wed Jun 27, 2018 10:09 am

dbr wrote:
Wed Jun 27, 2018 10:01 am
TheTimeLord wrote:
Wed Jun 27, 2018 9:32 am
ralph124cf wrote:
Wed Jun 27, 2018 9:28 am
If you know when you will die, the answer is easy. Not knowing when I will die, the answer is much harder.

Ralph
Very true, I am not saying at what point do you sell off all your equities, I assume the answer to that is never, I am asking at what point is there no practical purpose to adding if you feel you are FI and disinterested in the size of your legacy.
Probably now based on feeling that you are FI and disinterested in the size of your legacy. The technical answer is what is your definition of utility and what function of % equity is it? In the case that marginal utility of increased legacy is zero and there is no effect on FI, then you answer your own question.
Kind of what I was thinking, just wanted to make sure I wasn't missing something obvious (everyone has blindspots). Going forward I likely still purchase equities, out of habit mostly.
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PhilosophyAndrew
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Re: When does purchasing equities lose its marginal utility?

Post by PhilosophyAndrew » Wed Jun 27, 2018 10:09 am

OP, what form of utility are you referring to?

If your confidence is well-placed, then your equity allocation is irrelevant for your financial future. In this case, perhaps you ought to be reflecting on the forms of decumulatuon that might make you happiest, for example increasing consumption or charitable giving.


Andy.

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Re: When does purchasing equities lose its marginal utility?

Post by Valuethinker » Wed Jun 27, 2018 10:11 am

TheTimeLord wrote:
Wed Jun 27, 2018 9:09 am
If you have no interest in how large a legacy you are leaving and are confident you already have enough to last for the remainder of your life and fund your lifestyle at what point does investing in additional equities lose its marginal utility. Is it 35 years before death, 30, 20, 10 or never?
You still have inflation risk. So you either invest your portfolio entirely in TIPS and Ibonds, and trust that that will hedge against inflation, or you include equities.

Equities are not inflation hedges per se. The record of equities in periods of rising inflation is generally poor (depending on monetary policy). However they pay high (and risky) returns and that means that in the long run they tend to give real returns significantly in excess of inflation.

There's very few cases where I would suggest someone should be less than 20% equities. In a nominal bond-equity portfolio, that has historically minimized volatility over a 100% bond portfolio.

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TheTimeLord
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Re: When does purchasing equities lose its marginal utility?

Post by TheTimeLord » Wed Jun 27, 2018 10:16 am

PhilosophyAndrew wrote:
Wed Jun 27, 2018 10:09 am
OP, what form of utility are you referring to?

If your confidence is well-placed, then your equity allocation is irrelevant for your financial future. In this case, perhaps you ought to be reflecting on the forms of decumulatuon that might make you happiest, for example increasing consumption or charitable giving.


Andy.
To be clear I don't mind leaving a legacy to relatives or charities, it just isn't anything I care to target. Wife and I are essentially the same age, I will probably retire in the 2nd half of 2019, DW wants to keep going a few more years. We have pretty much everything we want and probably won't get to the point where we feel okay about getting a "Wheels Up" membership so don't see any marked decumulation for the next few years.
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dbr
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Re: When does purchasing equities lose its marginal utility?

Post by dbr » Wed Jun 27, 2018 10:25 am

TheTimeLord wrote:
Wed Jun 27, 2018 10:16 am
PhilosophyAndrew wrote:
Wed Jun 27, 2018 10:09 am
OP, what form of utility are you referring to?

If your confidence is well-placed, then your equity allocation is irrelevant for your financial future. In this case, perhaps you ought to be reflecting on the forms of decumulatuon that might make you happiest, for example increasing consumption or charitable giving.


Andy.
To be clear I don't mind leaving a legacy to relatives or charities, it just isn't anything I care to target. Wife and I are essentially the same age, I will probably retire in the 2nd half of 2019, DW wants to keep going a few more years. We have pretty much everything we want and probably won't get to the point where we feel okay about getting a "Wheels Up" membership so don't see any marked decumulation for the next few years.
Perhaps this has more to do with your question than anything else:

“Alice: Would you tell me, please, which way I ought to go from here?
The Cheshire Cat: That depends a good deal on where you want to get to.
Alice: I don't much care where.
The Cheshire Cat: Then it doesn't much matter which way you go.
Alice: ...So long as I get somewhere.
The Cheshire Cat: Oh, you're sure to do that, if only you walk long enough.”

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Cyclesafe
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Re: When does purchasing equities lose its marginal utility?

Post by Cyclesafe » Wed Jun 27, 2018 10:27 am

Good question, but the answer is unknowable.

For example, in 30-50 years there will be unimaginable advances in medicine. What is definitely imaginable is that access to these advances will not be free.....

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TheTimeLord
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Re: When does purchasing equities lose its marginal utility?

Post by TheTimeLord » Wed Jun 27, 2018 10:39 am

dbr wrote:
Wed Jun 27, 2018 10:25 am
TheTimeLord wrote:
Wed Jun 27, 2018 10:16 am
PhilosophyAndrew wrote:
Wed Jun 27, 2018 10:09 am
OP, what form of utility are you referring to?

If your confidence is well-placed, then your equity allocation is irrelevant for your financial future. In this case, perhaps you ought to be reflecting on the forms of decumulatuon that might make you happiest, for example increasing consumption or charitable giving.


Andy.
To be clear I don't mind leaving a legacy to relatives or charities, it just isn't anything I care to target. Wife and I are essentially the same age, I will probably retire in the 2nd half of 2019, DW wants to keep going a few more years. We have pretty much everything we want and probably won't get to the point where we feel okay about getting a "Wheels Up" membership so don't see any marked decumulation for the next few years.
Perhaps this has more to do with your question than anything else:

“Alice: Would you tell me, please, which way I ought to go from here?
The Cheshire Cat: That depends a good deal on where you want to get to.
Alice: I don't much care where.
The Cheshire Cat: Then it doesn't much matter which way you go.
Alice: ...So long as I get somewhere.
The Cheshire Cat: Oh, you're sure to do that, if only you walk long enough.”
I would say that would be an accurate reading. This is probably the natural consternation resulting from seeing my workalike come to and end and not having any goals to reset.
Last edited by TheTimeLord on Wed Jun 27, 2018 10:46 am, edited 1 time in total.
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ResearchMed
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Re: When does purchasing equities lose its marginal utility?

Post by ResearchMed » Wed Jun 27, 2018 10:43 am

TheTimeLord wrote:
Wed Jun 27, 2018 10:06 am
willthrill81 wrote:
Wed Jun 27, 2018 9:55 am
If you're confident that you have enough to last the rest of your life, then equities appear to only have the ability to increase your ability to spend over time, which is rarely a complaint. But the real crux of the issue is your confidence that you have enough. We don't know the future, including all of our financial needs, nor do we know how long we have left on this earth, as pointed out above. Consequently, I think that the assumption you're making is an impossible one.
I don't. When I look at something like the Trinity Study that tells you not only is a 4% withdrawal rate sustainable for 30 years but in a high percentage of cases you will have significant funds remaining I don't see the problem considering tis as long as you use a reasonable lifespan. If I was 55 I would have no problem with considering a remaining lifespan of 40 years as good enough.
Looking at those tables/graphs with "how much would be left", and seeing mostly huge numbers... that was something.

But first, do you mean "purchasing [more] equities" as in changing the asset allocation, or do you mean "still saving more"?

RM
This signature is a placebo. You are in the control group.

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TheTimeLord
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Re: When does purchasing equities lose its marginal utility?

Post by TheTimeLord » Wed Jun 27, 2018 10:45 am

ResearchMed wrote:
Wed Jun 27, 2018 10:43 am
TheTimeLord wrote:
Wed Jun 27, 2018 10:06 am
willthrill81 wrote:
Wed Jun 27, 2018 9:55 am
If you're confident that you have enough to last the rest of your life, then equities appear to only have the ability to increase your ability to spend over time, which is rarely a complaint. But the real crux of the issue is your confidence that you have enough. We don't know the future, including all of our financial needs, nor do we know how long we have left on this earth, as pointed out above. Consequently, I think that the assumption you're making is an impossible one.
I don't. When I look at something like the Trinity Study that tells you not only is a 4% withdrawal rate sustainable for 30 years but in a high percentage of cases you will have significant funds remaining I don't see the problem considering tis as long as you use a reasonable lifespan. If I was 55 I would have no problem with considering a remaining lifespan of 40 years as good enough.
Looking at those tables/graphs with "how much would be left", and seeing mostly huge numbers... that was something.

But first, do you mean "purchasing [more] equities" as in changing the asset allocation, or do you mean "still saving more"?

RM
Continuing to purchase equities beyond dividend reinvest resulting in a rising glide path.
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ResearchMed
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Re: When does purchasing equities lose its marginal utility?

Post by ResearchMed » Wed Jun 27, 2018 10:49 am

TheTimeLord wrote:
Wed Jun 27, 2018 10:45 am
ResearchMed wrote:
Wed Jun 27, 2018 10:43 am
TheTimeLord wrote:
Wed Jun 27, 2018 10:06 am
willthrill81 wrote:
Wed Jun 27, 2018 9:55 am
If you're confident that you have enough to last the rest of your life, then equities appear to only have the ability to increase your ability to spend over time, which is rarely a complaint. But the real crux of the issue is your confidence that you have enough. We don't know the future, including all of our financial needs, nor do we know how long we have left on this earth, as pointed out above. Consequently, I think that the assumption you're making is an impossible one.
I don't. When I look at something like the Trinity Study that tells you not only is a 4% withdrawal rate sustainable for 30 years but in a high percentage of cases you will have significant funds remaining I don't see the problem considering tis as long as you use a reasonable lifespan. If I was 55 I would have no problem with considering a remaining lifespan of 40 years as good enough.
Looking at those tables/graphs with "how much would be left", and seeing mostly huge numbers... that was something.

But first, do you mean "purchasing [more] equities" as in changing the asset allocation, or do you mean "still saving more"?

RM
Continuing to purchase equities beyond dividend reinvest resulting in a rising glide path.
I didn't think most people agreed that a rising glide path was suitable, which is partly why I asked if you meant "saving more".

Is there any suggestion about how often a rising glide path strategy is really used?

RM
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Leesbro63
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Re: When does purchasing equities lose its marginal utility?

Post by Leesbro63 » Wed Jun 27, 2018 10:54 am

As to the original question: It's a conundrum. You need the long term horsepower of equities to keep you up with inflation during your remaining lifetime, which might be long. But you don't want the risk of a 1929 or even a 1966 situation. I like the 50/50 solution, although there are those who say to go something like 30/70 "once you've won the game". But I'd argue that you don't know if you win or lose until you're on your deathbed.

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TheTimeLord
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Re: When does purchasing equities lose its marginal utility?

Post by TheTimeLord » Wed Jun 27, 2018 10:59 am

Leesbro63 wrote:
Wed Jun 27, 2018 10:54 am
As to the original question: It's a conundrum. You need the long term horsepower of equities to keep you up with inflation during your remaining lifetime, which might be long. But you don't want the risk of a 1929 or even a 1966 situation. I like the 50/50 solution, although there are those who say to go something like 30/70 "once you've won the game". But I'd argue that you don't know if you win or lose until you're on your deathbed.
May be it 30/70 with what you think you need for FI and 50/50 for anything there after?
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Re: When does purchasing equities lose its marginal utility?

Post by willthrill81 » Wed Jun 27, 2018 11:32 am

Leesbro63 wrote:
Wed Jun 27, 2018 10:54 am
But I'd argue that you don't know if you win or lose until you're on your deathbed.
:thumbsup

That was my point as well. You don't know that you had 'enough' until the 'game' is over.
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Re: When does purchasing equities lose its marginal utility?

Post by columbia » Wed Jun 27, 2018 11:44 am

I don’t think that the issue is about purchasing new equities pre-retirement, but rather decisions to sell them and reduce equity exposure. That rebalancing *might* involve buying fewer equities, but not necessarily.

A more interesting question/conundrum is whether one thinks that there is a diminishing marginal utility to buying equities, given valuations. If there is (today) an answer to that question, I certainly don’t know it. :mrgreen:

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Re: When does purchasing equities lose its marginal utility?

Post by bhsince87 » Wed Jun 27, 2018 1:41 pm

Coincidently, I was just talking to our company-provided financial advisor, and this came up.

He is a believer in always buying more equities. His personal plan is to have a rolling ladder of 3 year CDs, FDIC insured, amounting to 3 years of his expenses. Everything else goes into equities, where all dividends are reinvested. Zero bonds!

In retirement (i think he said he is 59 now), he plans to draw 4% most years. That will mostly come from the equity side, unless the market is down, i which case he'll rely on the CD's.

For someone "more conservative" in his words, he recommends building a longer CD ladder.

At some point in later retirement, he would reccomend selling equities to buy immediate annuities, but never sell them all. He is of the opinion that equities are the only sensible way to tackle long term inflation.

This is something I need to ponder.....
Retirement: When you reach a point where you have enough. Or when you've had enough.

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Re: When does purchasing equities lose its marginal utility?

Post by Dottie57 » Wed Jun 27, 2018 1:48 pm

TheTimeLord wrote:
Wed Jun 27, 2018 10:39 am
dbr wrote:
Wed Jun 27, 2018 10:25 am
TheTimeLord wrote:
Wed Jun 27, 2018 10:16 am
PhilosophyAndrew wrote:
Wed Jun 27, 2018 10:09 am
OP, what form of utility are you referring to?

If your confidence is well-placed, then your equity allocation is irrelevant for your financial future. In this case, perhaps you ought to be reflecting on the forms of decumulatuon that might make you happiest, for example increasing consumption or charitable giving.


Andy.
To be clear I don't mind leaving a legacy to relatives or charities, it just isn't anything I care to target. Wife and I are essentially the same age, I will probably retire in the 2nd half of 2019, DW wants to keep going a few more years. We have pretty much everything we want and probably won't get to the point where we feel okay about getting a "Wheels Up" membership so don't see any marked decumulation for the next few years.
Perhaps this has more to do with your question than anything else:

“Alice: Would you tell me, please, which way I ought to go from here?
The Cheshire Cat: That depends a good deal on where you want to get to.
Alice: I don't much care where.
The Cheshire Cat: Then it doesn't much matter which way you go.
Alice: ...So long as I get somewhere.
The Cheshire Cat: Oh, you're sure to do that, if only you walk long enough.”
I would say that would be an accurate reading. This is probably the natural consternation resulting from seeing my workalike come to and end and not having any goals to reset.
Sounds like your first goal is to determine new retirement goals. I am in the same position. :happy

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Re: When does purchasing equities lose its marginal utility?

Post by HornedToad » Wed Jun 27, 2018 1:50 pm

If you don't care about leaving a legacy and just want to maximize your funds then buy an annuity with most of it.

Otherwise, you can stop purchasing equity when your funds can last your foreseeable lifespan expenses /w inflation + X% (30-100%+)

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Re: When does purchasing equities lose its marginal utility?

Post by Pajamas » Wed Jun 27, 2018 1:55 pm

TheTimeLord wrote:
Wed Jun 27, 2018 9:09 am
If you have no interest in how large a legacy you are leaving and are confident you already have enough to last for the remainder of your life and fund your lifestyle at what point does investing in additional equities lose its marginal utility.
That IS the point at which there is no marginal utility in investing in additional equities or increasing your net worth. You would only need to maintain your resources against inflation or changes in lifestyle (needs and wants).

As is often quoted on Bogleheads, "If you've won the game, stop playing."

viewtopic.php?t=163863

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Re: When does purchasing equities lose its marginal utility?

Post by dkturner » Wed Jun 27, 2018 2:16 pm

If you don’t know how long you will live, and don’t know what life might throw at you, how can you be “confident” that you have sufficient resources to last for the rest of your life?

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TheTimeLord
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Re: When does purchasing equities lose its marginal utility?

Post by TheTimeLord » Wed Jun 27, 2018 2:18 pm

willthrill81 wrote:
Wed Jun 27, 2018 11:32 am
Leesbro63 wrote:
Wed Jun 27, 2018 10:54 am
But I'd argue that you don't know if you win or lose until you're on your deathbed.
:thumbsup

That was my point as well. You don't know that you had 'enough' until the 'game' is over.
True, but if you try to solve for all edge cases you never retire. So pretty much every who retires early makes this judgement, some just aren't conscious of their decision.
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TheTimeLord
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Re: When does purchasing equities lose its marginal utility?

Post by TheTimeLord » Wed Jun 27, 2018 2:19 pm

dkturner wrote:
Wed Jun 27, 2018 2:16 pm
If you don’t know how long you will live, and don’t know what life might throw at you, how can you be “confident” that you have sufficient resources to last for the rest of your life?
If you are not confident you have sufficient resources for the rest of your life how could you ever retire?
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TheTimeLord
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Re: When does purchasing equities lose its marginal utility?

Post by TheTimeLord » Wed Jun 27, 2018 2:23 pm

Dottie57 wrote:
Wed Jun 27, 2018 1:48 pm
TheTimeLord wrote:
Wed Jun 27, 2018 10:39 am
dbr wrote:
Wed Jun 27, 2018 10:25 am
TheTimeLord wrote:
Wed Jun 27, 2018 10:16 am
PhilosophyAndrew wrote:
Wed Jun 27, 2018 10:09 am
OP, what form of utility are you referring to?

If your confidence is well-placed, then your equity allocation is irrelevant for your financial future. In this case, perhaps you ought to be reflecting on the forms of decumulatuon that might make you happiest, for example increasing consumption or charitable giving.


Andy.
To be clear I don't mind leaving a legacy to relatives or charities, it just isn't anything I care to target. Wife and I are essentially the same age, I will probably retire in the 2nd half of 2019, DW wants to keep going a few more years. We have pretty much everything we want and probably won't get to the point where we feel okay about getting a "Wheels Up" membership so don't see any marked decumulation for the next few years.
Perhaps this has more to do with your question than anything else:

“Alice: Would you tell me, please, which way I ought to go from here?
The Cheshire Cat: That depends a good deal on where you want to get to.
Alice: I don't much care where.
The Cheshire Cat: Then it doesn't much matter which way you go.
Alice: ...So long as I get somewhere.
The Cheshire Cat: Oh, you're sure to do that, if only you walk long enough.”
I would say that would be an accurate reading. This is probably the natural consternation resulting from seeing my workalike come to and end and not having any goals to reset.
Sounds like your first goal is to determine new retirement goals. I am in the same position. :happy
I would say you are 100% correct. I was just thinking this morning instead of using time trying to perfect my portfolio and plan time might be better spent understanding what my priorities are and should be entering this new phase of life.
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Re: When does purchasing equities lose its marginal utility?

Post by Earl Lemongrab » Wed Jun 27, 2018 2:46 pm

One doesn't know what the future will bring. I caused some rather heated reaction in another thread by stating that if you need to cut back your lifestyle due to relatively common events, then you failed to plan and save properly. People were talking about stuff that I don't consider to be "black swans", more gray or even off-white ones.

You should be able to weather a ~50% equity crash with no difficulty. We know that is not only possible, it's happened twice in the past 20 years.

You should be prepared for extensive periods of skilled nursing. Maybe at home, maybe in a facility. This happens to a lot of people. Might be you. I don't have LTC insurance, so I'd pay out of assets.

You or a family member might run into something that requires a new regular outlay of monthly spending that you didn't anticipate.

There are true black swans that are hard to plan for. Besides disaster scenarios (asteroid lands in the ocean off the east coast of the US) there are ones that aren't necessarily bad, just costly. What if they develop a gene therapy that not only rejuvenates you to a degree but extends life 50 years? What if that costs a million dollars up front, no insurance coverage? I dunno.

I have what I consider to be ample reserves. I don't know in what scenarios that would fail. Likely nothing that I can foresee, but there's the ones that you don't. I have my allocation at 60/40, and don't have any near-term plans to change that.

It can be somewhat instructive to view the venerable old efficient frontier chart:

Image

A minimum-risk allocation would be around 25/75. My 60/40 is about the inflection point (although not of one) where the curve flattens out. I might consider 50/50 in the future as events progress.
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

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Re: When does purchasing equities lose its marginal utility?

Post by Leesbro63 » Wed Jun 27, 2018 2:47 pm

TheTimeLord wrote:
Wed Jun 27, 2018 2:18 pm
willthrill81 wrote:
Wed Jun 27, 2018 11:32 am
Leesbro63 wrote:
Wed Jun 27, 2018 10:54 am
But I'd argue that you don't know if you win or lose until you're on your deathbed.
:thumbsup

That was my point as well. You don't know that you had 'enough' until the 'game' is over.
True, but if you try to solve for all edge cases you never retire. So pretty much every who retires early makes this judgement, some just aren't conscious of their decision.
Having enough to retire with good probability of success and "winning the game" enough to go 30/70 (basically give up any real equity risk) are two different things.

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Re: When does purchasing equities lose its marginal utility?

Post by Leesbro63 » Wed Jun 27, 2018 2:48 pm

Earl Lemongrab wrote:
Wed Jun 27, 2018 2:46 pm
One doesn't know what the future will bring. I caused some rather heated reaction in another thread by stating that if you need to cut back your lifestyle due to relatively common events, then you failed to plan and save properly. People were talking about stuff that I don't consider to be "black swans", more gray or even off-white ones.

You should be able to weather a ~50% equity crash with no difficulty. We know that is not only possible, it's happened twice in the past 20 years.

You should be prepared for extensive periods of skilled nursing. Maybe at home, maybe in a facility. This happens to a lot of people. Might be you. I don't have LTC insurance, so I'd pay out of assets.

You or a family member might run into something that requires a new regular outlay of monthly spending that you didn't anticipate.

There are true black swans that are hard to plan for. Besides disaster scenarios (asteroid lands in the ocean off the east coast of the US) there are ones that aren't necessarily bad, just costly. What if they develop a gene therapy that not only rejuvenates you to a degree but extends life 50 years? What if that costs a million dollars up front, no insurance coverage? I dunno.

I have what I consider to be ample reserves. I don't know in what scenarios that would fail. Likely nothing that I can foresee, but there's the ones that you don't. I have my allocation at 60/40, and don't have any near-term plans to change that.

It can be somewhat instructive to view the venerable old efficient frontier chart:

Image

A minimum-risk allocation would be around 25/75. My 60/40 is about the inflection point (although not of one) where the curve flattens out. I might consider 50/50 in the future as events progress.
I find it hard to believe that IN THE FUTURE, 50/50 will provide anything near 10.5% shown here, in the past.
Last edited by Leesbro63 on Wed Jun 27, 2018 3:14 pm, edited 1 time in total.

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Re: When does purchasing equities lose its marginal utility?

Post by RadAudit » Wed Jun 27, 2018 2:49 pm

TheTimeLord wrote:
Wed Jun 27, 2018 2:23 pm
was just thinking this morning instead of using time trying to perfect my portfolio and plan time might be better spent understanding what my priorities are and should be entering this new phase of life.
+1

Spoiler alert. It doesn't get any easier from here.

I'm eight years in to retirement and new priorities keep cropping up - usually outside directed. DW wanted to remodel the house (OK. It needed a face lift.) and to travel. DS, currently unemployed, may be cycling back in to the household for some time. (How's he unemployed in this economy? Never mind.) DD may be getting a divorce and needing money for living expenses and / or the children's college educations.

I don't know about your family situation but my situation gives me and DW ample opportunities to ponder the marginal utility of equities for ever changing priorities in this new phase of life. Priorities I never dreamed I'd have.
FI is the best revenge. LBYM. Invest the rest. Stay the course. - PS: The Calvary isn't coming, kids. You are on your own.

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Re: When does purchasing equities lose its marginal utility?

Post by RadAudit » Wed Jun 27, 2018 2:53 pm

Earl Lemongrab wrote:
Wed Jun 27, 2018 2:46 pm
You or a family member might run into something that requires a new regular outlay of monthly spending that you didn't anticipate.
You're correct. Should of seen these things as likely possibilities. My bad.
FI is the best revenge. LBYM. Invest the rest. Stay the course. - PS: The Calvary isn't coming, kids. You are on your own.

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Re: When does purchasing equities lose its marginal utility?

Post by willthrill81 » Wed Jun 27, 2018 3:47 pm

TheTimeLord wrote:
Wed Jun 27, 2018 2:18 pm
willthrill81 wrote:
Wed Jun 27, 2018 11:32 am
Leesbro63 wrote:
Wed Jun 27, 2018 10:54 am
But I'd argue that you don't know if you win or lose until you're on your deathbed.
:thumbsup

That was my point as well. You don't know that you had 'enough' until the 'game' is over.
True, but if you try to solve for all edge cases you never retire. So pretty much every who retires early makes this judgement, some just aren't conscious of their decision.
I agree. But I still believe that dialing back equities too far can be just as risky as dialing them up too much.

Are you thinking along the lines of an LMP or just a high allocation to bonds?
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: When does purchasing equities lose its marginal utility?

Post by TheTimeLord » Wed Jun 27, 2018 4:08 pm

willthrill81 wrote:
Wed Jun 27, 2018 3:47 pm
TheTimeLord wrote:
Wed Jun 27, 2018 2:18 pm
willthrill81 wrote:
Wed Jun 27, 2018 11:32 am
Leesbro63 wrote:
Wed Jun 27, 2018 10:54 am
But I'd argue that you don't know if you win or lose until you're on your deathbed.
:thumbsup

That was my point as well. You don't know that you had 'enough' until the 'game' is over.
True, but if you try to solve for all edge cases you never retire. So pretty much every who retires early makes this judgement, some just aren't conscious of their decision.
I agree. But I still believe that dialing back equities too far can be just as risky as dialing them up too much.

Are you thinking along the lines of an LMP or just a high allocation to bonds?
For the sake of illustration let's say I believed a 1 million dollar portfolio at 30/70 was sufficient for the rest of my life, so I have $300,000 in equities. Let's say I or my spouse is continuing to work and we reinvest the dividends. My question is, is there any marginal utility to adding to my equities from my new savings until or after I retire if I feel the $300,000 in equities was sufficient to protect me from long term inflation for the remainder of my existence. So the question is about additional savings above and beyond what I perceive we would need, not rearranging existing savings or lowering existing dollar amounts of equities. Hopefully that makes it a little clearer.
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Re: When does purchasing equities lose its marginal utility?

Post by Earl Lemongrab » Wed Jun 27, 2018 4:09 pm

Leesbro63 wrote:
Wed Jun 27, 2018 2:48 pm
I find it hard to believe that IN THE FUTURE, 50/50 will provide anything near 10.5% shown here, in the past.
No one knows the future, including returns. But that's not supposed to be the take-away, it's the sort of general risk/reward curve.
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

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Re: When does purchasing equities lose its marginal utility?

Post by willthrill81 » Wed Jun 27, 2018 4:24 pm

TheTimeLord wrote:
Wed Jun 27, 2018 4:08 pm
For the sake of illustration let's say I believed a 1 million dollar portfolio at 30/70 was sufficient for the rest of my life, so I have $300,000 in equities. Let's say I or my spouse is continuing to work and we reinvest the dividends. My question is, is there any marginal utility to adding to my equities from my new savings until or after I retire if I feel the $300,000 in equities was sufficient to protect me from long term inflation for the remainder of my existence. So the question is about additional savings above and beyond what I perceive we would need, not rearranging existing savings or lowering existing dollar amounts of equities. Hopefully that makes it a little clearer.
So you're asking whether you should maintain the 30/70 AA or just set it at the point of retirement and not rebalance subsequently?

Based on the historic record, I'd say that a 30/70 is on the lower bound edge of reasonable for a typical retirement period of around 30 years.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: When does purchasing equities lose its marginal utility?

Post by TheTimeLord » Wed Jun 27, 2018 4:27 pm

willthrill81 wrote:
Wed Jun 27, 2018 4:24 pm
TheTimeLord wrote:
Wed Jun 27, 2018 4:08 pm
For the sake of illustration let's say I believed a 1 million dollar portfolio at 30/70 was sufficient for the rest of my life, so I have $300,000 in equities. Let's say I or my spouse is continuing to work and we reinvest the dividends. My question is, is there any marginal utility to adding to my equities from my new savings until or after I retire if I feel the $300,000 in equities was sufficient to protect me from long term inflation for the remainder of my existence. So the question is about additional savings above and beyond what I perceive we would need, not rearranging existing savings or lowering existing dollar amounts of equities. Hopefully that makes it a little clearer.
So you're asking whether you should maintain the 30/70 AA or just set it at the point of retirement and not rebalance subsequently?

Based on the historic record, I'd say that a 30/70 is on the lower bound edge of reasonable for a typical retirement period of around 30 years.
Using the illustration, I am asking is there any marginal utility to putting any of the money beyond the million allocated 30/70 into equities if I believe a million allocated 30/70 is sufficient.
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Re: When does purchasing equities lose its marginal utility?

Post by willthrill81 » Wed Jun 27, 2018 4:28 pm

TheTimeLord wrote:
Wed Jun 27, 2018 4:27 pm
willthrill81 wrote:
Wed Jun 27, 2018 4:24 pm
TheTimeLord wrote:
Wed Jun 27, 2018 4:08 pm
For the sake of illustration let's say I believed a 1 million dollar portfolio at 30/70 was sufficient for the rest of my life, so I have $300,000 in equities. Let's say I or my spouse is continuing to work and we reinvest the dividends. My question is, is there any marginal utility to adding to my equities from my new savings until or after I retire if I feel the $300,000 in equities was sufficient to protect me from long term inflation for the remainder of my existence. So the question is about additional savings above and beyond what I perceive we would need, not rearranging existing savings or lowering existing dollar amounts of equities. Hopefully that makes it a little clearer.
So you're asking whether you should maintain the 30/70 AA or just set it at the point of retirement and not rebalance subsequently?

Based on the historic record, I'd say that a 30/70 is on the lower bound edge of reasonable for a typical retirement period of around 30 years.
Using the illustration, I am asking is there any marginal utility to putting any of the money beyond the million allocated 30/70 into equities if I believe a million allocated 30/70 is sufficient.
If you truly believe that 30/70 is adequate, I'd say no.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: When does purchasing equities lose its marginal utility?

Post by RadAudit » Wed Jun 27, 2018 4:42 pm

TheTimeLord wrote:
Wed Jun 27, 2018 4:27 pm
I am asking is there any marginal utility to putting any of the money beyond the million allocated 30/70 into equities if I believe a million allocated 30/70 is sufficient.
If what you have is sufficient, there's no use in putting more in to equities just to have more than you need.
FI is the best revenge. LBYM. Invest the rest. Stay the course. - PS: The Calvary isn't coming, kids. You are on your own.

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Re: When does purchasing equities lose its marginal utility?

Post by Valuethinker » Thu Jun 28, 2018 4:55 am

bhsince87 wrote:
Wed Jun 27, 2018 1:41 pm
Coincidently, I was just talking to our company-provided financial advisor, and this came up.

He is a believer in always buying more equities. His personal plan is to have a rolling ladder of 3 year CDs, FDIC insured, amounting to 3 years of his expenses. Everything else goes into equities, where all dividends are reinvested. Zero bonds!

In retirement (i think he said he is 59 now), he plans to draw 4% most years. That will mostly come from the equity side, unless the market is down, i which case he'll rely on the CD's.

For someone "more conservative" in his words, he recommends building a longer CD ladder.

At some point in later retirement, he would reccomend selling equities to buy immediate annuities, but never sell them all. He is of the opinion that equities are the only sensible way to tackle long term inflation.

This is something I need to ponder.....
A couple of things to reflect on:

- equities were a poor protection (no protection) during the period of rising and high inflation (basically 1966-1980). There's plenty of academic work suggesting that equities are not good inflation protection assets

Inflation makes debts less of a burden which is a plus for companies with leverage. However it also causes a tax issue (the allowance for depreciation in taxes is based on nominal costs, thus does not take into account true replacement costs of assets. Most companies are intermediaries, and may not be able to pass on their higher costs to their customers.

Also periods of higher inflation tend also to be of higher real interest rates (peaking at over 8% in 1980-81). Thus making equities less attractive relative to fixed income. And rising interest rates are bad for equities (although if associated with strong economic growth, the impact on profits outweighs them in a positive direction).

Commercial property has a theoretically higher correlation with inflation. Unfortunately, the whole C RE market has a cyclicality to it which may totally overturn any inflation linked benefits.

- equities pay high returns. The quid pro quo is their extreme volatility. In the UK 1972-74 the equity market dropped over 80% in real terms. This was a time of 20%+ inflation in the UK, severe labour union unrest etc, but no collapse of government nor major war, etc.

So it's their high returns which have made them a "good" inflation protection not their inherent high correlation with inflation.

TIPS & Ibonds should have the highest correlation with inflation in your portfolio.

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Re: When does purchasing equities lose its marginal utility?

Post by Dandy » Thu Jun 28, 2018 7:34 am

the age at which you become confident that you have enough (hopefully with a decent margin for error) . At that age/time you should probably be in an asset preservation mode vs growth. Annuities might also be in order, additional equities aren't needed.

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Re: When does purchasing equities lose its marginal utility?

Post by PhilosophyAndrew » Thu Jun 28, 2018 8:02 am

Dandy wrote:
Thu Jun 28, 2018 7:34 am
the age at which you become confident that you have enough (hopefully with a decent margin for error) . At that age/time you should probably be in an asset preservation mode vs growth. Annuities might also be in order, additional equities aren't needed.
If you are confident that you have sufficient assets to meet your needs for the rest of your life, and if you have additional assets beyond what you think you need as a margin for error, wwhy would SPIAs be in order?

By hypothesis, the income annuities generate isn’t necessary to meet expenses in this situation, and their purchase reduces assets, not preserve them, contrary to the goal you recomend investors in this situation embrace.

Andy.

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Re: When does purchasing equities lose its marginal utility?

Post by Dandy » Thu Jun 28, 2018 8:54 am

If you are confident that you have sufficient assets to meet your needs for the rest of your life, and if you have additional assets beyond what you think you need as a margin for error, wwhy would SPIAs be in order?
Having lifetime income helps avoid the risks of living too long and reduces the need to withdraw as much from investments which helps further preserves them. I guess you can be confident and still be wrong e.g. you could live to 105 instead of say 90. This might be especially important if the person doesn't have a high income floor.

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Re: When does purchasing equities lose its marginal utility?

Post by dbr » Thu Jun 28, 2018 9:08 am

Dandy wrote:
Thu Jun 28, 2018 8:54 am
If you are confident that you have sufficient assets to meet your needs for the rest of your life, and if you have additional assets beyond what you think you need as a margin for error, wwhy would SPIAs be in order?
Having lifetime income helps avoid the risks of living too long and reduces the need to withdraw as much from investments which helps further preserves them. I guess you can be confident and still be wrong e.g. you could live to 105 instead of say 90. This might be especially important if the person doesn't have a high income floor.
Both side are right in their own way. I see the point of allocating some of the asset to annuities as it may be the surest way to

1. Take uncertainty and planning error out of the assessment that one has sufficient assets.
2. Take pressure and uncertainty off the remaining assets.

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Re: When does purchasing equities lose its marginal utility?

Post by aristotelian » Thu Jun 28, 2018 9:15 am

Allocation is determined by need, ability, and willingness to take risk. I usually ask myself in that order. In your case, sounds like you have no need to take the risk of equity investing, so why would you? Your ability and willingness are now irrelevant.

My only concern would be staying ahead of inflation and having some diversification beyond bonds.

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Re: When does purchasing equities lose its marginal utility?

Post by RadAudit » Thu Jun 28, 2018 9:29 am

Dandy wrote:
Thu Jun 28, 2018 8:54 am
Having lifetime income helps avoid the risks of living too long and reduces the need to withdraw as much from investments which helps further preserves them. I guess you can be confident and still be wrong e.g. you could live to 105 instead of say 90.


True.

But, we're adding what-ifs to the OP's question. (Something I do myself. All the time. Which is why I'm having trouble with understanding the original question.) I think the question was essentially if he had enough. Now, how he figured that number with a degree of certainty I'd be comfortable with, I don't know. But, if he is correct in his assumption, I'm coming to believe the marginal utility to him of an additional dollar in equities is zero.

I view the question something like the idea of when to retire? Ans: When you have enough. Well, what if ... Ans: One more year (OMY). Ultimate answer: Die at your desk.

We can what if the situation to the point where we're always adding money to equities. But, to what purpose? If our marginal utility is greater than zero, (and there are a host of reasons why it is at our level.), then we'll add to equities. But, for those lucky few, some don't have a need for more. They have enough. If so, quit.
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Re: When does purchasing equities lose its marginal utility?

Post by Bob » Thu Jun 28, 2018 9:49 am

All the above is good discussion that makes me feel that it would be useful to have a clear set of items and formula for the "marginal utility."

The OP says that "having more money" has little utility so perhaps reducing all the risks that his expense projections are wrong would add utility (a benefit.) Some of the risks are mentioned above but what might be interesting is an integrated approach that tries to balance the costs of "insurance" to reduce a risk with the magnitude and potential probability of the risk. Risks such as:

• Longevity (e.g.: live longer than average and far beyond expected age) -- so annuitizing some money
• Inflation (e.g. reduced buying power) - so investing it TIPS
• Stock Market Equity Values (e.g. a drop in value without recovery for 20 years like Japan experienced) -- so limiting equity expsoure
• Healthcare costs (e.g. need for LTC or similar) -- so buying insurance (?)
• Large, dollar devaluation (e.g.: Weimar Republic type situation caused by huge deficits) -- so having investments in other stable countries

I am not sure how to assemble all the pieces with their "costs" but clearly what I am thinking is that this requires a broad definition of "diversification" and clearly not just thinking about stocks versus bonds.

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Re: When does purchasing equities lose its marginal utility?

Post by Dandy » Thu Jun 28, 2018 10:07 am

• Longevity (e.g.: live longer than average and far beyond expected age) -- so annuitizing some money
• Inflation (e.g. reduced buying power) - so investing it TIPS
• Stock Market Equity Values (e.g. a drop in value without recovery for 20 years like Japan experienced) -- so limiting equity expsoure
• Healthcare costs (e.g. need for LTC or similar) -- so buying insurance (?)
• Large, dollar devaluation (e.g.: Weimar Republic type situation caused by huge deficits) -- so having investments in other stable countries
While I hadn't pushed my thinking that far but they seem to be things to at least think about. If the threat to your retirement lifestyle isn't not having enough assets or income floor then you can decide what other threats might be worth mitigating. Maybe instead of thinking asset preservation it should be lifestyle preservation. You probably can't or shouldn't look to try to mitigate all but at least give it some thought and maybe if conditions change you will have at least thought about how to deploy assets differently.

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