Why I'm NOT 100% stocks

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bargainhuntingking
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Why I'm NOT 100% stocks

Post by bargainhuntingking » Tue Oct 30, 2018 7:14 am

Here's why I'm not 100% stocks:

Let's suppose I have $1M with 75% in a total stock market fund and 25% in a total bond fund or cash.

Let's say there is a crash like the Great Depression and my stock fund drops 90%. Let's suppose my cash/bond fund stays the same.

I now have $75k in equities and $250k in fixed assets. My total stock market fund would have to increase 10 fold to regain it's previous level.

Since I'm an unemotional diehard Boglehead automaton, I ignore the media hype about the MAJOR STOCK CRASH and am nonplussed that my hard earned $1M is now a paltry $325k. Instead, I review my IPS on re-balancing and realize that now might be a good time to check if I need to rebalance. Indeed it is, so I shift my fixed assets into my total stock market fund to rebalance back to 75/25.

After re-balancing, my equity fund is now ~$244k and my fixed assets are ~$81k.

As my luck would have it, the stock market rapidly rebounds 10 fold to reach it's former height. All the folks who panicked and pulled out of the bottom of the market or switched to gold, canned food, bullets, and bitcoin were kicking themselves at missing out on the rebound.

My $244k in equities increased 10 times to $2.44M. I check my IPS and realized that I need to re-balance, and shift some of my equity fund back to fixed assets.

I check on the Bogleheads forum and see that the 100% equity people who rode out the storm are feeling good that they are back to where they started. I think about posting that my 401k increased by more than 2 1/2 during the same interval, but instead I take a nap and retire early.
Last edited by bargainhuntingking on Tue Oct 30, 2018 7:20 am, edited 1 time in total.

nick evets
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Re: Why I'm NOT 100% stocks

Post by nick evets » Tue Oct 30, 2018 7:16 am

How are you timing when you check and act on your IPS?

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jadd806
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Re: Why I'm NOT 100% stocks

Post by jadd806 » Tue Oct 30, 2018 7:28 am

Well yeah, if you perfectly timed the bottom of the greatest stock market crash in modern history of course you would have made quite a bit of money. In reality:

- You would have been rebalancing all the way down, so your entire 25% in fixed income does not convert to equities at the bottom of the crash.
- Assuming both portfolios start at a lump sum of $1M is dishonest, as the 100% equities portfolio would have had a larger run-up before the crash while fixed income drags down the other portfolio.
- You should have rebalanced on the way back up, so you don't just get to 10x your equity portion and call it a day.

Your post might as well have read as such:

I have $1M in a total stock market fund. I sell it all right before the Great Depression and buy back in at the bottom. Some time later I now have $10M. Hah, gotcha 100% equity investors!

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JoMoney
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Re: Why I'm NOT 100% stocks

Post by JoMoney » Tue Oct 30, 2018 12:49 pm

bargainhuntingking wrote:
Tue Oct 30, 2018 7:14 am
...Let's say there is a crash like the Great Depression and my stock fund drops 90%...

90% drop :shock:
Sounds like my rationale for not rebalancing.

If you had $750 equities and $250 cash, and equities fell in half to $375
You would rebalance to $470/$155
Then the market falls in half again, and you rebalance
$295/$95
Then it falls in half again, and you rebalance
$180/$62.50
Then it falls in half again, and you rebalance
$114/$38.50

At this point your equities still haven't really fallen 90% from where they were, and you've rebalanced away your cash. Your 25% cash could have lasted you 6+ years assuming your withdrawing roughly 4% a year, but now you have less than one years expenses...
Better start praying for that rebound :shock:
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

lostdog
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Re: Why I'm NOT 100% stocks

Post by lostdog » Tue Oct 30, 2018 12:55 pm

This is just market timing. Nice story though.
I don't invest looking in the rear view mirror and I know absolutely nothing about the future. I invest in Vanguard Total World Stock Index.

GibsonL6s
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Re: Why I'm NOT 100% stocks

Post by GibsonL6s » Tue Oct 30, 2018 12:57 pm

Do you really believe the market is capable of a 90% drop given today's margin requirements, broader ownership of stocks and other factors?

MIretired
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Re: Why I'm NOT 100% stocks

Post by MIretired » Tue Oct 30, 2018 1:32 pm

Hopefully you were in your 20's or 30's when the GD happened. Otherwise you'd've been at least 60+ before that ten-fold increase was complete.

CarpeDiem22
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Re: Why I'm NOT 100% stocks

Post by CarpeDiem22 » Tue Oct 30, 2018 1:42 pm

Well, adding some bonds increases return and reduces risk. Some days back somebody posted a portfolio visualizer link that showed the same for past 40 years or so.

WanderingDoc
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Re: Why I'm NOT 100% stocks

Post by WanderingDoc » Tue Oct 30, 2018 1:52 pm

GibsonL6s wrote:
Tue Oct 30, 2018 12:57 pm
Do you really believe the market is capable of a 90% drop given today's margin requirements, broader ownership of stocks and other factors?
You don't think a market mostly fueled by debt, credit, and trillions of dollars (of imaginary money) pumped into the economy can drop by 90%? Do you think a publicly traded company valued at $200B is really, truly, worth anywhere near that? Based on the products and income they generate.

It possible that the recent explosion of indexers might be an even greater cause of concern. I believe it went from 8% in 2008 to around 35% today (of all paper asset holders, index holders relative to individual stocks). People are putting their 'money' into indexes indiscriminately without stopping to think about WHAT they are actually investing in.
I'm not looking to get rich quick (stocks), I'm not looking to get rich slow (indexing), I'm looking to get rich, for sure (real estate) | Don't wait to buy real estate. Buy real estate.. and wait.

GibsonL6s
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Re: Why I'm NOT 100% stocks

Post by GibsonL6s » Tue Oct 30, 2018 3:28 pm

If you take the S&Ps earnings of 156 cut them in half and use a 10 P/E you get a drop of 70% from today's level, so I guess you are what they call a bear :D

Snowjob
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Re: Why I'm NOT 100% stocks

Post by Snowjob » Tue Oct 30, 2018 4:56 pm

JoMoney wrote:
Tue Oct 30, 2018 12:49 pm
bargainhuntingking wrote:
Tue Oct 30, 2018 7:14 am
...Let's say there is a crash like the Great Depression and my stock fund drops 90%...

90% drop :shock:
Sounds like my rationale for not rebalancing.

If you had $750 equities and $250 cash, and equities fell in half to $375
You would rebalance to $470/$155
Then the market falls in half again, and you rebalance
$295/$95
Then it falls in half again, and you rebalance
$180/$62.50
Then it falls in half again, and you rebalance
$114/$38.50

At this point your equities still haven't really fallen 90% from where they were, and you've rebalanced away your cash. Your 25% cash could have lasted you 6+ years assuming your withdrawing roughly 4% a year, but now you have less than one years expenses...
Better start praying for that rebound :shock:
Do you re-balance from equity -> Fixed income and just not back the other direction? or do you treat them as two different portfolios and withdraw from each according to some percentage?

indexonlyplease
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Re: Why I'm NOT 100% stocks

Post by indexonlyplease » Tue Oct 30, 2018 5:06 pm

JoMoney wrote:
Tue Oct 30, 2018 12:49 pm
bargainhuntingking wrote:
Tue Oct 30, 2018 7:14 am
...Let's say there is a crash like the Great Depression and my stock fund drops 90%...

90% drop :shock:
Sounds like my rationale for not rebalancing.

If you had $750 equities and $250 cash, and equities fell in half to $375
You would rebalance to $470/$155
Then the market falls in half again, and you rebalance
$295/$95
Then it falls in half again, and you rebalance
$180/$62.50
Then it falls in half again, and you rebalance
$114/$38.50

At this point your equities still haven't really fallen 90% from where they were, and you've rebalanced away your cash. Your 25% cash could have lasted you 6+ years assuming your withdrawing roughly 4% a year, but now you have less than one years expenses...
Better start praying for that rebound :shock:
I like your point and why I think I may not reballance this January. If my AA stock portion was to high then I might reballance to keep the fixed income percent I want. But if it drops just ride it out. Some say reballancce may not be needed.
This is also another reason I truly believe in less stocks the older I get. I like the idea of if you have enough stop risking so much.

Topic Author
bargainhuntingking
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Re: Why I'm NOT 100% stocks

Post by bargainhuntingking » Tue Oct 30, 2018 5:12 pm

Good discussion. Thanks for responding.

Nick- My IPS includes rebalancing on my birthday, when there is a 5% change (only if I happen to notice it...I use Swedroe's 5%/25% rebalancing style), and when I make contributions. In this theoretical scenario, I noticed that the headlines had been screaming about the 2nd Great Depression, so I eventually checked my balance and noticed equities were down 90%. That's not timing.

Jadd- 1) I'm not converting my fixed asset to 100% equities at the bottom, I rebalanced. 2) I wan't comparing it to other portfolios, but yes if I had started saving at the same time a 100% equity guy started, he might have more than $1M saved at the outset of the 2nd Great Depression, so his 90% drawdown might not drop as low as my equity portion. One could calculate an interesting comparison between these two scenarios, eh? 3) If I were checking my portfolio habitually, I might have rebalanced at every 5% interval. I see your point about the fixed drag in that case slowing my gains. Also an interesting scenario to calculate. Your final comment about perfect market timing to maximize returns isn't really the same situation.

JoMoney- Good illustration of rebalancing away one's "secure" fixed portion! So what do you personally do? Set aside a safe amount to live on for a few years while waiting for markets to recover and remain 100% equities otherwise? How many years' worth of expenses is considered safe?

Gibson- Yes, a second Great Depression is realistic in my worldview.

MIretired- How long did the market "fully" recover after the first Great Depression, assuming a total stock market equity holding? Some years really rebounded, like 1933: 54.2% !!! according to Vanguard's data.

CarpeDiem: I think many in the 100% equities crowd overlook situations where a bond portion actually increases returns. Most view bonds as portfolio drag.

WanderingDoc- Agree. Black Swans occur. Financial markets can be a house of cards. It's easy to forget this.

Thank you all for this discussion.
Last edited by bargainhuntingking on Tue Oct 30, 2018 5:15 pm, edited 1 time in total.

MotoTrojan
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Re: Why I'm NOT 100% stocks

Post by MotoTrojan » Tue Oct 30, 2018 5:14 pm

jadd806 wrote:
Tue Oct 30, 2018 7:28 am
Well yeah, if you perfectly timed the bottom of the greatest stock market crash in modern history of course you would have made quite a bit of money. In reality:

- You would have been rebalancing all the way down, so your entire 25% in fixed income does not convert to equities at the bottom of the crash.
- Assuming both portfolios start at a lump sum of $1M is dishonest, as the 100% equities portfolio would have had a larger run-up before the crash while fixed income drags down the other portfolio.
- You should have rebalanced on the way back up, so you don't just get to 10x your equity portion and call it a day.

Your post might as well have read as such:

I have $1M in a total stock market fund. I sell it all right before the Great Depression and buy back in at the bottom. Some time later I now have $10M. Hah, gotcha 100% equity investors!
Perfectly stated.

Topic Author
bargainhuntingking
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Re: Why I'm NOT 100% stocks

Post by bargainhuntingking » Tue Oct 30, 2018 5:39 pm

JoMoney wrote:
Tue Oct 30, 2018 12:49 pm
bargainhuntingking wrote:
Tue Oct 30, 2018 7:14 am
...Let's say there is a crash like the Great Depression and my stock fund drops 90%...

90% drop :shock:
Sounds like my rationale for not rebalancing.

If you had $750 equities and $250 cash, and equities fell in half to $375
You would rebalance to $470/$155
Then the market falls in half again, and you rebalance
$295/$95
Then it falls in half again, and you rebalance
$180/$62.50
Then it falls in half again, and you rebalance
$114/$38.50

At this point your equities still haven't really fallen 90% from where they were, and you've rebalanced away your cash. Your 25% cash could have lasted you 6+ years assuming your withdrawing roughly 4% a year, but now you have less than one years expenses...
Better start praying for that rebound :shock:
In your scenario of rebalancing after four consecutive 50% drops, my final equity portion would be 6.25% of my original equity portion ($750k). But rebalancing after every 50% drop, it would be 15.2% of my original $750k. While rebalancing might deplete my fixed reserves, it would also cushion my equity portion and give a greater return when markets eventually rebounded ($1.8M vs only $750k if I hadn't rebalanced). Interesting to play out these variations and the massive impact they can have in certain scenarios.

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JoMoney
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Re: Why I'm NOT 100% stocks

Post by JoMoney » Tue Oct 30, 2018 10:53 pm

Snowjob wrote:
Tue Oct 30, 2018 4:56 pm
...

Do you re-balance from equity -> Fixed income and just not back the other direction? or do you treat them as two different portfolios and withdraw from each according to some percentage?
I'm still in an accumulation phase, so what I actually do is just keep dollar-cost-averaging over time.
I haven't actually decided on what my withdrawal strategy will be, but I will likely have some pension, social security, might purchase a SPIA at some point, so all of those would provide a non-rebalancable income floor.
The strategy that I think I'm leaning towards, would be something similar to the idea of a one-way "rebalance" from equity to fixed income only, and if stocks are down I'll just take from the fixed income only until it gets down to the minimum percentage, and then take from both proportionately.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

Agggm
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Re: Why I'm NOT 100% stocks

Post by Agggm » Tue Oct 30, 2018 11:51 pm

bargainhuntingking wrote:
Tue Oct 30, 2018 7:14 am
Here's why I'm not 100% stocks:

Let's suppose I have $1M with 75% in a total stock market fund and 25% in a total bond fund or cash.

Let's say there is a crash like the Great Depression and my stock fund drops 90%. Let's suppose my cash/bond fund stays the same.

I now have $75k in equities and $250k in fixed assets. My total stock market fund would have to increase 10 fold to regain it's previous level.

Since I'm an unemotional diehard Boglehead automaton, I ignore the media hype about the MAJOR STOCK CRASH and am nonplussed that my hard earned $1M is now a paltry $325k. Instead, I review my IPS on re-balancing and realize that now might be a good time to check if I need to rebalance. Indeed it is, so I shift my fixed assets into my total stock market fund to rebalance back to 75/25.

After re-balancing, my equity fund is now ~$244k and my fixed assets are ~$81k.

As my luck would have it, the stock market rapidly rebounds 10 fold to reach it's former height. All the folks who panicked and pulled out of the bottom of the market or switched to gold, canned food, bullets, and bitcoin were kicking themselves at missing out on the rebound.

My $244k in equities increased 10 times to $2.44M. I check my IPS and realized that I need to re-balance, and shift some of my equity fund back to fixed assets.

I check on the Bogleheads forum and see that the 100% equity people who rode out the storm are feeling good that they are back to where they started. I think about posting that my 401k increased by more than 2 1/2 during the same interval, but instead I take a nap and retire early.
Include the cash drag leading up to the original 1M. Instead it would have been slightly above 3M (ending balance of 100/0 portfolio using the 75/25 portfolio's time to get to 1M). And you could have cashed out before your GD (using your impeccable market timing), and retired even earlier and avoided the debacle altogether.

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bargainhuntingking
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Re: Why I'm NOT 100% stocks

Post by bargainhuntingking » Wed Oct 31, 2018 12:30 am

Agggm wrote:
Tue Oct 30, 2018 11:51 pm
bargainhuntingking wrote:
Tue Oct 30, 2018 7:14 am
Here's why I'm not 100% stocks:

Let's suppose I have $1M with 75% in a total stock market fund and 25% in a total bond fund or cash.

Let's say there is a crash like the Great Depression and my stock fund drops 90%. Let's suppose my cash/bond fund stays the same.

I now have $75k in equities and $250k in fixed assets. My total stock market fund would have to increase 10 fold to regain it's previous level.

Since I'm an unemotional diehard Boglehead automaton, I ignore the media hype about the MAJOR STOCK CRASH and am nonplussed that my hard earned $1M is now a paltry $325k. Instead, I review my IPS on re-balancing and realize that now might be a good time to check if I need to rebalance. Indeed it is, so I shift my fixed assets into my total stock market fund to rebalance back to 75/25.

After re-balancing, my equity fund is now ~$244k and my fixed assets are ~$81k.

As my luck would have it, the stock market rapidly rebounds 10 fold to reach it's former height. All the folks who panicked and pulled out of the bottom of the market or switched to gold, canned food, bullets, and bitcoin were kicking themselves at missing out on the rebound.

My $244k in equities increased 10 times to $2.44M. I check my IPS and realized that I need to re-balance, and shift some of my equity fund back to fixed assets.

I check on the Bogleheads forum and see that the 100% equity people who rode out the storm are feeling good that they are back to where they started. I think about posting that my 401k increased by more than 2 1/2 during the same interval, but instead I take a nap and retire early.
Include the cash drag leading up to the original 1M. Instead it would have been slightly above 3M (ending balance of 100/0 portfolio using the 75/25 portfolio's time to get to 1M). And you could have cashed out before your GD (using your impeccable market timing), and retired even earlier and avoided the debacle altogether.
I see. So 100% equities fund always leads to 3x the gain of an equivalent 75/25 fund? Always? Great, so at the 90% crash you now have $300k instead of $3M. What next? What do YOU personally do?

minimalistmarc
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Re: Why I'm NOT 100% stocks

Post by minimalistmarc » Wed Oct 31, 2018 12:50 am

WanderingDoc wrote:
Tue Oct 30, 2018 1:52 pm
GibsonL6s wrote:
Tue Oct 30, 2018 12:57 pm
Do you really believe the market is capable of a 90% drop given today's margin requirements, broader ownership of stocks and other factors?
You don't think a market mostly fueled by debt, credit, and trillions of dollars (of imaginary money) pumped into the economy can drop by 90%?

No, I wouldn’t invest if I thought there was a significant chance of this. It would probably be the end of the world

Do you think a publicly traded company valued at $200B is really, truly, worth anywhere near that? Based on the products and income they generate.

yes, in fact when big companies get bought they sell for more than their equity valuation

It possible that the recent explosion of indexers might be an even greater cause of concern. I believe it went from 8% in 2008 to around 35% today (of all paper asset holders, index holders relative to individual stocks). People are putting their 'money' into indexes indiscriminately without stopping to think about WHAT they are actually investing in.

been discussed ad infinatum, I’m not concerned

indexonlyplease
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Re: Why I'm NOT 100% stocks

Post by indexonlyplease » Wed Oct 31, 2018 4:57 am

Question on this topic would be

Is it worth rebalancing. Some say it does not help I believe. It helps protecting you fixed income and keeping your AA correct?

More important I would think is lowering your AA as you get toward retirment or maybe when you have enough and to reduce your exposure to risk.


100% stocks, I was there until 2 years before I retired. Why, because I did not understand why someone would need bonds or fixed income in the AA. But I was lucky to retire at a good time (2 years ago) and with a pension. Whole different situation for me. So, I gues I took the risk without even knowing.

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permport
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Re: Why I'm NOT 100% stocks

Post by permport » Wed Oct 31, 2018 5:02 am

I'll tell you why you're not 100% stocks -- it's because you're being prudent.

Historically, an 80/20 split between stocks and bonds has delivered roughly the same compound returns as a 100% stock allocation but with much less in the way of drawdowns and risk.

The fact that a 100% stock allocation would prevent the portfolio from ever rebalancing is in and of itself a reason not do it.
Buy right and hold tight.

Snowjob
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Re: Why I'm NOT 100% stocks

Post by Snowjob » Wed Oct 31, 2018 5:51 am

JoMoney wrote:
Tue Oct 30, 2018 10:53 pm
Snowjob wrote:
Tue Oct 30, 2018 4:56 pm
...

Do you re-balance from equity -> Fixed income and just not back the other direction? or do you treat them as two different portfolios and withdraw from each according to some percentage?
I'm still in an accumulation phase, so what I actually do is just keep dollar-cost-averaging over time.
I haven't actually decided on what my withdrawal strategy will be, but I will likely have some pension, social security, might purchase a SPIA at some point, so all of those would provide a non-rebalancable income floor.
The strategy that I think I'm leaning towards, would be something similar to the idea of a one-way "rebalance" from equity to fixed income only, and if stocks are down I'll just take from the fixed income only until it gets down to the minimum percentage, and then take from both proportionately.
Still accumulating here also, but now that I'm a shade over half way to my target I've been thinking more and more about how to withdraw. I wont have a pension but Intend to add an SPIA to my social security which together will hopefully be about 50% of my income target, then let the portfolio take the rest. I'm planning on the potential for a fairly long retirement which would suggest a higher allocation to equities, but not re-balancing into them I think makes a sense.

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jadd806
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Re: Why I'm NOT 100% stocks

Post by jadd806 » Wed Oct 31, 2018 7:02 am

permport wrote:
Wed Oct 31, 2018 5:02 am
Historically, an 80/20 split between stocks and bonds has delivered roughly the same compound returns as a 100% stock allocation but with much less in the way of drawdowns and risk.
Every analysis I've ever seen to "prove" this point is historical cherry picking. 1982 was the start of a bull market for bonds that lasted over 3 decades, during which interest rates on the 10Y Treasury dropped from ~15% to ~3% today. That type of performance for fixed income will not be repeated in our lifetimes, unless you're building your plan around interest rates dropping to negative double digits. If you're looking to cherry pick the best period in US history for fixed income, this is almost certainly it.

I'll additionally note that I don't think most advocates of statements like the above quoted portion are maliciously spreading misinformation. I suspect the main culprit is Portfolio Visualizer being the most popular backtesting tool, yet their data only goes back to 1972 so it almost perfectly captures this misleading period of performance for fixed income.
permport wrote:
Wed Oct 31, 2018 5:02 am
The fact that a 100% stock allocation would prevent the portfolio from ever rebalancing is in and of itself a reason not do it.
Rebalancing is a tool to control risk, not to eke out some mythical "rebalancing bonus." Anyone who expects a portfolio containing fixed income to outperform (or match) 100% equites on a total return basis over any meaningful time period is being intellectually dishonest.

If an investor's risk tolerance calls for an allocation to 100% equities, by definition they do not need to rebalance since their portfolio always matches their risk tolerance regardless of market volatility.

McGilicutty
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Re: Why I'm NOT 100% stocks

Post by McGilicutty » Wed Oct 31, 2018 7:25 am

You have a well-thought out plan and will likely be able to execute it sometime within the next 100,000 years when the events you anticipate transpire exactly as you have planned them.

Good luck. We're all counting on you.

HEDGEFUNDIE
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Re: Why I'm NOT 100% stocks

Post by HEDGEFUNDIE » Wed Oct 31, 2018 7:41 am

jadd806 wrote:
Wed Oct 31, 2018 7:02 am
permport wrote:
Wed Oct 31, 2018 5:02 am
Historically, an 80/20 split between stocks and bonds has delivered roughly the same compound returns as a 100% stock allocation but with much less in the way of drawdowns and risk.
Every analysis I've ever seen to "prove" this point is historical cherry picking. 1982 was the start of a bull market for bonds that lasted over 3 decades, during which interest rates on the 10Y Treasury dropped from ~15% to ~3% today. That type of performance for fixed income will not be repeated in our lifetimes, unless you're building your plan around interest rates dropping to negative double digits. If you're looking to cherry pick the best period in US history for fixed income, this is almost certainly it.

I'll additionally note that I don't think most advocates of statements like the above quoted portion are maliciously spreading misinformation. I suspect the main culprit is Portfolio Visualizer being the most popular backtesting tool, yet their data only goes back to 1972 so it almost perfectly captures this misleading period of performance for fixed income.
permport wrote:
Wed Oct 31, 2018 5:02 am
The fact that a 100% stock allocation would prevent the portfolio from ever rebalancing is in and of itself a reason not do it.
Rebalancing is a tool to control risk, not to eke out some mythical "rebalancing bonus." Anyone who expects a portfolio containing fixed income to outperform (or match) 100% equites on a total return basis over any meaningful time period is being intellectually dishonest.

If an investor's risk tolerance calls for an allocation to 100% equities, by definition they do not need to rebalance since their portfolio always matches their risk tolerance regardless of market volatility.
This is the hundredth time I’ve seen this fallacious argument that we’ve just had a huge bond bull market and so we can’t expect the same return from bonds going forward.

Yes over the past 30 years interest rates did drop a bunch. Interest rate risk therefore benefited bond investors. But reinvestment risk worked against them, i.e. every time a bond matured the bond fund was forced to reinvest the principal at a lower interest rate. Over 30 years the two effects cancel out.

Now we are entering a period where exactly the opposite dynamic could play out, where reinvestment risk will benefit the bond fund and interest rate risk will harm it. Again, as interest rates rise the two effects will cancel out.

So there is nothing “intellectually dishonest” with saying that what we have seen historically in bonds since the 1980s can be repeated going forward.

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marklearnsbogle
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Re: Why I'm NOT 100% stocks

Post by marklearnsbogle » Wed Oct 31, 2018 8:10 am

I ignore the media hype about the MAJOR STOCK CRASH and am nonplussed that my hard earned $1M is now a paltry $325k.
Just to clarify, do you mean you are indifferent to the decreased value? (nonplussed refers to being speechless and perplexed.)
"Nothing is simpler than owning the stock market and holding it forever, and that’s essentially the idea behind the index fund.” - Bogle.

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jadd806
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Re: Why I'm NOT 100% stocks

Post by jadd806 » Wed Oct 31, 2018 8:59 am

HEDGEFUNDIE wrote:
Wed Oct 31, 2018 7:41 am
jadd806 wrote:
Wed Oct 31, 2018 7:02 am
permport wrote:
Wed Oct 31, 2018 5:02 am
Historically, an 80/20 split between stocks and bonds has delivered roughly the same compound returns as a 100% stock allocation but with much less in the way of drawdowns and risk.
Every analysis I've ever seen to "prove" this point is historical cherry picking. 1982 was the start of a bull market for bonds that lasted over 3 decades, during which interest rates on the 10Y Treasury dropped from ~15% to ~3% today. That type of performance for fixed income will not be repeated in our lifetimes, unless you're building your plan around interest rates dropping to negative double digits. If you're looking to cherry pick the best period in US history for fixed income, this is almost certainly it.

I'll additionally note that I don't think most advocates of statements like the above quoted portion are maliciously spreading misinformation. I suspect the main culprit is Portfolio Visualizer being the most popular backtesting tool, yet their data only goes back to 1972 so it almost perfectly captures this misleading period of performance for fixed income.
permport wrote:
Wed Oct 31, 2018 5:02 am
The fact that a 100% stock allocation would prevent the portfolio from ever rebalancing is in and of itself a reason not do it.
Rebalancing is a tool to control risk, not to eke out some mythical "rebalancing bonus." Anyone who expects a portfolio containing fixed income to outperform (or match) 100% equites on a total return basis over any meaningful time period is being intellectually dishonest.

If an investor's risk tolerance calls for an allocation to 100% equities, by definition they do not need to rebalance since their portfolio always matches their risk tolerance regardless of market volatility.
This is the hundredth time I’ve seen this fallacious argument that we’ve just had a huge bond bull market and so we can’t expect the same return from bonds going forward.

Yes over the past 30 years interest rates did drop a bunch. Interest rate risk therefore benefited bond investors. But reinvestment risk worked against them, i.e. every time a bond matured the bond fund was forced to reinvest the principal at a lower interest rate. Over 30 years the two effects cancel out.

Now we are entering a period where exactly the opposite dynamic could play out, where reinvestment risk will benefit the bond fund and interest rate risk will harm it. Again, as interest rates rise the two effects will cancel out.

So there is nothing “intellectually dishonest” with saying that what we have seen historically in bonds since the 1980s can be repeated going forward.
This is a ridiculously simplified view. The effects rarely "cancel out" just because one is positive and one is negative. Additionally we're talking US treasuries here, not callable corporate bonds.

You seem to understand the basic concepts of interest rate risk and reinvestment risk in isolation and are able to throw around some vocabulary words, but fail to connect the dots to see the big picture. This is a consistent theme in your posts. Maybe these links will help you:

https://www.analystforum.com/forums/cfa ... m/91332252
https://www.investopedia.com/articles/b ... vexity.asp

I'm sure many people would be very interested in your proof that you can get the "same return going forward." Please use the data set for the 10Y Treasury from 1982-2012 for your falling rates example and then reverse the data set to see what happens in an environment where interest rates increase the same magnitude that they fell over the period. Do you really think returns will be equal in both scenarios?

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bargainhuntingking
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Re: Why I'm NOT 100% stocks

Post by bargainhuntingking » Wed Oct 31, 2018 4:37 pm

Just to clarify, do you mean you are indifferent to the decreased value? (nonplussed refers to being speechless and perplexed.)
Yes, indifferent. “Nonplussed” in North America implies lack of concern.

INFORMAL•NORTH AMERICAN
(of a person) not disconcerted; unperturbed.

visualguy
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Re: Why I'm NOT 100% stocks

Post by visualguy » Wed Oct 31, 2018 5:13 pm

jadd806 wrote:
Wed Oct 31, 2018 7:02 am
Anyone who expects a portfolio containing fixed income to outperform (or match) 100% equites on a total return basis over any meaningful time period is being intellectually dishonest.
This has happened before, so not sure why it wouldn't happen again, or how it can be "intellectually dishonest" to expect that when we already have evidence from the past that it happens. Also, I keep thinking about how the return of US equities has been so exceptionally good overall. If you look at ex-US, it has under-performed long treasuries over the last 32 years, for example. Hence, fixed income can out-perform equities even in the long run, and even in modern times. The higher risk and volatility of equities isn't necessarily rewarded. What if both US and ex-US perform in the future similarly to the way ex-US performed in the past? Can we really rule that out as extremely unlikely? Why?

I wouldn't be comfortable at all sticking everything in equities. This doesn't mean that the rest needs to be in fixed income. Direct real estate is a better choice in my opinion for those who are willing to do that, but I'd rather have a nice chunk in fixed income than 100% stock.

Agggm
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Re: Why I'm NOT 100% stocks

Post by Agggm » Wed Oct 31, 2018 11:20 pm

bargainhuntingking wrote:
Wed Oct 31, 2018 12:30 am
Agggm wrote:
Tue Oct 30, 2018 11:51 pm
bargainhuntingking wrote:
Tue Oct 30, 2018 7:14 am
Here's why I'm not 100% stocks:

Let's suppose I have $1M with 75% in a total stock market fund and 25% in a total bond fund or cash.

Let's say there is a crash like the Great Depression and my stock fund drops 90%. Let's suppose my cash/bond fund stays the same.

I now have $75k in equities and $250k in fixed assets. My total stock market fund would have to increase 10 fold to regain it's previous level.

Since I'm an unemotional diehard Boglehead automaton, I ignore the media hype about the MAJOR STOCK CRASH and am nonplussed that my hard earned $1M is now a paltry $325k. Instead, I review my IPS on re-balancing and realize that now might be a good time to check if I need to rebalance. Indeed it is, so I shift my fixed assets into my total stock market fund to rebalance back to 75/25.

After re-balancing, my equity fund is now ~$244k and my fixed assets are ~$81k.

As my luck would have it, the stock market rapidly rebounds 10 fold to reach it's former height. All the folks who panicked and pulled out of the bottom of the market or switched to gold, canned food, bullets, and bitcoin were kicking themselves at missing out on the rebound.

My $244k in equities increased 10 times to $2.44M. I check my IPS and realized that I need to re-balance, and shift some of my equity fund back to fixed assets.

I check on the Bogleheads forum and see that the 100% equity people who rode out the storm are feeling good that they are back to where they started. I think about posting that my 401k increased by more than 2 1/2 during the same interval, but instead I take a nap and retire early.
Include the cash drag leading up to the original 1M. Instead it would have been slightly above 3M (ending balance of 100/0 portfolio using the 75/25 portfolio's time to get to 1M). And you could have cashed out before your GD (using your impeccable market timing), and retired even earlier and avoided the debacle altogether.
I see. So 100% equities fund always leads to 3x the gain of an equivalent 75/25 fund? Always? Great, so at the 90% crash you now have $300k instead of $3M. What next? What do YOU personally do?
Lol... I'll take the bait.
No.... you have impeccable market timing. So you would have cashed out at 3MM.

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Re: Why I'm NOT 100% stocks

Post by bargainhuntingking » Thu Nov 01, 2018 3:18 am

minimalistmarc wrote:
Wed Oct 31, 2018 12:50 am
WanderingDoc wrote:
Tue Oct 30, 2018 1:52 pm
GibsonL6s wrote:
Tue Oct 30, 2018 12:57 pm
Do you really believe the market is capable of a 90% drop given today's margin requirements, broader ownership of stocks and other factors?
You don't think a market mostly fueled by debt, credit, and trillions of dollars (of imaginary money) pumped into the economy can drop by 90%?

No, I wouldn’t invest if I thought there was a significant chance of this. It would probably be the end of the world

Do you think a publicly traded company valued at $200B is really, truly, worth anywhere near that? Based on the products and income they generate.

yes, in fact when big companies get bought they sell for more than their equity valuation

It possible that the recent explosion of indexers might be an even greater cause of concern. I believe it went from 8% in 2008 to around 35% today (of all paper asset holders, index holders relative to individual stocks). People are putting their 'money' into indexes indiscriminately without stopping to think about WHAT they are actually investing in.

been discussed ad infinatum, I’m not concerned
During the 2008-2009 financial crisis, REIT funds dropped 80%. Firms valued in the billions were liquidated. Read Michael Lewis’ “The Big Short”. Financial market are precarious. A Great Depression could happen again anytime.

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jadd806
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Re: Why I'm NOT 100% stocks

Post by jadd806 » Thu Nov 01, 2018 7:52 am

visualguy wrote:
Wed Oct 31, 2018 5:13 pm
This has happened before, so not sure why it wouldn't happen again, or how it can be "intellectually dishonest" to expect that when we already have evidence from the past that it happens.
Playing with the historical data that I have, the longest outperformance scenario that I can find is that 90/10 outperforms 100% equities from 2000-present. I used intermediate treasuries for bonds, and for equities I used both 100% US and 50/50 US/INT (same result for both). So that's 18 years and counting. But, this is incredibly sensitive to the start date and assumes both investors put in a lump sum just before the tech bubble burst. Using any other start date I can't find a period where a portfolio containing 10% bonds or more outperforms 100% equity for much more than about a decade. I don't consider a decade to be a meaningful time period, so I think my original point still stands.

I'd be interested if anyone has a more thorough analysis of this comparison, as long as it doesn't involve investing a lump sum right before a crash to "prove" the point.
visualguy wrote:
Wed Oct 31, 2018 5:13 pm
Also, I keep thinking about how the return of US equities has been so exceptionally good overall. If you look at ex-US, it has under-performed long treasuries over the last 32 years, for example. Hence, fixed income can out-perform equities even in the long run, and even in modern times. The higher risk and volatility of equities isn't necessarily rewarded. What if both US and ex-US perform in the future similarly to the way ex-US performed in the past? Can we really rule that out as extremely unlikely? Why?
Do you really think that this 3+ decade bull market in fixed income will continue? Interest rates fell ~12% since 1982 to where they are today - where's the upside here? I'm not predicting a bond bear market or anything as I'm not pretending to predict what rates will do, but I don't think it's that outrageous to predict what they won't due when the result of said outcome would be fiscal implosion.

I agree with you regarding US outperformance. Global equity returns have historically been 5% real over the long term, compared to 7% real in the US. It would certainly be more prudent to use the former as a starting point for expectations.
visualguy wrote:
Wed Oct 31, 2018 5:13 pm
I wouldn't be comfortable at all sticking everything in equities. This doesn't mean that the rest needs to be in fixed income. Direct real estate is a better choice in my opinion for those who are willing to do that, but I'd rather have a nice chunk in fixed income than 100% stock.
I don't see any role for bonds in my portfolio other than liability matching approaching and during retirement. I don't need a volatility damper. I'm not willing to bet on the mythical "dry powder" or "rebalancing bonus."

I am however willing to bet that 100% equities will get me to my number faster than a portfolio containing fixed income. If I bet wrong and it underperforms a mixed portfolio of bonds/equities, I will accept my punishment of working for a few more years to make up for it and still enjoy an (slightly later) early retirement.

MichCPA
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Re: Why I'm NOT 100% stocks

Post by MichCPA » Thu Nov 01, 2018 8:01 am

lostdog wrote:
Tue Oct 30, 2018 12:55 pm
This is just market timing. Nice story though.
To be fair, having an IPS and re-balancing to a set AA on a regular basis isn't market timing. The OPs idea that you could somehow do so perfectly at the bottom and the rationale for doing so is market timing.

staythecourse
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Re: Why I'm NOT 100% stocks

Post by staythecourse » Thu Nov 01, 2018 8:14 am

Nothing wrong with being 100% stocks as long as it gets you to where you need to go. There is no reason though to bring out worst case scenarios AND market timing to try to make your point.

Be confident in your plan. If it is right for you it is the right one.

Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle

XS650
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Re: Why I'm NOT 100% stocks

Post by XS650 » Thu Nov 01, 2018 8:01 pm

Every bond fund I examined drops substantially along with the SP500. I have been told and read that bonds go down when stocks go up, but the charts over the last 10 years say otherwise. The only thing that seems stable with bonds is the yield they provide, which is fixed even though the price of fund goes down, making for a higher yield percentage. Any insight to help me understand this better?

cheezit
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Re: Why I'm NOT 100% stocks

Post by cheezit » Thu Nov 01, 2018 9:20 pm

XS650 wrote:
Thu Nov 01, 2018 8:01 pm
Every bond fund I examined drops substantially along with the SP500. I have been told and read that bonds go down when stocks go up, but the charts over the last 10 years say otherwise.
My understanding is that intermediate to long treasuries can have this behavior in crashes to a notable extent. Short term treasuries are more flat. Corporate bonds will go down with the stock market in many kinds of crashes. Cf. this chart of the financial crisis and some of the ripples in its aftermath.

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bargainhuntingking
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Re: Why I'm NOT 100% stocks

Post by bargainhuntingking » Fri Nov 02, 2018 3:46 pm

MichCPA wrote:
Thu Nov 01, 2018 8:01 am
lostdog wrote:
Tue Oct 30, 2018 12:55 pm
This is just market timing. Nice story though.
To be fair, having an IPS and re-balancing to a set AA on a regular basis isn't market timing. The OPs idea that you could somehow do so perfectly at the bottom and the rationale for doing so is market timing.
Actually, my illustration wasn't market timing and that was not my idea for posting; perfect market timing isn't very interesting because it's impossible in real life. My point in posting was to provide a counterpoint to the main post of "Why I'm 100% stocks" argument that essentially states 100% equities always win. They don't, and there are plenty of periods in which having a mixed portfolio of equities offset by fixed assets, esp bonds, can be beneficial. I created an extreme example to illustrate it, and so far in this post the there have been only 2 opposing arguments to my original post. The first argument was "You can't compare a $1m portfolio of 75% stock/25% bonds to a 100% stock portfolio because the stock portfolio will always start out higher, as in 3x higher, so you will always have more." There was no evidence provided to support this. The second argument was "100% equities portfolios always gain more therefore you would be able to retire early and avoid any severe crash." Ummm...

While this thread was opened, the "Why I'm 100% stocks" thread was updated with evidence of a 80% TSM/20% long bonds outperforming a 100% equity portfolio over the past 10 years. But then someone provided additional evidence from Portfolio Visualizer demonstrating that if someone contributed monthly amounts instead of lump summing during that same period, the final amount would actually FAVOR the 100% equity portfolio. That was interesting to me, the difference between lump summing vs monthly contributions over the same period of time showing dramatically different results.

These more subtle variations are what's interesting to me. Someone on this thread mentioned that by rebalancing at regular intervals on the way down, my outcome would have been dramatically different. Also, others discussed the idea of only rebalancing one-way - from equities to stocks, but not vice versa, in order to harvest equity gains but not deplete the fixed reserves portion. Another poster pointed of that repeated dramatic drops with rebalancing from bonds to equities would nearly deplete one's fixed reserves after a while. Many of these variations show substantially different outcomes, with significant implications that we may not be considering by adopting a standard approach of "I'm 100% equity always because it's better " or "I'm 75/25 because consistent rebalancing always wins."

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