Low need to take risk - decrease allocation to stocks?

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ge1
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Low need to take risk - decrease allocation to stocks?

Post by ge1 »

We are in the fortunate situation that we have a fairly low need to take risk given the size of our portfolio (3m, in our late 40s). We currently have 45% in equities and equity-like investments such as EM bonds, otherwise cash band bonds. (We may increase that to 50% should the current market weakness continue.) We earn good money and in a typical year add 150k-200k to our investments. Not sure how much longer we will do this, but I‘m not considering early retirement until we have 4-5m. We carry a fairly low mortgage on our house which will be paid off in 8 years.

For others in similar circumstances, do you have a reduced allocation to stocks as well? Reading the posts here I always get the impression that most people have 60%+ in equities regardless the size of the portfolio.

Thanks
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vineviz
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Re: Low need to take risk - decrease allocation to stocks?

Post by vineviz »

On the one hand you have a relatively low need to take equity risk, but on the other hand you have a low need to avoid it: doesn’t sound like a market crash would jeopardize your situation materially.

My view is that maintaining a roughly 50% allocation to equities would provide some protection against inflation that nominal bonds do not provide.

You could lower volatility by favoring low volatility or minimum variance equity funds. Vanguard Global Minimum Volatility Fund Admiral Shares (VMNVX) and iShares Edge MSCI Min Vol Global ETF (ACWV) are two examples.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
Fallible
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Re: Low need to take risk - decrease allocation to stocks?

Post by Fallible »

ge1 wrote: Sun Dec 09, 2018 1:29 pm We are in the fortunate situation that we have a fairly low need to take risk given the size of our portfolio (3m, in our late 40s). ...

For others in similar circumstances, do you have a reduced allocation to stocks as well? Reading the posts here I always get the impression that most people have 60%+ in equities regardless the size of the portfolio. ...
An asset allocation, which must be what is right for you only, is based on need, willingness, and ability to take risk - all three. Here they are as written by Boglehead pro Larry Swedroe, in the order he has written them:

https://www.cbsnews.com/news/asset-allo ... -you-take/

https://www.cbsnews.com/news/asset-allo ... tolerance/

https://www.cbsnews.com/news/asset-allo ... -you-need/
"Yes, investing is simple. But it is not easy, for it requires discipline, patience, steadfastness, and that most uncommon of all gifts, common sense." ~Jack Bogle
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ge1
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Re: Low need to take risk - decrease allocation to stocks?

Post by ge1 »

vineviz wrote: Sun Dec 09, 2018 1:45 pm On the one hand you have a relatively low need to take equity risk, but on the other hand you have a low need to avoid it: doesn’t sound like a market crash would jeopardize your situation materially.

My view is that maintaining a roughly 50% allocation to equities would provide some protection against inflation that nominal bonds do not provide.

You could lower volatility by favoring low volatility or minimum variance equity funds. Vanguard Global Minimum Volatility Fund Admiral Shares (VMNVX) and iShares Edge MSCI Min Vol Global ETF (ACWV) are two examples.
Yes agree, that why I‘m targeting approx 50%.

Volatility doesn't bother me but thanks for sharing the idea.
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ge1
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Re: Low need to take risk - decrease allocation to stocks?

Post by ge1 »

Fallible wrote: Sun Dec 09, 2018 1:53 pm
ge1 wrote: Sun Dec 09, 2018 1:29 pm We are in the fortunate situation that we have a fairly low need to take risk given the size of our portfolio (3m, in our late 40s). ...

For others in similar circumstances, do you have a reduced allocation to stocks as well? Reading the posts here I always get the impression that most people have 60%+ in equities regardless the size of the portfolio. ...
An asset allocation, which must be what is right for you only, is based on need, willingness, and ability to take risk - all three. Here they are as written by Boglehead pro Larry Swedroe, in the order he has written them:

https://www.cbsnews.com/news/asset-allo ... -you-take/

https://www.cbsnews.com/news/asset-allo ... tolerance/

https://www.cbsnews.com/news/asset-allo ... -you-need/
Thanks Fallible, I‘m aware of the concept. My willingness and ability to take risk is high, but my need is low.
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Re: Low need to take risk - decrease allocation to stocks?

Post by Random Walker »

I’m 56 years old and have a 40/36/24 allocation. The 40% equities are evenly split between US and Int and very heavily tilted to SV. The 36% bonds are AAA/AA with average maturity 5-6 years. The remaining 24% is alternatives with Pre tax equity like expected returns. Big losses severely hurt terminal wealth, so cooling off your AA can make big sense. I’m a fan of Monte Carlo Simulation. The results can be enlightening and sometimes anti-intuitive. It’s not uncommon for the plan that yields the greatest mean terminal wealth to not be the same as the plan that maximizes likelihood of meeting your goals. I find the exercise really pushes one to clarify needs versus wants. Lastly, important to remember that the pain of a loss is at least twice the happiness gained from equal sized gain. And I think that 2:1 ratio increases substantially with wealth.

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TomatoTomahto
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Re: Low need to take risk - decrease allocation to stocks?

Post by TomatoTomahto »

ge1 wrote: Sun Dec 09, 2018 1:29 pm For others in similar circumstances, do you have a reduced allocation to stocks as well? Reading the posts here I always get the impression that most people have 60%+ in equities regardless the size of the portfolio.
We are in similar circumstances, and no longer do a percentage based asset allocation. We use something like a liability matching portfolio (LMP). In our case, we decided that somewhere between $3M and $4M in fixed income was “sufficient” for almost any foreseeable future, have it mostly in tax deferred accounts, and the remainder of our portfolio is the “risk portfolio.” The risk portion goes to equities of one flavor or another.
I get the FI part but not the RE part of FIRE.
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Watty
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Re: Low need to take risk - decrease allocation to stocks?

Post by Watty »

ge1 wrote: Sun Dec 09, 2018 1:29 pm (3m, in our late 40s). We currently have 45% in equities and equity-like investments such as EM bonds, otherwise cash band bonds.
.......
We carry a fairly low mortgage on our house which will be paid off in 8 years.
If you have 55% in bonds that is around $1.7 million in bonds that might be paying a bit more than 2%, and will lose value if interest rates go up.

You didn't give the details but if you have a $200K mortage at 3.5% then it makes little sense. I would take a hard look at paying off the mortgage early.
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Re: Low need to take risk - decrease allocation to stocks?

Post by Random Musings »

ge1 wrote: Sun Dec 09, 2018 1:29 pm (We may increase that to 50% should the current market weakness continue.)
Thanks
For the sake of simplicity, at what % loss in the S&P 500 will you pull the trigger and add 5% to your equity position? 20%, 30%, 50%?

Or would you go even higher into equities at various larger percentage losses?

Is this part of your written investment plan?

RM
I figure the odds be fifty-fifty I just might have something to say. FZ
Random Walker
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Re: Low need to take risk - decrease allocation to stocks?

Post by Random Walker »

TomatoTomahto wrote: Sun Dec 09, 2018 5:52 pm
ge1 wrote: Sun Dec 09, 2018 1:29 pm For others in similar circumstances, do you have a reduced allocation to stocks as well? Reading the posts here I always get the impression that most people have 60%+ in equities regardless the size of the portfolio.
We are in similar circumstances, and no longer do a percentage based asset allocation. We use something like a liability matching portfolio (LMP). In our case, we decided that somewhere between $3M and $4M in fixed income was “sufficient” for almost any foreseeable future, have it mostly in tax deferred accounts, and the remainder of our portfolio is the “risk portfolio.” The risk portion goes to equities of one flavor or another.
I’m approaching same sort of circumstance. I really like taking a top down approach to my finances, but I too, at this stage, am looking more and more in terms of dividing out the bonds as a separate liability matching portfolio.

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ge1
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Re: Low need to take risk - decrease allocation to stocks?

Post by ge1 »

Watty wrote: Sun Dec 09, 2018 6:23 pm
ge1 wrote: Sun Dec 09, 2018 1:29 pm (3m, in our late 40s). We currently have 45% in equities and equity-like investments such as EM bonds, otherwise cash band bonds.
.......
We carry a fairly low mortgage on our house which will be paid off in 8 years.
If you have 55% in bonds that is around $1.7 million in bonds that might be paying a bit more than 2%, and will lose value if interest rates go up.

You didn't give the details but if you have a $200K mortage at 3.5% then it makes little sense. I would take a hard look at paying off the mortgage early.
Good point and I thought about that too. We have a 2.75% rate and the remaining balance is 245k. It‘s close to what I earn on my muni bonds, so I don‘t think there is a clear benefit of paying it off early. Having said that, we will probably use some of the future savings to pay it off earlier.
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Re: Low need to take risk - decrease allocation to stocks?

Post by ge1 »

Random Musings wrote: Sun Dec 09, 2018 6:32 pm
ge1 wrote: Sun Dec 09, 2018 1:29 pm (We may increase that to 50% should the current market weakness continue.)
Thanks
For the sake of simplicity, at what % loss in the S&P 500 will you pull the trigger and add 5% to your equity position? 20%, 30%, 50%?

Or would you go even higher into equities at various larger percentage losses?

Is this part of your written investment plan?

RM
No fixed %, but should markets drop another 10% I‘m pretty sure I would increase my allocation by 5%.

At that point I wouldn‘t increase my allocation to equities further unless markets dropped a lot more.
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Re: Low need to take risk - decrease allocation to stocks?

Post by ge1 »

TomatoTomahto wrote: Sun Dec 09, 2018 5:52 pm
ge1 wrote: Sun Dec 09, 2018 1:29 pm For others in similar circumstances, do you have a reduced allocation to stocks as well? Reading the posts here I always get the impression that most people have 60%+ in equities regardless the size of the portfolio.
We are in similar circumstances, and no longer do a percentage based asset allocation. We use something like a liability matching portfolio (LMP). In our case, we decided that somewhere between $3M and $4M in fixed income was “sufficient” for almost any foreseeable future, have it mostly in tax deferred accounts, and the remainder of our portfolio is the “risk portfolio.” The risk portion goes to equities of one flavor or another.
Interesting, I haven‘t thought about it that way before.

I could imagine that we would increase our allocation to stocks again should we reach certain milestones. For example based on current spending I know that 4m would with a high degree certainty work for us - so let‘s say we had a 6m portfolio, I would probably be fine allocating 60% to stocks, as even after a 50% drop we would be over 4m. Currently we are in that zone where (at least that is my perception) a 30% drop in our portfolio value would really set us back.
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Leif
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Re: Low need to take risk - decrease allocation to stocks?

Post by Leif »

I also have a low need for equity risk. I recently retired. I'm at 50/50 allocation. I was at 70% equity about 10 years ago. I've further diversified to include TIPS, short and intermediate bonds, large cap blend, small cap value, REITs, and international.

I'll let AA float with the market, but sell equities at the predetermined price to replenish bonds/cash.

If you feel more comfortable at the lower equity AA then go for it. Just have a plan in place. You need to be honest with yourself. If you are selling due to the recent stock volatility then you really need a plan in place.
Last edited by Leif on Sun Dec 09, 2018 7:43 pm, edited 2 times in total.
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Stock and Bond Allocation

Post by Taylor Larimore »

ge1:

I have a similar plan to TomatoTomahto.

Money that I cannot afford to lose is in safe fixed-income. The rest is in stocks.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
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Re: Low need to take risk - decrease allocation to stocks?

Post by indexonlyplease »

I retired at 52 and then lowered my AA to 50/50. I have not reballanced since (2 years). I was 100% stock funds before I retired. I am now just letting the stock market decide my AA but will keep the fixed part around 50%. I also built a large savings account (was emergency fund before retired). My thinking was I would use the savings account for any major needs for the year ie car, vacations ect. If I use up the savings I will then dive into the investments. I have not done this yet. But I do have a pension that covers all of the family expenses.

Yes, I agrree with you, why take the extra risk. I could but why would I need to.
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Re: Low need to take risk - decrease allocation to stocks?

Post by TomatoTomahto »

ge1 wrote: Sun Dec 09, 2018 7:27 pm
TomatoTomahto wrote: Sun Dec 09, 2018 5:52 pm
ge1 wrote: Sun Dec 09, 2018 1:29 pm For others in similar circumstances, do you have a reduced allocation to stocks as well? Reading the posts here I always get the impression that most people have 60%+ in equities regardless the size of the portfolio.
We are in similar circumstances, and no longer do a percentage based asset allocation. We use something like a liability matching portfolio (LMP). In our case, we decided that somewhere between $3M and $4M in fixed income was “sufficient” for almost any foreseeable future, have it mostly in tax deferred accounts, and the remainder of our portfolio is the “risk portfolio.” The risk portion goes to equities of one flavor or another.
Interesting, I haven‘t thought about it that way before.

I could imagine that we would increase our allocation to stocks again should we reach certain milestones. For example based on current spending I know that 4m would with a high degree certainty work for us - so let‘s say we had a 6m portfolio, I would probably be fine allocating 60% to stocks, as even after a 50% drop we would be over 4m. Currently we are in that zone where (at least that is my perception) a 30% drop in our portfolio value would really set us back.
OP, that works, but doesn’t have the benefit of being on autopilot. I am profoundly lazy, which was a virtue when I was a software developer. Now, the virtue is expressed in my portfolio management.
I get the FI part but not the RE part of FIRE.
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Re: Low need to take risk - decrease allocation to stocks?

Post by chevca »

ge1 wrote: Sun Dec 09, 2018 7:07 pm
Watty wrote: Sun Dec 09, 2018 6:23 pm
ge1 wrote: Sun Dec 09, 2018 1:29 pm (3m, in our late 40s). We currently have 45% in equities and equity-like investments such as EM bonds, otherwise cash band bonds.
.......
We carry a fairly low mortgage on our house which will be paid off in 8 years.
If you have 55% in bonds that is around $1.7 million in bonds that might be paying a bit more than 2%, and will lose value if interest rates go up.

You didn't give the details but if you have a $200K mortage at 3.5% then it makes little sense. I would take a hard look at paying off the mortgage early.
Good point and I thought about that too. We have a 2.75% rate and the remaining balance is 245k. It‘s close to what I earn on my muni bonds, so I don‘t think there is a clear benefit of paying it off early. Having said that, we will probably use some of the future savings to pay it off earlier.
You also said you add $150-200k/year to your investments. Which are fairly conservative at 45/55 or the 50/50 you might move to. The mortgage is a little chunk compared to your investments and earnings. It really doesn't matter if you pay it off or keep it. But, for simplicity's sake, I would just pay it off in your situation.

Up to you though... I think you will be just fine whichever change you make.

What's the saying.... if you've won the game, stop playing? :happy
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Re: Stock and Bond Allocation

Post by Leif »

Taylor Larimore wrote: Sun Dec 09, 2018 7:37 pm Money that I cannot afford to lose is in safe fixed-income. The rest is in stocks.
That's the trick, isn't it? Determining money you cannot afford to lose. No way to know the future.
Last edited by Leif on Mon Dec 10, 2018 11:54 am, edited 1 time in total.
SoAnyway
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Re: Stock and Bond Allocation

Post by SoAnyway »

Taylor Larimore wrote: Sun Dec 09, 2018 7:37 pm ge1:

I have a similar plan to TomatoTomahto.

Money that I cannot afford to lose is in safe fixed-income. The rest is in stocks.

Best wishes.
Taylor
OP, there is definitely a point at which, if one has been fortunate and stayed the course (Thank you, Jack!), one reaches the point where one realizes - sometimes to one's complete shock and astonishment as in my case because I really wasn't paying attention to my "set-it-and-forget-it" portfolio, and with everlasting gratitude to Mr. Bogle and Vanguard, btw - that, to use your words: "My willingness and ability to take risk is high, but my need is low."

Bottom line: I'm in the same boat, OP. It's hard for many to "relate" to that situation, but it's nevertheless disconcerting and distressing for those in it. Side comment: For those reading who aspire to be there, please don't judge because someday you WILL be there if you stay the course. And you WILL experience the distress that OP is experiencing. Please be kind.

Back to OP: There are different schools of thought on what one should do at that point from an investing perspective:

- At one extreme, "You've won the game. Take it ALL off the table, and invest 100% in guaranteed vehicles. (e.g. high-yield savings, CDs, Treasury MMFs, etc.)" No need to keep running if you've crossed the finish line, broken the tape and are hoisting the winning trophy.

- At the other extreme, "Keep what you need (conservatively calculated) to live the life YOU want to live in the way that YOU have become accustomed to/aspire to until you die, in 100% safe vehicles. And then go absolutely hog-wild in any and every crazy investment scheme'opportunity' that gets thrown your way! (crypto, Brooklyn Bridges, whatever) Woo hoo!" After all, at that point, you have the freedom and wealth to lose all of that portion if you've (hopefully, very carefully) defined what you want/need in your lifetime accurately (taking all the various wild cards outside your control into account) such that you can afford to do so without jeopardizing your life dreams and your commitments to your family. If you take this approach, you might hit the jackpot!! In that case, your heirs will be SOOO grateful...."

To be clear, this is a spectrum and not a "binary" thing. Most people will lean more one way another but will "feel" pulls in both directions. Where you fall between these extremes, OP, will likely depend greatly on how much you enjoy the "game" of investing, how much of your ego/identity is wrapped up In "winning", whether you need/want to leave a legacy, how your own upbringing/family background/experiences have influenced your attitude toward money, whether you actually aspire to a grander lifestyle than your most optimistic dreams, etc. Not judging! You are who you are and you should never feel pressed to apologize for that, and as you know this ain't no "dress rehearsal". YOLO.

To answer your question in my case, OP: I was just tooling along, working hard, living below my means, saving/investing per BH philosophy with a 100/0, then 90/10, then 80/20 AA, rebalancing annually, etc. over time. Boring but it seemed to be working just fine, and my attentions were focused elsewhere. For reasons I won't bore you or anyone else with, it very suddenly came to my attention that Whoa! I had quote-unquote "won the game". Whatt?? :confused (D'Oh!!) Oh, ok. Now what do I do?

I'm still figuring out pieces of that, but with the help of this forum and in light of my own situation, I decided that I don't need to take as much risk as previously. And if you read between the lines of my words above re. the two extremes, some of the crazier investment schemes (even if I can afford to lose it all) aren't my thang. Bottom line: My goal right now is to transition (in a tax-efficient manner) to 50-50 for early retirement (overly conservative due to SOR risk) with a glidepath to an ultimate 60-40 AA.

Hope that helps! As with any AA decision, it's intensely personal to your own situation. And I CERTAINLY wouldn't judge anyone who decides that 100% safe vehicles is the only thing that would allow someone in this situation to sleep well, secure in the knowledge that they and the people/things they care most about have been addressed. Best wishes to you and yours, OP. :happy
Nothing in this post constitutes legal or medical advice. | Consult your attorney or physician to verify if/how anything stated might or might not be applicable to your specific situation.
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Re: Low need to take risk - decrease allocation to stocks?

Post by nisiprius »

1) I have a real problem with the whole concept of "need" to take risk. You "need" to do something if a bad thing will happen if you fail to do it, but not if you do it. Stock investing does not change the downside much, although (in my opinion a strong argument for it) it doesn't make the downside much worse, either. But if you cannot meet your "needs" from the past statistical performance of 25/75, say, you have no guarantee or near-guarantee of meeting them at 75/25, either. You can see this from most Monte Carlo retirement calculators, such as Vanguard's.

Making typical assumptions, the chances of running out of money are almost the same over a wide range of stock allocations. For example, when I ran it using 35 years, $1 million, $35,000 withdrawals: 25/75 yielded 8% failure rate, 75/25 yielded 8% failure rate. Now, if I put in a $60,000 withdrawal, then, yes, 25/75 yields a 80% failure rate while 75/25 yields "only" a 43% failure rate, but is something with a predicted (real life will likely be higher) 43% failure rate a prudent plan? In that situation, you don't "need to take risk," you need to figure out a way of living on less than $60,000!

If cannot meet your "needs," tinkering with stock/bond allocation is not an effective way to address the problem. Looking more carefully at "needs" and considering tools like income annuities (SPIAs) are more appropriate. (By the way, in my one experience with a retirement advisor, it sure seemed to me that he began by encouraging me to express high aspirational goals for income in retirement, living my dreams of travel, etc., defining those aspirational goals as "needs," and looking at the Monte Carlo simulator after he'd already noodged me into stating a high number).

2) To me it is a big problem that people cannot accept the idea that risk tolerance is a matter of personal taste. It is meaningless to talk about some objectively correct amount to take. You can and should talk about probable range of consequences, but not about one's feelings or values. It seems perfectly simple to me.

If you have enough money to meet your needs, and you have "increasing relative risk aversion," then you say "Why should I keep playing when I've won the game?" and you dial back your stock allocation, maybe to zero in some cases. (A fairly common question on the forum is "what should I do? My ninety-year-old grandmother keeps everything in the bank and won't invest in stock or mutuals funds?" The forum answer is usually "at ninety, that's completely reasonable.")

If you have enough money to meet your needs, and you have "decreasing relative risk aversion," then you say "Now I have money to burn, money I can afford to lose, I'm going to take risks and grab for the brass ring."

The choice has nothing to do with anything that can be calculated, and everything to do with whether you personally enjoy playing the game.

Where the investment industry seems to get it wrong (or perhaps is acting in obvious self-interest) is that the majority of people do not enjoy playing the game. But the investment industry attracts people who do, and people who rather like financial risk--but seem to be too ready to project those tastes onto others. (As in stories of Ken Fisher's firm putting people 100% into stocks after they have said that they don't want to take risks).
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Re: Low need to take risk - decrease allocation to stocks?

Post by cas »

nisiprius wrote: Mon Dec 10, 2018 6:21 am Where the investment industry seems to get it wrong (or perhaps is acting in obvious self-interest) is that the majority of people do not enjoy playing the game. But the investment industry attracts people who do, and people who rather like financial risk--but seem to be too ready to project those tastes onto others.
Interestingly enough, Christine Benz (over at Morningstar) included a bit of a mea culpa along these lines in her article that was posted this morning. She was reviewing themes and lessons from her annual Porfolio Makeover Week that ran last week. One of her lessons was this (bold added by me, indicating the tie in to what nisiprius wrote):
'Enough' can beat 'more.'

For people like me who have been weaned on the concept of trying to maximize a portfolio's risk-adjusted returns, the situation featured on Day 1 of the series was illuminating. Ted, the retiree in the article, was making do on Social Security and extremely modest portfolio withdrawals of less than 2%. His portfolio was also extremely conservatively positioned, featuring just a third of assets in stocks. I had some concerns about the effect of inflation on such a conservative portfolio, especially because he noted that his healthcare expenses were beginning to flare up. But in hindsight, I think my increase of stocks in the "after" portfolio was more reflexive than it was necessary. I plumped up the equity position because his spending rate was so low; he absolutely could afford to take more equity risk. And switching into a more aggressive portfolio mix would probably enlarge his eventual balance, which he could use for travel or pass on to his daughter. But as Ted himself and readers were quick to remind me, enlarging his equity position wasn't necessary if a more conservative mix allowed him to meet his cash-flow needs and provided peace of mind.
-Christine Benz; "Lessons From Portfolio Makeover Week"; morningstar.com December 10, 2018; https://www.morningstar.com/articles/90 ... -week.html
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ge1
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Re: Low need to take risk - decrease allocation to stocks?

Post by ge1 »

Thanks all, very interesting and good responses. Overall the responses confirm the approach I am taking, i.e. reducing the allocation to stocks is prudent if the expected higher return from stocks is not needed to meet my retirement goals. (Just to clarify that I actually reduced my allocation to stocks a few years ago when I realized that we would meet our retirement goals safely with a lower allocation to stocks, this has nothing to do with the current weakness in the market.)

This is all a matter of personal preference, but I wouldn't want to be 100% in safe investments (even though we would meet our retirement goals that way as well); as I would feel I would give up unnecessarily extra returns and I'm happy to accept the increased volatility that comes with that.
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Re: Low need to take risk - decrease allocation to stocks?

Post by 22twain »

nisiprius wrote: Mon Dec 10, 2018 6:21 am Where the investment industry seems to get it wrong (or perhaps is acting in obvious self-interest) is that the majority of people do not enjoy playing the game. But the investment industry attracts people who do, and people who rather like financial risk--but seem to be too ready to project those tastes onto others.
The same can probably be said for forums like this one, at least among regular readers and posters as opposed to people who simply drop in for advice.
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Re: Low need to take risk - decrease allocation to stocks?

Post by Grt2bOutdoors »

You may be a candidate for Benjamin Graham's asset allocation plan - hold no less than a 25/75 portfolio, nor no more than 75/25.
Theoretically, you could drop it to 40/60 at your ages, and let it ride, particularly if you are still salting away $150-$200K each year. If you are not salting anymore away, then ask yourself if you can live on $90K per year until age 60 before ramping it up to 4% per year. If you can do that, then anything between 30-40% equity should be plenty.
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Re: Low need to take risk - decrease allocation to stocks?

Post by senex »

I'm surprised there has been less discussion of inflation. If inflation reverts to 12%+ (which many bogleheads have witnessed in their lifetime), then your "absolutely safe" pool of money (if, say, you invested it in 5 year treasuries) could easily lose a third or more of its purchasing power. Oops! The idea of a "safe" pool and "risk" pool seems likely to lead one astray.

I like Grt2bOutdoor's suggestion for a range of equity allocation. Always keep something in equities, because there isn't actually a "safe" alternative in the long term.

When I'm tempted to reduce equity exposure I re-read Charlie Munger's advice when someone asked him about a big market decline:

"What happened is the value of my partnership, that I was running, went down by 50% in one year. [...] And that has happened to me 3 times with my Berkshire stock. So I regard it as a part of manhood: that if you’re going to be in this game for the long haul, which is the way to do it, you better be able to handle a 50% decline without fussing too much about it. So my lesson to all of you is to conduct your life so that you can handle a 50% decline with aplomb and grace. Don’t try to avoid it. It will come. In fact, if it doesn’t come, I would say you aren’t being aggressive enough."
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Re: Low need to take risk - decrease allocation to stocks?

Post by garlandwhizzer »

If you have the ability and willingness to take on volatility/risk and a large pool of assets I suggest keeping at least 50% of your portfolio in broadly diversified equity and the rest in less volatile assets primarily bonds/cash, perhaps some alternates. The greatest long term multi-decade risk to a portfolio is inflation IMO. Although inflation has been tame for a long time that does not rule out its emergence in the future and having everything in nominal bonds can be financially devastating in an inflationary environment as those who held bonds from 1940 to 1980 know too well. Going forward from where we are now bonds do not offer the prospect of robust positive real inflation adjusted returns in the foreseeable future. Broadly diversified equity including both US and INTL does. The other point is that it would be wise IMO to include TIPS as part of the bond portfolio to provide additional protection from unexpected inflation.

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Re: Low need to take risk - decrease allocation to stocks?

Post by ThrustVectoring »

Portfolio size in nominal terms isn't particularly informative without a rough estimate of annual expenses. If you're not considering retirement until at least $4m, I'm going to assume you have 3/4ths of your annual expenses covered at a 4% withdrawal rate (so roughly 19 years of expenses saved).

Anyhow, at roughly this level, anything between 40% and 60% equities is fine. Generally speaking, getting your asset allocation exactly right isn't too important. As you get closer to the "correct" value, your investment results get much less sensitive to allocation changes. In other words, going from 20% equities to 40% equities is a much bigger deal than going from 40% equities to 60%.

If your expenses are under $100k per year I'd suggest retiring now, or setting aside any extra money you save entirely in equities. So you'll have roughly $1.5M in bonds, inflation-adjusted, and the rest in stocks. If you have much more than 30 times annual expenses saved, normal spending is basically never going to deplete your portfolio. If you've saved over 35 or 40 times annual expenses, normal expenses likely will never take your portfolio below its starting balance. At this point, you're investing for your heirs or other benefactors, and have a much longer investing timeframe, which implies a heavier stock allocation.
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Re: Low need to take risk - decrease allocation to stocks?

Post by Scooter57 »

garlandwhizzer wrote: Mon Dec 10, 2018 10:47 am The greatest long term multi-decade risk to a portfolio is inflation IMO. Although inflation has been tame for a long time that does not rule out its emergence in the future and having everything in nominal bonds can be financially devastating in an inflationary environment as those who held bonds from 1940 to 1980 know too well.
A five year CD ladder with 6 month early withdrawal penalties offers sound protection against inflation, unlike bond funds. But I have to challenge
your statement that inflation is the biggest threat to savings. That was true during the period you cite, but not through large swatches of the 19th century and certainly not over the last 10 years.

What you are missing is that we are coming out of the "American Century" during which the US economy and companies selling to America grew dramatically for reasons which may not be repeatable. That dramatic growth was reflected in the progress of our stock market.

But looking at the history of other economies and other markets it should be clear that the greatest long term threat to any market is economic stagnation brought about by various combinations of political mismanagement or collapse, failure to innovate or adapt to changing conditions, closing society to the immigrants who bring new energy and ways of thinking, eroding of trust in markets due to widespread corruption, aging populations, exhaustion of natural resources, massive plagues, etc. etc.

The idea that investing internationally can save you from these kinds of forces is probably naive. Vanguard's Total International Stock Market Fund did worse during the last big downturn than the US markets did and it has yet to get back to it's 2007 peak. Much of the world economy is not represented by the stocks available to retail investors via instruments like that fund. Much of the world's economy outside of much of Europe and the US s also dominated by Oligarchs or dictatorial governments who have no reason to wish to enrich American and European investors.

Inflation can be adapted to should it somehow take off. The threat of economic stagnation or decline cannot. I have no idea how the market will behave for the next 30 years, any more than anyone else does, but I see far too many assumptions repeated over and over again which are based on the idea that the future will be like the recent past. The inflation warnings fall into that category. So does the idea that over a decade or two the market is almost certain to go up.

If you have enough to generate a solid $110,000 a year or more, which is twice the median American family income, and are earning enough to grow that amount even further without the need to invest in a market over which you have no control it makes a great deal of sense to cut back on stock investments.

Since you are young, it may make even more sense to invest some of your money into some entrepreneurial business you can understand and control so that you have an alternative source of income when you retire from salaries work, as well as something to keep you engaged and intellectually young.
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Re: Low need to take risk - decrease allocation to stocks?

Post by garlandwhizzer »

Scooter57 wrote:

I see far too many assumptions repeated over and over again which are based on the idea that the future will be like the recent past. The inflation warnings fall into that category. So does the idea that over a decade or two the market is almost certain to go up.
I respectfully disagree that long term inflation isn't a major risk that should be prepared for. There is a reason why that assumption gets repeated over and over. I also believe very strongly that over the next decade or two the market with dividends re-invested is almost certain to go up. There is a solid reason why that assumption gets repeated over and over. What seems far fetched to me is the idea that economic stagnation will certainly occur and is likely to persist indefinitely into the future in all equity markets. The future in unpredictable but that I'll put my money on what has worked well in the US for the last couple of centuries. I don't believe economic stagnation and doom are our future in spite of current challenges.

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Re: Low need to take risk - decrease allocation to stocks?

Post by NYCwriter »

I've learned a lot from Bogleheads, but if I've learned anything, it's that there's usually only partial agreement on an approach. :D

I've always felt that those with significant assets are in a position where they have the luxury of not having to take on risk. And in an environment where one can earn over 2.3% and going up with cash and short-term treasuries, there is less worry about sacrificing return.

I think investing for long-term returns is something many of us do because we have to. It's the reason this forum exists, right? It's all about minimizing expenses in a market that doesn't favor the middle-class retail investor, but operates in a reasonably efficient way.

I'm a college teacher so I don't earn a lot, though I still have to think about taxes living in NYC. I benefited from a small inheritance some years ago that increased my taxable, so I've ramped up retirement contributions. I've gone from 80/20 to 70/30, and expect to be 60/40 (including cash) within a year or two. Since I have enough to cover 2 years of expenses, very little debt and personal expenses, and no mortgage or property taxes (rent-stab housing), I can leave the risk where it is. My portfolio is only ("only") mid-6 figures, but it would be a lot less if I hadn't been level-headed for a long time and careful with my expenses. If I had the option of taking all risk off the table I'd do that. I choose instead to manage it.
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Re: Low need to take risk - decrease allocation to stocks?

Post by birdsong »

I have the same question as ge1. What are boglehead suggestions when several inheritances over the years (and a recent one the biggest at 7 figures) on top of my already carefully saved retirement assets have dramatically dropped my need for a lot of stocks. I'm 72, widowed long ago and no heirs except charities. Currently my Vanguard account is 36/45/19. Other assets are $200,000 in I and EE bonds and some CD's maturing in the next several years worth about $73,000. Hi Yield Savings and checking of about $125,000. Assets are 50 x's annual expenses. I admire Taylor and Tomato Tomahto for their view of stocks but they have heirs.

Being conservative, what stock/bond ratio would you consider in my situation? I already have a DAF and help a friend with expenses and a college student and other things outside my DAF.
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Re: Low need to take risk - decrease allocation to stocks?

Post by Scooter57 »

garlandwhizzer wrote: Mon Dec 10, 2018 6:29 pm
I respectfully disagree that long term inflation isn't a major risk that should be prepared for. There is a reason why that assumption gets repeated over and over. I also believe very strongly that over the next decade or two the market with dividends re-invested is almost certain to go up. There is a solid reason why that assumption gets repeated over and over. What seems far fetched to me is the idea that economic stagnation will certainly occur and is likely to persist indefinitely into the future in all equity markets. The future in unpredictable but that I'll put my money on what has worked well in the US for the last couple of centuries. I don't believe economic stagnation and doom are our future in spite of current challenges.

Garland Whizzer
No one is saying stagnation will certainly occur. My point is that is could occur, just as serious inflation could occur though it has taken everything the Fed could finagle to prevent deflation over the past 10 years. The situation in the US over the last two centuries was very different from its current state. One might just as well cite the glories of England's centuries of Empire in a discussion of Brexit. We no longer are the manufacturing dynamo we were just 50 years ago. Foreign citizens, some hostile to our interests, control companies many think of as being American. We have wasted obscene amounts on military spending that has achieved little and drained away the resources that in earlier US history would have gone into research, infrastructure, and other necessities for the public good.

No one knows the future. Too often investors assume they do, cushioning this belief by citing 'the long term" as if extending the time frame gave them the ability to predict correctly. We only know the past. There are more possibilities in the future than people realize and many do not resemble the past.

If you decide to invest on stocks the Boglehead approach is excellent. But no expert can guarantee that stock investments will protect you against losses that could extend for a very long time. The term "risk" gets bandied about a lot but there is very little real thought given to what that risk entails and whether we are being adequately compensated for taking it right now.
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Re: Low need to take risk - decrease allocation to stocks?

Post by willthrill81 »

nisiprius wrote: Mon Dec 10, 2018 6:21 am 1) I have a real problem with the whole concept of "need" to take risk. You "need" to do something if a bad thing will happen if you fail to do it, but not if you do it. Stock investing does not change the downside much, although (in my opinion a strong argument for it) it doesn't make the downside much worse, either. But if you cannot meet your "needs" from the past statistical performance of 25/75, say, you have no guarantee or near-guarantee of meeting them at 75/25, either. You can see this from most Monte Carlo retirement calculators, such as Vanguard's.

Making typical assumptions, the chances of running out of money are almost the same over a wide range of stock allocations. For example, when I ran it using 35 years, $1 million, $35,000 withdrawals: 25/75 yielded 8% failure rate, 75/25 yielded 8% failure rate. Now, if I put in a $60,000 withdrawal, then, yes, 25/75 yields a 80% failure rate while 75/25 yields "only" a 43% failure rate, but is something with a predicted (real life will likely be higher) 43% failure rate a prudent plan? In that situation, you don't "need to take risk," you need to figure out a way of living on less than $60,000!

If cannot meet your "needs," tinkering with stock/bond allocation is not an effective way to address the problem. Looking more carefully at "needs" and considering tools like income annuities (SPIAs) are more appropriate. (By the way, in my one experience with a retirement advisor, it sure seemed to me that he began by encouraging me to express high aspirational goals for income in retirement, living my dreams of travel, etc., defining those aspirational goals as "needs," and looking at the Monte Carlo simulator after he'd already noodged me into stating a high number).

2) To me it is a big problem that people cannot accept the idea that risk tolerance is a matter of personal taste. It is meaningless to talk about some objectively correct amount to take. You can and should talk about probable range of consequences, but not about one's feelings or values. It seems perfectly simple to me.

If you have enough money to meet your needs, and you have "increasing relative risk aversion," then you say "Why should I keep playing when I've won the game?" and you dial back your stock allocation, maybe to zero in some cases. (A fairly common question on the forum is "what should I do? My ninety-year-old grandmother keeps everything in the bank and won't invest in stock or mutuals funds?" The forum answer is usually "at ninety, that's completely reasonable.")

If you have enough money to meet your needs, and you have "decreasing relative risk aversion," then you say "Now I have money to burn, money I can afford to lose, I'm going to take risks and grab for the brass ring."

The choice has nothing to do with anything that can be calculated, and everything to do with whether you personally enjoy playing the game.

Where the investment industry seems to get it wrong (or perhaps is acting in obvious self-interest) is that the majority of people do not enjoy playing the game. But the investment industry attracts people who do, and people who rather like financial risk--but seem to be too ready to project those tastes onto others. (As in stories of Ken Fisher's firm putting people 100% into stocks after they have said that they don't want to take risks).
:thumbsup

I've never been on board with Larry's "need to take risk." I am totally on board with willingness and ability. If you're willing and able to take on the risks of stocks, go for it. By Larry's take on this, most deca-millionaires shouldn't own any stock at all because they don't need to.
Last edited by willthrill81 on Tue Dec 11, 2018 7:49 am, edited 1 time in total.
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Re: Low need to take risk - decrease allocation to stocks?

Post by Dandy »

I am in a similar position in that I don't need to take investment risks. So, I chose the option of trying to secure my retirement funding first then deciding on how to allocate the rest of my assets. I roughly follow Dr. Wm Bernstein's idea of having 20 years worth of drawdown in "safe" fixed income. That will take me to age 90. The rest is currently allocated about 67/33 for an overall allocation of about 42/58.

So, I am, overall, taking moderate risk but in a sense not really much since I have pretty safe assets that I can draw upon for 20 years if I need to. My heirs should do fine, in fact since implementing this approach we have started to give our heirs yearly "early inheritance" gifts now rather than have them wait for a decade or 2. I see no need to take the risks to try to triple our assets but this approach could result in moderate growth.

I found this bottom up approach more useful than guessing at what overall allocation was right for me.
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Re: Low need to take risk - decrease allocation to stocks?

Post by ge1 »

Dandy wrote: Tue Dec 11, 2018 7:32 am I am in a similar position in that I don't need to take investment risks. So, I chose the option of trying to secure my retirement funding first then deciding on how to allocate the rest of my assets. I roughly follow Dr. Wm Bernstein's idea of having 20 years worth of drawdown in "safe" fixed income. That will take me to age 90. The rest is currently allocated about 67/33 for an overall allocation of about 42/58.

So, I am, overall, taking moderate risk but in a sense not really much since I have pretty safe assets that I can draw upon for 20 years if I need to. My heirs should do fine, in fact since implementing this approach we have started to give our heirs yearly "early inheritance" gifts now rather than have them wait for a decade or 2. I see no need to take the risks to try to triple our assets but this approach could result in moderate growth.

I found this bottom up approach more useful than guessing at what overall allocation was right for me.
I'm not doing exactly the same, but it definitely helps me in terms of absolute $ and not in %. In my mind I basically apply a 50% haircut to my risky assets and see what that would mean. So right now for example total portfolio is 3.1m with 1.3-1.4m in risky assets. Applying a 50% haircut gets me to 2.4-2.5m - which would be a setback but not devastating. And, probably most importantly, emotionally I wouldn't have significant issues with that.
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Re: Low need to take risk - decrease allocation to stocks?

Post by goingup »

I was raised in a household that always owned stocks and talked about it. I can remember being a teen (1970s-early 80's) and hearing my folks discuss GM, DTE, and Flying Tiger stocks. In his later years my dad talked to his broker often, and they were social friends.

Being in market is completely natural and comfortable for me. I feel overly conservative with a 60/40 allocation at age 57. We have enough in bonds/cash and the rest in equity. I let things drift 5-10% and imagine they'll drift up over time.

Ideas about risk aversion and tolerance (at least in my case) may have a lot to do with learned behavior and stock exposure.
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Re: Low need to take risk - decrease allocation to stocks?

Post by vineviz »

willthrill81 wrote: Mon Dec 10, 2018 9:44 pm
nisiprius wrote: Mon Dec 10, 2018 6:21 am 1) I have a real problem with the whole concept of "need" to take risk. You "need" to do something if a bad thing will happen if you fail to do it, but not if you do it. Stock investing does not change the downside much, although (in my opinion a strong argument for it) it doesn't make the downside much worse, either. But if you cannot meet your "needs" from the past statistical performance of 25/75, say, you have no guarantee or near-guarantee of meeting them at 75/25, either. You can see this from most Monte Carlo retirement calculators, such as Vanguard's.
:thumbsup

I've never been on board with Larry's "need to take risk." I am totally on board with willingness and ability. If you're willing and able to take on the risks of stocks, go for it. By Larry's take on this, most deca-millionaires shouldn't own any stock at all because they don't need to.
I agree that "need" probably doesn't work very well as a rationale for reducing an investor's equity exposure.

On the other hand, it probably does work reasonably well as a rationale for increasing it. In other words, my take on this is that "need" in the context of risk is something of an asymmetric consideration.

The reality is that many investors do NEED to take some investment risk in order to adequately fund their retirement. For an investor starting to save for retirement at age 25, for instance, saving 10% of their income in a retirement portfolio consisting only of CDs and/or short-term bonds probably isn't going to do the job for them. Unless they can dramatically increase their savings rate, such an investor almost certainly does NEED to take on more investment risk in order to provide a stream of income in retirement that is meaningful.

Such an investor would need to invest 20% of their income in a total bond market fund to match the retirement income of an investor who saves 10% of their income in a 75/25 portfolio. If they are investing in cash accounts or CDs, it's even more than 20%. For the vast majority of Americans, a 20% savings rate is frankly out of reach. If they are investing in cash accounts or CDs, even 20% might not be enough.

I think an investor who can "only" save 10% of their income probably should be aware that they might need to take on some equity risk, and that this need is somewhat independent of their ability and willingness.

I agree, though, that for investors who have "won the game" I'm not sure need is much of a factor anymore.
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Re: Low need to take risk - decrease allocation to stocks?

Post by zuma »

Larry has explained (in this thread) that need to take risk can be determined by a variety personal factors and can be defined as the rate of return one needs to achieve a particular goal.
larryswedroe wrote: Thu Mar 06, 2008 6:59 pm And as to desire, to me that determines the need. Whatever word you want to put on it, it is the same, what return do I need to meet my financial goals,whether that goal is determined by "need" or "desire" it is still the rate of return you NEED.

Basically I think this is issue of wordsmithing. Nothing more
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Re: Low need to take risk - decrease allocation to stocks?

Post by Call_Me_Op »

goingup wrote: Tue Dec 11, 2018 8:46 am I was raised in a household that always owned stocks and talked about it. I can remember being a teen (1970s-early 80's) and hearing my folks discuss GM, DTE, and Flying Tiger stocks. In his later years my dad talked to his broker often, and they were social friends.

Being in market is completely natural and comfortable for me. I feel overly conservative with a 60/40 allocation at age 57. We have enough in bonds/cash and the rest in equity. I let things drift 5-10% and imagine they'll drift up over time.

Ideas about risk aversion and tolerance (at least in my case) may have a lot to do with learned behavior and stock exposure.
Interesting. I grew-up poor, in a house-hold where views on investing were shaped by the Great Depression. Perhaps that's why I am very conservative in my investing. Still, I have enough in stocks that over the long term, the stock returns should cover my expenses.
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Re: Low need to take risk - decrease allocation to stocks?

Post by goodenyou »

The decision is much different when you have an earned income and a yearly savings rate the far exceeds your yearly income needs in retirement. I have a cash and fixed income position that has an almost certain probability to be sufficient to get me past 70 years old when both my wife and I will max out on SS benefits. I am still 60% stocks, but that will likely be entirely legacy. If my needs change, I can tap into whatever value the stock portfolio has at the time. So, in effect I have a Liability Matching Portfolio. I leave a portion in stocks because I believe I would be forgoing a significant growth opportunity for my heirs over the next 30-40 years.
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Re: Low need to take risk - decrease allocation to stocks?

Post by garlandwhizzer »

Scooter 57 wrote:

No one is saying stagnation will certainly occur. My point is that is could occur, just as serious inflation could occur though it has taken everything the Fed could finagle to prevent deflation over the past 10 years.
1+

I agree totally that we can't anticipate what the future holds for us. It could be inflation, stagnation, more of the same, or something no one anticipates at present. Inflation sticks in my mind because I lived through the 70s and early 80s, with severe inflation and stagflation, which is a combo of both stagnation and inflation. That made a deep impression on me that I've never forgotten. I remember feeling incredibly lucky for getting a mortgage at less than 10% interest. What a deal! I thought. We're a far cry from that today. Actually I believe that substantial and increasing inflation is a very low probability event for the foreseeable future whereas a sluggish economy and markets relative to our rosy past is a likely outcome. The problem with inflation is that once it gets traction, a wage/price feedback spiral keeps it going and increasing until the FED steps in and kills it with high interest rates which causes a deep recession. That strikes a death blow to inflation but produces widespread economic pain. There have been a lot of ups and downs with investing in past decades and very likely will be in the future as well, but in spite of it, I keep the faith that given sufficient patience it will work out in the end even if our future returns are lower than in the past.

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Re: Low need to take risk - decrease allocation to stocks?

Post by ThrustVectoring »

birdsong wrote: Mon Dec 10, 2018 7:52 pm I have the same question as ge1. What are boglehead suggestions when several inheritances over the years (and a recent one the biggest at 7 figures) on top of my already carefully saved retirement assets have dramatically dropped my need for a lot of stocks. I'm 72, widowed long ago and no heirs except charities. Currently my Vanguard account is 36/45/19. Other assets are $200,000 in I and EE bonds and some CD's maturing in the next several years worth about $73,000. Hi Yield Savings and checking of about $125,000. Assets are 50 x's annual expenses. I admire Taylor and Tomato Tomahto for their view of stocks but they have heirs.

Being conservative, what stock/bond ratio would you consider in my situation? I already have a DAF and help a friend with expenses and a college student and other things outside my DAF.
At 50x annual expenses, pretty much any asset allocation "works" as far as meeting your personal expenses. The choices that look appealing to me are either to optimize your portfolio for donating to charity (which means having a relatively high stock allocation and donating appreciated shares to your donor-advised fund), or increase your spending. For the former, I'd have a standard relatively-conservative asset allocation for the funds you'll think you'll need (30x annual expenses), and then put all the rest into stocks in your taxable brokerage account for eventual donation to your donor advised fund. For the latter, I'd increase spending until it's 1/30th of your overall portfolio.

36% stocks seems a bit low to me, but it's basically fine. I always suggest between 40 to 60%, and you probably want to be on the higher end because of the tax efficiency of the donor-advised fund. Like, 40% fixed income for you means you have 20 years of expenses guaranteed for taking you to age 92, you'll be fine regardless of what the stock market does.
Current portfolio: 60% VTI / 40% VXUS
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