Why did you decide to change your asset allocation?

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Calico
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Why did you decide to change your asset allocation?

Post by Calico »

I am curious what others have done and why when it come to changing your asset allocations (in particular, scaling back equity investments and how and why you did it). Why did you decide to change your AA? I would ask how you changed your AA, but I already found a lot of threads on that topic and read those. I am curious as to why people changed allocations. But feel free to add how if you wish.

The reason I ask is because I am considering changing my asset allocation and am currently reflecting on it a lot and wondering if I am doing this for the right reasons because I think it's based in emotion. You see, there is no great life changing event for me right now or anything like that. Current events have made me realize that my tolerance for risk isn't what it used to be.

I am currently doing an 80/20 allocation (equities/bonds) and want to adjust that to 70/30. I am 48 years old but am aggressive because 1) I've always been aggressive and tolerant of market downturns and 2) there was a series of bad events during the recession put me behind on retirement savings 3) The women in my family typically live to be over 100 years old and I am as healthy as any of them ever were so I think I need my money to last me longer than usual and 4) I am single and never had a pension so it's all on me.

I am just wondering if I am changing my asset allocations for the right reasons.

I decided I will do it slowly and not make any rash decisions. I don't plan on shifting existing money around to rebalance. My plan is to change my entire 401k contributions to one of the two bond funds our 401k company offers and to change my entire Roth IRA contribution to the bond fund I already have. If I do that, in a year, that should put me at 30% bonds (give or take, I was assuming 0% return on equities). I may just shift the 401k and leave Roth as is (going into a TSM fund). Then it would take a little longer than a year, but that's okay. After everything is shifted to 70/30, I will reevaluate.

For what it's worth, it's easy for me to change my 401k. I don't like any of the funds we are offered anyway (they are all manged funds with high costs. The bond funds, are actually lower cost options). But I like my TSM fund with my Roth, so I am more reluctant to change that.
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jfn111
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Re: Why did you decide to change your asset allocation?

Post by jfn111 »

When I retired 7 years ago I changed my AA to aprox. 50/50. That was my "sleep at night" number.
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Raybo
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Re: Why did you decide to change your asset allocation?

Post by Raybo »

During the market meltdown in 2008, I kept moving money from bonds into stocks to maintain my 60/40 allocation. It was hard to watch the moved money decrease in value but I firmly believed that the market would recover. At the very bottom, I could no longer stomach the losses and stopped buying. When the dust settled, I ended up about 50/50. I've stayed there every since.

The market recovered even better than I thought and I not only got years of losses to deduct from my taxes but years of capital gains to take at zero federal taxes. It has worked out nicely and I worry less about a crashing market.

I am not certain that in another crash I would keep moving money from bonds to stocks.
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Re: Why did you decide to change your asset allocation?

Post by RadAudit »

I changed my AA when I found out my risk tolerance wasn't as high as I thought it was. :oops: It happened two times as I went from 70 / 30 to 50 / 50 during several downturns. Fortunately the downturns occurred about once every ten years and coincided nicely with becoming more conservative as I neared retirement.

You seem to be a lot more thoughtful about your situation than I ever was about mine. I'm sure you've run calculations (estimates) on portfolio returns on an 80 / 20 and 70 /30 AA. If a lower AA meets your needs and is consistent with your ability to take those risks, I'm sure you're changing the AA for the right reasons.
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goingup
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Re: Why did you decide to change your asset allocation?

Post by goingup »

We're 60/40ish at ages 50 & 57. After 2008 we added bonds/cash (in addition to equities) to get a better balance. There isn't a great need to take risk anymore, but this asset allocation is likely for the duration.

For comparison, the Vanguard TR 2035 has about 23% bond funds. Assuming you'll retire in your mid-sixties, your current AA is about right.
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Re: Why did you decide to change your asset allocation?

Post by asif408 »

I actually went the opposite way of you. I started out more conservative (I was 70/30) but now am at 100% stocks, because I felt after a couple year experience with choppy markets (especially overseas) in 2014/2015 my risk tolerance was much higher. I think downturns like this can help guide your risk tolerance. Since you are thinking about reducing your stock allocation, it sounds like you started out with too high a stock allocation. Unless your were thinking about this more than a year ago, it sounds like recent performance is affecting your judgement as well. If you are having trouble rebalancing or adding to losing positions that is a sign your risk tolerance is lower than your allocation.

Normally I would say that I agree with you and you should sell down to the sleeping point. The problem is if things go down more you might decide 50/50 is what you can tolerate, or less. A question for you: What would you do if stocks drop 20-30% more in the next several months?

If you can wait things out so you can experience all the highs and lows, you can average out your emotions over that time and get a better sense of your tolerance. Because the news is negative now and could get worse before it gets better. If you don't think you can do that, probably better to go fairly conservative now (say 50/50 or 40/60) and then boost your stock allocation from there if needed.
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Re: Why did you decide to change your asset allocation?

Post by KlangFool »

OP,

I adjusted my AA based on my portfolio size. When it is big enough to cross the threshold, I adjust my AA. My AA is from 70/30 to 60/40.

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Mike Scott
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Re: Why did you decide to change your asset allocation?

Post by Mike Scott »

Based on much reading, personal feelings, circumstances including mine and spouses family longevity and expected pensions/social security etc ... I decided on a 75/25 AA slowly moving to a permanent 50/50 AA when I retire. It's still basically a guess but I don't know of any reason to change anything.
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Re: Why did you decide to change your asset allocation?

Post by livesoft »

I changed my asset allocation from about 60% equities to about 64% equities simply because the stock markets are 15% to 20% off their recent highs, a few RBDs happened over the past few weeks, bond funds went up more than 1% in a single month, and the number of TLH threads increased dramatically at bogleheads.org. I'm just following my IPS.
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Calico
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Re: Why did you decide to change your asset allocation?

Post by Calico »

asif408 wrote: Wed Dec 19, 2018 9:38 am I actually went the opposite way of you. I started out more conservative (I was 70/30) but now am at 100% stocks, because I felt after a couple year experience with choppy markets (especially overseas) in 2014/2015 my risk tolerance was much higher. I think downturns like this can help guide your risk tolerance. Since you are thinking about reducing your stock allocation, it sounds like you started out with too high a stock allocation. Unless your were thinking about this more than a year ago, it sounds like recent performance is affecting your judgement as well. If you are having trouble rebalancing or adding to losing positions that is a sign your risk tolerance is lower than your allocation.

Normally I would say that I agree with you and you should sell down to the sleeping point. The problem is if things go down more you might decide 50/50 is what you can tolerate, or less. A question for you: What would you do if stocks drop 20-30% more in the next several months?

If you can wait things out so you can experience all the highs and lows, you can average out your emotions over that time and get a better sense of your tolerance. Because the news is negative now and could get worse before it gets better. If you don't think you can do that, probably better to go fairly conservative now (say 50/50 or 40/60) and then boost your stock allocation from there if needed.
I used to be 100% equities for a while (stared out that way). I've been adding more bonds as I've been getting older. I've been through a few market downturns (including 2008 and I was all equities then) and I just rode it out. Granted, in 2008 (as I mentioned earlier) there was a lot going on in my life and I didn't put money into the market (I couldn't/didn't have anything to invest). But I left well enough alone what was already there. So my answer is when the market has turned down, I've always just rode it out.

Assuming I go though with this and change my 401k investing each month from investing each month into equities to investing into a bond fund instead, if the market drops 20-30% I most likely would look and see if the loss in value puts me at that 70/30 AA and if it does, decrease what I am putting into bonds and increase equities to maintain 70/30. That could be tricky. I usually rebalance in July and would look then to see where things are.

I am not sure what "sell down to a sleeping point" means. As I said, I don't plan on selling anything. I am just planning on changing future contributions to change my AA. But you are right that recent events have me questioning things. This is a first for me really where market events are having me rethink. Usually it's life events. So I do question if recent events are effecting my judgement. I am not sure if it's a good or bad effect.
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Re: Why did you decide to change your asset allocation?

Post by montanagirl »

I was always a 40/60 type investor when I should have been more aggressive. Now I'm moving toward 60/40 because I like that upside pop more than I worry about the downside.

Plus, I'm comfortably retired now and not needing to cover a layoff.
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bengal22
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Re: Why did you decide to change your asset allocation?

Post by bengal22 »

As I age, I have slowly adjusted my AA. I am 66 wit a 55/45 stock and bond ratio. No plans to change ever.
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Cyclesafe
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Re: Why did you decide to change your asset allocation?

Post by Cyclesafe »

Will going from 80/20 to 70/30 really make much difference either to the probable range of outcomes or to your ability to sleep? I think not.

Staying put on equity and shifting new money to fixed will make you feel like you are doing something, but would be of real benefit if it keeps you from selling equity while it is low. When the market recovers, remember how you feel now and adjust your AA when there is no penalty.

Also, things are not so bad. Hang in there.
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Sandtrap
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Re: Why did you decide to change your asset allocation?

Post by Sandtrap »

Retired.
1. Started with an IPS at 30/70
2. As things started to take shape, gradually shifted toward 40/60 in Index Funds
3. Over time, have increased "sleep factor", decreased "sequence of returns risk", with:
(actionably)
. . . A) Diversification of fixed (at present, any new monty goes here within the 5% rebalancing band)
. . . B) Diversification of income streams
. . . C) Further "simplification".

Decisions and strategies influenced by Kitches, Bernstein, and Bogleheadville. :happy
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Re: Why did you decide to change your asset allocation?

Post by AerialWombat »

I aim to keep an overall AA of 50/35/15 real estate/bonds/equities. I arrived at this number within the last few months, primarily thanks to this forum.

I consider cash flow from my rental properties to be my primary retirement vehicle, and I’ll hit my cash flow number in a few more months, at age 41. That gives me the option to “FIRE”.

But since real estate has it’s own unique set of risks, I wanted the paper securities side of my portfolio to balance the real estate side. So, I’m trying to keep a 1:1 ratio between RE equity and securities, and go 30/70 stocks/bonds in the securities portfolio to minimize volatility and correlation to equity markets.

At 30/70, despite my age, I sleep well, do not feel compelled to check daily, and still have the potential to see some upside. I’m cool with not hitting home runs in equities — that’s what real estate is for.
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Re: Why did you decide to change your asset allocation?

Post by Fallible »

Calico wrote: Wed Dec 19, 2018 9:06 am I am curious what others have done and why when it come to changing your asset allocations (in particular, scaling back equity investments and how and why you did it). ...

The reason I ask is because I am considering changing my asset allocation and am currently reflecting on it a lot and wondering if I am doing this for the right reasons because I think it's based in emotion. You see, there is no great life changing event for me right now or anything like that. Current events have made me realize that my tolerance for risk isn't what it used to be. ...
Your thoughts and questions are on the right track in determining the best allocation for you at this time. Individual risk tolerance is very much about our emotions, which is why it's not easy to understand and deal with, emotions being what they are. :shock: Here is where we really need to know ourselves in order to find an allocation that is right for us. Our risk tolerance also changes often, which is good to know since we are trying not only to determine our emotional feelings about risk in the present, but also in the future. And it's all played out against the great backdrop of uncertainty, in investing and life.

Good books on risk tolerance, in particular how it changes, inclue Jason Zweig's Your Money & Your Brain, and Rick Ferri's All About Asset Allocation, 2nd ed.; and good blogs such as those by author Ben Carlson (links below):

https://awealthofcommonsense.com/2013/0 ... tolerance/
https://awealthofcommonsense.com/2014/1 ... -emotions/
https://awealthofcommonsense.com/2018/1 ... -tolerant/
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mtmingus
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Re: Why did you decide to change your asset allocation?

Post by mtmingus »

My AA was involuntarily changed from 60:40 to 57:43 lately...
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Earl Lemongrab
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Re: Why did you decide to change your asset allocation?

Post by Earl Lemongrab »

I started my "real" portfolio in 2007 (age 50) with a 70/30 allocation. After the crash and during the subsequent recovery, I changed from that to 65/35 and later to 60/40 based on progress. I have remained at 60/40 into retirement.
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changingtimes
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Re: Why did you decide to change your asset allocation?

Post by changingtimes »

I was 80/20 through most of my 40s, and now in my early 50s I'm 70-30. But my 401k is still 80-20; my taxable and the IRA I inherited from DH are more like 60-40, since it's money I'll be using over the next eight years or so.

But I will have a pension as well, plus DH's small pension, and presumably Social Security (which I'll start at 60 with survivor's benefits then switch to mine at 70), and a house with a whole lot of equity, and have no need to leave any sort of inheritance (no kids), so I feel like I can be a little more aggressive. Which I guess in its own way is counterintuitive (ie, have I already "won the game"?), but DH would smite me from above if I got way too conservative. :)
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Toons
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Re: Why did you decide to change your asset allocation?

Post by Toons »

Age.
Was 90% equity for 30 years.
70/30 now
Age 68
:happy
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Re: Why did you decide to change your asset allocation?

Post by 2015 »

The achievement of liability matching allowed me to increase my AA from 40/60 to 50/50 where it will remain.
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David Jay
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Re: Why did you decide to change your asset allocation?

Post by David Jay »

I was 100% equities into my mid-50s. Had to change my AA in preparation for retirement, could not afford to delay SS if the market dropped 50% in the first year or two of retirement. Currently 50/50 with an intent to increase my equity percentage through my retirement years, eventually reaching 70/30.
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Artsdoctor
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Re: Why did you decide to change your asset allocation?

Post by Artsdoctor »

Calico,

There's the emotional component, and there's the academic component. Of course, this is just my opinion:

When you choose your AA, you'd figure out what the expected returns might be for both equities and bonds, and figure out what sort of goal(s) you'd like/need. With each major life change, you'd assess your AA and see if it still fits.

However, you'd also want to do an honest assessment of what you can tolerate (risk tolerance). Investor psychology is going to play an important role as well.

We're most likely coming to an end of a very long bull market (or at least the anticipated equity returns going forward should be muted). This has probably resulted in many people having much larger portfolios than originally anticipated. Consequently, they may choose to re-adjustment their AA because they've exceeded their goals and they no longer have to take the same risk as before.
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Re: Why did you decide to change your asset allocation?

Post by Dandy »

2008 was a tough year - lost job at age 60 and market plunged to the extent that instead of having enough I probably didn't.
So, bad sequence of returns just at the start of my retirement. Recovery was rather quick but the risk lesson was learned. I kept my allocation at about 45% equities down from a high of 55%. I didn't have a good idea of what overall allocation made sense.

A few years ago I stumbled on Dr. Wm Bernstein's idea of have X number of drawdown dollars "safe" and invest the rest anyway you want. I changed my fixed income allocation to more FDIC products, short term bond funds etc. to implement enough drawdown dollars to fund retirement to age 90. That has resulted in an overall allocation of about 43/57 (as of early Dec I haven't checked lately).

My main goal is to maintain the viability of my "safe" fixed income funding of my retirement. On a secondary basis I want to try to keep my equities at least at 40%. When there is a really bad day I might move some fixed income into the Balanced Index Fund. Did a bit in early December but the rest of December I have passed. When I look in a week or so I may do more. I'd like to keep my overall equity exposure between 40 and 43%.
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Re: Why did you decide to change your asset allocation?

Post by Doom&Gloom »

I made several haphazard changes in years past for what I now believe were nonsensical reasons and superstitions.
My first rational change was when I discovered this site and the concept of AA.
I tweaked it a bit after I did more reading here.
I tweaked it even more after the 2016-2017 run up which allowed me to sleep much easier.
I have tweaked it very slightly since then after more reading here.
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vitaflo
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Re: Why did you decide to change your asset allocation?

Post by vitaflo »

When I realized I was going to retire before 50. I had been using an age-based calculation for my bond %, and that no longer applied when we were on track to FIRE. I have since tied my bond allocation to how much we need to retire on. As our portfolio goes up closer to our number, bonds go up. As they it goes down (say in a crash) the bond allocation goes down. So the AA becomes dynamic based on the need to take risk.
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Re: Why did you decide to change your asset allocation?

Post by quantAndHold »

I’m one of those “I eat risk for breakfast” people. I was either 100/0 or 90/10 until I was 5 years from (early) retirement. That includes 2008, which I barely noticed. At 5 years out, I changed to 75/25. When I quit my job, I went to 70/30. I’m still young enough and my skills are enough in demand that I could go back to work if I needed, so I don’t see a reason to go lower at this point. When I reach the point where I couldn’t go back to work for whatever reason, I’ll probably go to 60/40.
Yes, I’m really that pedantic.
staythecourse
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Re: Why did you decide to change your asset allocation?

Post by staythecourse »

To answer the question of why you are asking this question now...

Never change you allocation same way as the market is moving. This way you know it isn't just behavioral.

Good luck.
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Re: Why did you decide to change your asset allocation?

Post by staythecourse »

To answer the question of why you are asking this question now...

Never change you allocation same way as the market is moving. This way you know it isn't just behavioral.

Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle
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Re: Why did you decide to change your asset allocation?

Post by boglefannyc »

A combination of getting older, reduced income after my retirement (wife is still working), having much less to contribute towards retirement, having much more to lose than the last crash, and fear of sequence of returns.
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Re: Why did you decide to change your asset allocation?

Post by Elsebet »

I think I was 100% stocks in my 20's to early 30's. In my mid 30's I read a few financial books and found the /financialindependence subreddit and started slowly moving money into bonds and bond funds. At 42 I'm now 70/30. Some people may think I'm a bit conservative for my age but I'm more comfortable at 70/30 than 80/20. I will probably start moving to 60/40 at 50. I've been in the market since age 22 so I feel I'm on the right track.
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Re: Why did you decide to change your asset allocation?

Post by SGM »

I was 100% in stock until a few years prior to retirement. Currently I am about 65/35, but that may have changed somewhat as unspent dividends and income is going into bond funds. I am pretty comfortable with a larger range in AA as long as I have other income streams. I will look at my AA in early January and see if I will make an adjustment. I am thinking that 60'/40 is fine. I sleep well.
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Re: Why did you decide to change your asset allocation?

Post by ByThePond »

Two reasons: nearing retirement and reaching my number.

I was securely employed and at 100% equities til about 2 or 3 years before retiring but am now retired and in the 60/40 range. I also recently purchased a SPIA to establish a firmer income floor, so one might consider my AA even less exposed to equities. SS will happen at age 70.

Riding out the 2008 recession at 100% equities took a lot of faith in the market's ability to recover, but I kept telling myself I had time to see it happen and had reliable employment.

At a certain point, I realized the truth in "When you've won the game, stop playing.", and backed off.

A great deal of my reasoning was/is based on the precepts and wisdom gathered from this board.

Thanks, all, for the help.
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Re: Why did you decide to change your asset allocation?

Post by MathWizard »

Was 100% equities for a long time.

Dialed it back to 50/50 in late 2016 as I was less than a decade from retirement.
I also put in some more foreign equities since I was almost exclusively US.

I will admit to some market timing, based mainly upon the Schiller PE, but also on other
personal estimates on downside risks. My wife went to 80/20 from 100% equities
about 6 months after I did.

I may easily be wrong regarding the risks, but I also have to sleep at night.
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stemikger
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Re: Why did you decide to change your asset allocation?

Post by stemikger »

I jumped around for a while and finally got sick of doing that, it was driving me crazy. I settled for the one fund portfolio and put it all in the Vanguard Balanced Index Fund. The main reason I went that route because my wife doesn't really show any interest in this stuff and if I predecease her, I want her to not have to worry about doing anything other than taking out the money when she needs it.

The Vanguard Balanced Index does all the work for you, in fact, I don't even look at it and 60/40 passes the sleep test for me.
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Re: Why did you decide to change your asset allocation?

Post by hightower »

Calico wrote: Wed Dec 19, 2018 9:06 am I am curious what others have done and why when it come to changing your asset allocations (in particular, scaling back equity investments and how and why you did it). Why did you decide to change your AA? I would ask how you changed your AA, but I already found a lot of threads on that topic and read those. I am curious as to why people changed allocations. But feel free to add how if you wish.

The reason I ask is because I am considering changing my asset allocation and am currently reflecting on it a lot and wondering if I am doing this for the right reasons because I think it's based in emotion. You see, there is no great life changing event for me right now or anything like that. Current events have made me realize that my tolerance for risk isn't what it used to be.

I am currently doing an 80/20 allocation (equities/bonds) and want to adjust that to 70/30. I am 48 years old but am aggressive because 1) I've always been aggressive and tolerant of market downturns and 2) there was a series of bad events during the recession put me behind on retirement savings 3) The women in my family typically live to be over 100 years old and I am as healthy as any of them ever were so I think I need my money to last me longer than usual and 4) I am single and never had a pension so it's all on me.

I am just wondering if I am changing my asset allocations for the right reasons.

I decided I will do it slowly and not make any rash decisions. I don't plan on shifting existing money around to rebalance. My plan is to change my entire 401k contributions to one of the two bond funds our 401k company offers and to change my entire Roth IRA contribution to the bond fund I already have. If I do that, in a year, that should put me at 30% bonds (give or take, I was assuming 0% return on equities). I may just shift the 401k and leave Roth as is (going into a TSM fund). Then it would take a little longer than a year, but that's okay. After everything is shifted to 70/30, I will reevaluate.

For what it's worth, it's easy for me to change my 401k. I don't like any of the funds we are offered anyway (they are all manged funds with high costs. The bond funds, are actually lower cost options). But I like my TSM fund with my Roth, so I am more reluctant to change that.
I changed my AA earlier this year because I was already starting to feel nervous about the looming bear market. Fortunately it was before any of the corrections had started to occur. I went from 80/20 to 60/30/10 (stocks/bonds/cash).
For me, the reason for the switch was to avoid a situation in which I might be tempted to sell anything during a recession. I just felt like there was no way the market could keep going up like it had the last 10 years. I could already tell that I was feeling nervous and would be tempted to sell if the market dropped. I wanted to have cash on hand to rebalance as the stocks decline. Now I do. I honestly feel fine about the current market correction(s). I don't actually care much and haven't even really been paying attention to it. I'll probably just keep my AA where it is because I know I'll be able to sleep well with it like this. I realize I'm missing out on potential growth, but I think it's too risky to stay in an AA that makes me nervous, because selling at the bottom would be far more detrimental to reaching my goals than having a slightly conservative AA. Best of luck with whatever you decide, but I agree with others that you need to find a mix that makes you feel comfortable so you're more likely to stay the course.
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Re: Why did you decide to change your asset allocation?

Post by galeno »

The older we get the less equities we hold. Started 30+ years ago with 80/20. Backed off to 60/40 in 2006. Went to 40/60 one year before we retired in 2013.
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MnD
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Re: Why did you decide to change your asset allocation?

Post by MnD »

In 1986 I started out at 50:50 because well 1) that seemed pretty aggressive for someone that to date had only had checking and savings, and 2) I didn't know any better and 3) given my portfolio was one money market fund and one stock fund it was simple to manage. I would mail in one check a month always of equal amount, alternating between the two funds every other month.

As I learned about investing I gradually got it to 80/20 over about 5 years by the early 90's. Around 2005 got a little uncomfortable with 80/20 and dialed it back to 75/25 and around 2015 to 70/30 when I decided I would be comfortable with 70/30 for life. I have a pension so with that and SS can afford to and desire to have a higher AA than typical.
70/30 AA for life, Global market cap equity. Rebalance if fixed income <25% or >35%. Weighted ER< .10%. 5% of annual portfolio balance SWR, Proportional (to AA) withdrawals.
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John151
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Re: Why did you decide to change your asset allocation?

Post by John151 »

I followed the “age in bonds” approach, gradually reducing my stocks allocation as I got older. I’m in my seventies now, and I have about thirty percent of my investments in stocks. I’m comfortable with that.
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oldcomputerguy
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Re: Why did you decide to change your asset allocation?

Post by oldcomputerguy »

For most of my investing career, I was (through ignorance of investing and blind acceptance of someone else's recommendation) 100% stock in my 401. A few years ago, I discovered Bogleheads and did some serious reading. I changed my AA to 60/40 at that point (better late than never, I guess).

I retired last year, and at that point I backed down a bit, to 50/50. Risk tolerance is still fairly good, because DW is still working and we're living solely on her paycheck. When she retires, we'll probably back down further, but for now we're 50/50 and hanging there.
"I’ve come around to this: If you’re dumb, surround yourself with smart people; and if you’re smart, surround yourself with smart people who disagree with you." (Aaron Sorkin)
EnjoyTheJourney
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Re: Why did you decide to change your asset allocation?

Post by EnjoyTheJourney »

We recently made a "bond tent" to reduce sequence of returns risk, given that we're not far from downshifting to part-time work with few or no expected new funds to be added to our retirement pool.

These changes also to help keep stress levels down because we've moved to the point where new additions to our retirement portfolio are typically a small percentage of annual changes in portfolio value and investment returns have become a much more important driver of the total value of portfolio holdings; retirement could potentially be pushed back by several years if we didn't proactively manage our exposure to sequence of returns risk.
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grabiner
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Re: Why did you decide to change your asset allocation?

Post by grabiner »

I have made three changes.

I started at 80% stock in 1997, a common recommendation for a new investor.

In 2000-2002, I had been through a bear market, so I knew how I reacted, and had a better idea of my risk tolerance. I also had a more secure job. Therefore, I changed to a more aggressive portfolio. I chose to hold 90% stock, but with the risk of 100% stock, overweighting small-cap, value, and emerging markets.

In 2013, I bought a home. This was a major change in my financial situation, so it required me to re-evaluate my asset allocation. I chose to go to 100% net stock, counting my mortgage as a negative bond. Thus, if I had paid cash for the home, I would have changed to a more aggressive portfolio (all stock), because the home reduced my retirement costs and thus increased my risk tolerance.. I actually took out a mortgage, and changed my bond holding to equal my mortgage, keeping the same amount in stock as if I had paid cash for the house. (The reason I did not pay cash for the house is that I would have had to sell stock for a huge capital gain.)

In 2015, as retirement became closer, I started decreasing my stock allocation by 2% per year. My target net stock allocation is 8%, and will become 10% when I do my January 2019 rebalance.
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jmk
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Re: Why did you decide to change your asset allocation?

Post by jmk »

I originally started with 50/50 for long term monies and 30/70 for short term monies. The 50/50 came from William Sharpe's comment that he did 50/50 since he didn't know which would do better. But I solidified the 50/50 by doing an imagination exercise on what I emotionally could handle in a crash. I did that by taking all returns 1871-present and randomly rearranging them in excel. I kept regenerating a graph of my returns and I'd stay and stare and picture myself living through the worst that showed up in really bad combos. My imagination is quite good, so I was able to figure out that I could handle the worst a 50/50 would give me.

Then as I got more sophisticated I started running simple Monte Carlo scenarios. The Vanguard Nest Egg is one easy to use example but I also ran various monte carlos in Portfolio visualizer, including using conservative statistical estimates (e.g. 2.3% real for 50/50 with historic volatility). That validated my 50/50 for my particular needs. Then as I got more sophisticated I started thinking about different Perfect Withdrawal Rates, and that also validated my 50/50. (90/10 didn't give me a higher withdrawal rate than 50/50!)

Most recently, as I approach a couple years from retirement, I've switched my thinking yet again. Now I'm thinking in terms of funded ratio of liability matching. I made a spreadsheet of all my future liabilities whose present value I compared all my future guaranteed income (ss, pension). That then gave me an amount I needed to match safely (with CDs, bonds etc)-- and in turn let me know how much I could invest in stocks without hampering my essential lifestyle. This is leading me to a much more aggressive allocation of my portfolio, something like 80equity/20 bonds. (But note this would actually amount to only 30% equity/70% bonds if I included the pv of future SS + pension within the bond portion.)

However, as I'm only 2 years from retirement I am also thinking about sequence of return risk. If the market crashes now will I still be able to retire on schedule? I've wavered reducing my AA to 30/70 for the next several years; but given my Funded Ratio is 1.29 even with a crash I am leaning toward keeping things 50/50 as they've always been and then gradually increasing to the 80/20 mentioned in previous paragraph.
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Calico
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Re: Why did you decide to change your asset allocation?

Post by Calico »

First, thanks for the responses everyone. I enjoyed reading how and why you all changed your AA (or didn't).
staythecourse wrote: Wed Dec 19, 2018 4:37 pm To answer the question of why you are asking this question now...

Never change you allocation same way as the market is moving. This way you know it isn't just behavioral.

Good luck.
I think it's a combination of things. I think I've been neglectful of reassessing my risk tolerance and that the seeming end to the bull market has drawn attention to it to for me. But I don't think there is any harm in waiting. I hate to rush into things and this is no different.
Artsdoctor wrote: Wed Dec 19, 2018 4:02 pm Calico,

There's the emotional component, and there's the academic component. Of course, this is just my opinion:

When you choose your AA, you'd figure out what the expected returns might be for both equities and bonds, and figure out what sort of goal(s) you'd like/need. With each major life change, you'd assess your AA and see if it still fits.

However, you'd also want to do an honest assessment of what you can tolerate (risk tolerance). Investor psychology is going to play an important role as well.

We're most likely coming to an end of a very long bull market (or at least the anticipated equity returns going forward should be muted). This has probably resulted in many people having much larger portfolios than originally anticipated. Consequently, they may choose to re-adjustment their AA because they've exceeded their goals and they no longer have to take the same risk as before.
I think at this point, I will reevaluate again in July when I always rebalance and I get a chunk of money to invest. I may be jumping the gun on changing my AA, but I think I am going to need to adjust things in the next few years. So I will keep this in mind going forward.
Cyclesafe wrote: Wed Dec 19, 2018 10:13 am Will going from 80/20 to 70/30 really make much difference either to the probable range of outcomes or to your ability to sleep? I think not.

Staying put on equity and shifting new money to fixed will make you feel like you are doing something, but would be of real benefit if it keeps you from selling equity while it is low. When the market recovers, remember how you feel now and adjust your AA when there is no penalty.

Also, things are not so bad. Hang in there.
Most likely it will not make any difference in my ability to sleep. You are right. I am going to make a note of my thinking now and, like I said, start looking at changing AA when I rebalance. I might not do anything this July, but maybe July 2020 will be the time to make a slight shift. I do think I need to buffer myself a little better though as I approach retirement age. I just need to make sure I don't go on autopilot again and forget.

Haha, I was thinking last night: Carnie rides and the ups an downs of the stock market were both things I could handle better 20 years ago. Now, both make me a little queasy.
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Re: Why did you decide to change your asset allocation?

Post by FreedomHawk »

Currently 70/30 with 3 Fund Portfolio at age 47 but think about it a lot.
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