What does 20% extra of portfolio allocated to equities get you?

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livesoft
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What does 20% extra of portfolio allocated to equities get you?

Post by livesoft » Sat Jan 19, 2019 12:55 pm

What does 20% extra of portfolio allocated to equities get you?

I was thinking about the Vanguard LifeStrategy funds and their allocations to stocks and 10-year CAGR:

20% VASIX Income
40% VSCGX Conservative Growth
60% VSMGX Moderate Growth
80% VASGX Growth

Morningstar.com has the following performance numbers from the past:

Image

So depending on the time range, one might expect 0.8% to 2.2% extra annual performance for every 20% allocated to equities based on what happened in the past. Do you read that the same way?
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samsdad
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Re: What does 20% extra of portfolio allocated to equities get you?

Post by samsdad » Sat Jan 19, 2019 1:07 pm

Seems to fall in line with Vanguard’s numbers wrt historical returns equities:bonds

https://personal.vanguard.com/us/insigh ... ns?lang=en

100% Equities: 10.3% return
80/20 got you 9.6% return (-.7%)
60/40 got you 8.8% return (-1.5%)
40/60 got you 7.8% return (-2.5%)

We used to have this guy around here named livesoft that knew this stuff like the back of his hand. A market timer to be sure, but still knowledgeable despite that obvious failing. Miss that guy...
Last edited by samsdad on Sat Jan 19, 2019 1:11 pm, edited 1 time in total.

Dantes
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Re: What does 20% extra of portfolio allocated to equities get you?

Post by Dantes » Sat Jan 19, 2019 1:11 pm

Yes. Except i would say "variance" rather than extra. More equity happened to mean worse performance for 1 year. I think of "extra" as poitive rather than absolute.

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dogagility
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Re: What does 20% extra of portfolio allocated to equities get you?

Post by dogagility » Sat Jan 19, 2019 1:21 pm

livesoft wrote:
Sat Jan 19, 2019 12:55 pm
Do you read that the same way?
Yes, over the long term.

I'm curious why you asked the question.
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james7777
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Re: What does 20% extra of portfolio allocated to equities get you?

Post by james7777 » Sat Jan 19, 2019 1:21 pm

and what happens to that 20% equity portfolio if we get a 30%-60% stock crash that takes 2-5 years to recover? Ive done backtests on stock/bond ratios from 100/0 to 0/100 and the best rish reward ration is 30% stocks/70% bonds to a 50/50% mix. Im currently 49% stocks and 51% bonds and Im going to cut back on stocks soon. here is what everybody is forgetting:

1) a bad day/year in stocks is far worse than a bad day/year in bonds.

2) a good year in stocks is better than a good year in bonds.

3) if your portfolio goes down 25% due to a 50% stock crash in a 50/50 allocation your portfolio must go UP 33% to break even.

4) if your portfolio goes down 40% due to a 50% stock crash in a 80% stock/20% bond portfolio your portfolio must gain 66% to break even!

5) everyones goal should be FIRST to NOT LOSE MONEY, its not about how much money you gain its about how much you dont lose. this goes whether you are 22 years old or 78 years old. I recently was 100% stocks and I got killed in decembers crash, NEVER again!. I will never go over 50% stocks.

now someone will say "yea but bonds are going lower due to rising interest rates".....my reply is :

1) what gurantee do you have interest rates will go higher? in december that .25% hike crashed the stock market.

2) U.S. interest rates are currently the highest in the world with europe close to zero.. in addition I get very concerned when people say "everyone KNOWS that interest rates will go higher".

my advice? give up that extra 2% gain for safety of not having to make up a 40%-70% loss.

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Davinci
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Re: What does 20% extra of portfolio allocated to equities get you?

Post by Davinci » Sat Jan 19, 2019 1:23 pm

We used to have this guy around here named livesoft that knew this stuff like the back of his hand. A market timer to be sure, but still knowledgeable despite that failing. Miss that guy...
You do realize that livesoft is in the room and he was the initial poster right? I have to assume you are either being silly with this comment, sarcastic or trolling us? LOL :D

I find this data fascinating on the percentage of equities against performance and how much risk one is taking. If I am reading the numbers correctly, most people need to be more conservative and not take as much risk for a 0.8%-2.2% increased return for every 20% on equities?

Ally just increased my online savings account to 2.2% yesterday so not sure if one want to take a lot of risk for small returns in equities? I am not in any way proposing to have a lot of cash in online savings, I am fully invested and only keep emergency savings there but as an apples to orange comparison on rates.
" Simplicity is the ultimate sophistication" Leonardo Da Vinci.

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livesoft
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Re: What does 20% extra of portfolio allocated to equities get you?

Post by livesoft » Sat Jan 19, 2019 1:25 pm

dogagility wrote:
Sat Jan 19, 2019 1:21 pm
I'm curious why you asked the question.
I was thinking of a different metric to compare things like tax-loss harvesting, rebalancing, advisor fees, and market timing with.

For instance, paying an advisor is like needing to have 20% more of one's portfolio allocated to equities.
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livesoft
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Re: What does 20% extra of portfolio allocated to equities get you?

Post by livesoft » Sat Jan 19, 2019 1:27 pm

Davinci wrote:
Sat Jan 19, 2019 1:23 pm
You do realize that livesoft is in the room and he was the initial poster right? I have to assume you are either being silly with this comment, sarcastic or trolling us? LOL :D
I took the comment as a sign of respect.
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marcopolo
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Re: What does 20% extra of portfolio allocated to equities get you?

Post by marcopolo » Sat Jan 19, 2019 1:30 pm

james7777 wrote:
Sat Jan 19, 2019 1:21 pm
and what happens to that 20% equity portfolio if we get a 30%-60% stock crash that takes 2-5 years to recover? Ive done backtests on stock/bond ratios from 100/0 to 0/100 and the best rish reward ration is 30% stocks/70% bonds to a 50/50% mix. Im currently 49% stocks and 51% bonds and Im going to cut back on stocks soon. here is what everybody is forgetting:

1) a bad day/year in stocks is far worse than a bad day/year in bonds.

2) a good year in stocks is better than a good year in bonds.

3) if your portfolio goes down 25% due to a 50% stock crash in a 50/50 allocation your portfolio must go UP 33% to break even.

4) if your portfolio goes down 40% due to a 50% stock crash in a 80% stock/20% bond portfolio your portfolio must gain 66% to break even!

5) everyones goal should be FIRST to NOT LOSE MONEY, its not about how much money you gain its about how much you dont lose. this goes whether you are 22 years old or 78 years old. I recently was 100% stocks and I got killed in decembers crash, NEVER again!. I will never go over 50% stocks.

now someone will say "yea but bonds are going lower due to rising interest rates".....my reply is :

1) what gurantee do you have interest rates will go higher? in december that .25% hike crashed the stock market.

2) U.S. interest rates are currently the highest in the world with europe close to zero.. in addition I get very concerned when people say "everyone KNOWS that interest rates will go higher".

my advice? give up that extra 2% gain for safety of not having to make up a 40%-70% loss.
If you felt you got killed in the December "crash", then you are probably right to dial back your equity exposure.

Not everyone felt that way.
Once in a while you get shown the light, in the strangest of places if you look at it right.

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Re: What does 20% extra of portfolio allocated to equities get you?

Post by MotoTrojan » Sat Jan 19, 2019 1:33 pm

marcopolo wrote:
Sat Jan 19, 2019 1:30 pm
james7777 wrote:
Sat Jan 19, 2019 1:21 pm
and what happens to that 20% equity portfolio if we get a 30%-60% stock crash that takes 2-5 years to recover? Ive done backtests on stock/bond ratios from 100/0 to 0/100 and the best rish reward ration is 30% stocks/70% bonds to a 50/50% mix. Im currently 49% stocks and 51% bonds and Im going to cut back on stocks soon. here is what everybody is forgetting:

1) a bad day/year in stocks is far worse than a bad day/year in bonds.

2) a good year in stocks is better than a good year in bonds.

3) if your portfolio goes down 25% due to a 50% stock crash in a 50/50 allocation your portfolio must go UP 33% to break even.

4) if your portfolio goes down 40% due to a 50% stock crash in a 80% stock/20% bond portfolio your portfolio must gain 66% to break even!

5) everyones goal should be FIRST to NOT LOSE MONEY, its not about how much money you gain its about how much you dont lose. this goes whether you are 22 years old or 78 years old. I recently was 100% stocks and I got killed in decembers crash, NEVER again!. I will never go over 50% stocks.

now someone will say "yea but bonds are going lower due to rising interest rates".....my reply is :

1) what gurantee do you have interest rates will go higher? in december that .25% hike crashed the stock market.

2) U.S. interest rates are currently the highest in the world with europe close to zero.. in addition I get very concerned when people say "everyone KNOWS that interest rates will go higher".

my advice? give up that extra 2% gain for safety of not having to make up a 40%-70% loss.
If you felt you got killed in the December "crash", then you are probably right to dial back your equity exposure.

Not everyone felt that way.
Agreed. There was no crash and nobody got killed, in my humble opinion.

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Re: What does 20% extra of portfolio allocated to equities get you?

Post by samsdad » Sat Jan 19, 2019 1:39 pm

livesoft wrote:
Sat Jan 19, 2019 1:27 pm
Davinci wrote:
Sat Jan 19, 2019 1:23 pm
You do realize that livesoft is in the room and he was the initial poster right? I have to assume you are either being silly with this comment, sarcastic or trolling us? LOL :D
I took the comment as a sign of respect.
‘Twas

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Re: What does 20% extra of portfolio allocated to equities get you?

Post by KlangFool » Sat Jan 19, 2019 1:47 pm

james7777 wrote:
Sat Jan 19, 2019 1:21 pm

now someone will say "yea but bonds are going lower due to rising interest rates".....my reply is :
james7777,

That statement is wrong in the first place. Bond will not drop because of expected rising interest rate. Bond will only drop due to the unexpected rising interest rate. Folks underwiring the bond are not dummies. They issue bonds with interest rate that account for any expected rising interest rate.

KlangFool

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Re: What does 20% extra of portfolio allocated to equities get you?

Post by arcticpineapplecorp. » Sat Jan 19, 2019 1:50 pm

livesoft wrote:
Sat Jan 19, 2019 12:55 pm
So depending on the time range, one might expect 0.8% to 2.2% extra annual performance for every 20% allocated to equities based on what happened in the past. Do you read that the same way?
In a past podcast Paul Merriman said that for every 10% in bonds you add to your portfolio you generally reduce your returns by half of one percent. So a 20% difference in bond allocation would change your return by around 1% per year. I asked about this here:

viewtopic.php?t=104739
"May you live as long as you want and never want as long as you live" -- Irish Blessing | "Invest we must" -- Jack Bogle

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Re: What does 20% extra of portfolio allocated to equities get you?

Post by KlangFool » Sat Jan 19, 2019 1:58 pm

arcticpineapplecorp. wrote:
Sat Jan 19, 2019 1:50 pm
livesoft wrote:
Sat Jan 19, 2019 12:55 pm
So depending on the time range, one might expect 0.8% to 2.2% extra annual performance for every 20% allocated to equities based on what happened in the past. Do you read that the same way?
In a past podcast Paul Merriman said that for every 10% in bonds you add to your portfolio you generally reduce your returns by half of one percent. So a 20% difference in bond allocation would change your return by around 1% per year. I asked about this here:

viewtopic.php?t=104739
arcticpineapplecorp,

That is not exactly correct. The difference is less on the efficient frontier of 75/25 to 25/75.

https://www.vanguard.com/us/insights/sa ... llocations

There is little to no reason to invest outside of that range. It is not worth the risk.

KlangFool

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Re: What does 20% extra of portfolio allocated to equities get you?

Post by arcticpineapplecorp. » Sat Jan 19, 2019 4:17 pm

KlangFool wrote:
Sat Jan 19, 2019 1:58 pm
arcticpineapplecorp. wrote:
Sat Jan 19, 2019 1:50 pm
livesoft wrote:
Sat Jan 19, 2019 12:55 pm
So depending on the time range, one might expect 0.8% to 2.2% extra annual performance for every 20% allocated to equities based on what happened in the past. Do you read that the same way?
In a past podcast Paul Merriman said that for every 10% in bonds you add to your portfolio you generally reduce your returns by half of one percent. So a 20% difference in bond allocation would change your return by around 1% per year. I asked about this here:

viewtopic.php?t=104739
arcticpineapplecorp,

That is not exactly correct. The difference is less on the efficient frontier of 75/25 to 25/75.

https://www.vanguard.com/us/insights/sa ... llocations

There is little to no reason to invest outside of that range. It is not worth the risk.

KlangFool
can you explain more of what you mean? Looking at the return differences at the link you provided I see:
10.3% (100% stock)
9.6% (80/20)
9.3% (70/30)
8.8% (60/40)
8.4% (50/50)
7.8% (40/60)
7.3% (30/70)
6.7% (20/80)
5.4% (100% bonds)

which means there's a difference between each:
.7% (between 100% stock and 80/20)
.3% (between 80/20 and 70/30)
.5% (between 70/30 and 60/40)
.4% (between 60/40 and 50/50)
.6% (between 50/50 and 40/60)
.5% (between 40/60 and 30/70)
.6% (between 30/70 and 20/80)
1.3% (between 100% bonds and 20/80)

Noticeably absent is the difference between 90/10 and 100% stock and 10/90 and 100% bond.Which we'd assume would be around the same percentage difference as all the other 10% increments. In other words a 90/10 portfolio would have returned between 9.6% (80/20) and 10.3% (100% stock) (returning around 9.9% or so) and the 10/90 portfolio (not shown either above) would have fallen in between the ranges of the 100% bond (5.4%) and the 20/80 (6.7%) returning around 6% or so. The difference between 100% bonds and 20/80 actually has the LARGEST discrepancy (of 1.3% which is more than assuming a .5% difference with each 10% increase in bonds).

But otherwise it seems like there's around a .5% difference for each 10% in bonds added to the portfolio. What am I missing?
"May you live as long as you want and never want as long as you live" -- Irish Blessing | "Invest we must" -- Jack Bogle

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Re: What does 20% extra of portfolio allocated to equities get you?

Post by KlangFool » Sat Jan 19, 2019 4:38 pm

arcticpineapplecorp. wrote:
Sat Jan 19, 2019 4:17 pm


which means there's a difference between each:
.7% (between 100% stock and 80/20)
.3% (between 80/20 and 70/30)
.5% (between 70/30 and 60/40)
.4% (between 60/40 and 50/50)
.6% (between 50/50 and 40/60)
.5% (between 40/60 and 30/70)
.6% (between 30/70 and 20/80)
1.3% (between 100% bonds and 20/80)
arcticpineapplecorp,

I am doing a lousy job explaining this. I need to go back to find the research material on the efficient frontier.

KlangFool
Last edited by KlangFool on Sat Jan 19, 2019 4:54 pm, edited 1 time in total.

sambb
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Re: What does 20% extra of portfolio allocated to equities get you?

Post by sambb » Sat Jan 19, 2019 4:42 pm

saving and investing in yourself to raise income is far more important than allocations changes of 20-30%, but not often discussed

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Re: What does 20% extra of portfolio allocated to equities get you?

Post by aristotelian » Sat Jan 19, 2019 4:46 pm

Davinci wrote:
Sat Jan 19, 2019 1:23 pm

I find this data fascinating on the percentage of equities against performance and how much risk one is taking. If I am reading the numbers correctly, most people need to be more conservative and not take as much risk for a 0.8%-2.2% increased return for every 20% on equities?
2% doesn't sound like a lot, but as a proportion of real returns it is a lot. For the 60/40 portfolio, that is about 1/3 of your real return.

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Re: What does 20% extra of portfolio allocated to equities get you?

Post by livesoft » Sat Jan 19, 2019 4:49 pm

^Another way to think of it is that increasing equities by 10% to 20% doesn't increase your possible losses that much. Sure, there is Adrian's idea of 50% drop in equities kills you, but there are ways to get out of the extra 10% to 20% before you get killed.
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Re: What does 20% extra of portfolio allocated to equities get you?

Post by staythecourse » Sat Jan 19, 2019 4:57 pm

aristotelian wrote:
Sat Jan 19, 2019 4:46 pm
Davinci wrote:
Sat Jan 19, 2019 1:23 pm

I find this data fascinating on the percentage of equities against performance and how much risk one is taking. If I am reading the numbers correctly, most people need to be more conservative and not take as much risk for a 0.8%-2.2% increased return for every 20% on equities?
2% doesn't sound like a lot, but as a proportion of real returns it is a lot. For the 60/40 portfolio, that is about 1/3 of your real return.
Just keep in mind those numbers do not seem large, but COMPOUND those numbers over 20 years and you see a HUGE difference in the end return. That is why the article I know Taylor always quotes is a bad one. That difference compounded over time HAS to show a larger dispersion of returns over a long time period thus a higher S.D. of returns. This does NOT mean a stocks become MORE risky just that the effect of compounding is more on 2% vs. 0.8% returns. It is pure math.

These numbers CAN make a difference over a long period of time. That is the whole point of compounding.

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

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Re: What does 20% extra of portfolio allocated to equities get you?

Post by KlangFool » Sat Jan 19, 2019 4:59 pm

livesoft wrote:
Sat Jan 19, 2019 4:49 pm
^Another way to think of it is that increasing equities by 10% to 20% doesn't increase your possible losses that much. Sure, there is Adrian's idea of 50% drop in equities kills you, but there are ways to get out of the extra 10% to 20% before you get killed.
livesoft,

Or not.

You have to survive in order to succeed.

If you are unemployed long enough, that 10% to 20% may mean whether

A) You have to take a huge loss on your portfolio.

B) You will lose your house before you find a job.

C) You have to settle for a lower pay job instead of waiting for a better offer in a few weeks.

Yes, there are folks that are financially destroyed in every recession with that 50% loss and unemployment.

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Re: What does 20% extra of portfolio allocated to equities get you?

Post by KlangFool » Sat Jan 19, 2019 5:01 pm

staythecourse wrote:
Sat Jan 19, 2019 4:57 pm
aristotelian wrote:
Sat Jan 19, 2019 4:46 pm
Davinci wrote:
Sat Jan 19, 2019 1:23 pm

I find this data fascinating on the percentage of equities against performance and how much risk one is taking. If I am reading the numbers correctly, most people need to be more conservative and not take as much risk for a 0.8%-2.2% increased return for every 20% on equities?
2% doesn't sound like a lot, but as a proportion of real returns it is a lot. For the 60/40 portfolio, that is about 1/3 of your real return.
Just keep in mind those numbers do not seem large, but COMPOUND those numbers over 20 years and you see a HUGE difference in the end return.
staythecourse,

Only if you survive that 20 years. You have to survive in order to succeed.

KlangFool

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Re: What does 20% extra of portfolio allocated to equities get you?

Post by goodenyou » Sat Jan 19, 2019 5:10 pm

100% Equities and a SPIA has been advocated.
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Re: What does 20% extra of portfolio allocated to equities get you?

Post by arcticpineapplecorp. » Sat Jan 19, 2019 5:20 pm

KlangFool wrote:
Sat Jan 19, 2019 4:38 pm
arcticpineapplecorp. wrote:
Sat Jan 19, 2019 4:17 pm


which means there's a difference between each:
.7% (between 100% stock and 80/20)
.3% (between 80/20 and 70/30)
.5% (between 70/30 and 60/40)
.4% (between 60/40 and 50/50)
.6% (between 50/50 and 40/60)
.5% (between 40/60 and 30/70)
.6% (between 30/70 and 20/80)
1.3% (between 100% bonds and 20/80)
arcticpineapplecorp,

I am doing a lousy job explaining this. I need to go back to find the research material on the efficient frontier.

KlangFool
thank you. I just wanted to make sure it wasn't me!

Look forward to hearing what you find from your research.
"May you live as long as you want and never want as long as you live" -- Irish Blessing | "Invest we must" -- Jack Bogle

staythecourse
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Re: What does 20% extra of portfolio allocated to equities get you?

Post by staythecourse » Sat Jan 19, 2019 5:41 pm

KlangFool wrote:
Sat Jan 19, 2019 5:01 pm
staythecourse wrote:
Sat Jan 19, 2019 4:57 pm
aristotelian wrote:
Sat Jan 19, 2019 4:46 pm
Davinci wrote:
Sat Jan 19, 2019 1:23 pm

I find this data fascinating on the percentage of equities against performance and how much risk one is taking. If I am reading the numbers correctly, most people need to be more conservative and not take as much risk for a 0.8%-2.2% increased return for every 20% on equities?
2% doesn't sound like a lot, but as a proportion of real returns it is a lot. For the 60/40 portfolio, that is about 1/3 of your real return.
Just keep in mind those numbers do not seem large, but COMPOUND those numbers over 20 years and you see a HUGE difference in the end return.
staythecourse,

Only if you survive that 20 years. You have to survive in order to succeed.

KlangFool
If I'm dead then I definitely don't care what does better. My kids will though.

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

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Davinci
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Re: What does 20% extra of portfolio allocated to equities get you?

Post by Davinci » Sat Jan 19, 2019 5:56 pm

2% doesn't sound like a lot, but as a proportion of real returns it is a lot. For the 60/40 portfolio, that is about 1/3 of your real return.
Just keep in mind those numbers do not seem large, but COMPOUND those numbers over 20 years and you see a HUGE difference in the end return. That is why the article I know Taylor always quotes is a bad one. That difference compounded over time HAS to show a larger dispersion of returns over a long time period thus a higher S.D. of returns. This does NOT mean a stocks become MORE risky just that the effect of compounding is more on 2% vs. 0.8% returns. It is pure math.

These numbers CAN make a difference over a long period of time. That is the whole point of compounding.

Good luck.
staythecourse, aristotelian,

Excellent points, thank you for clarifying! This is very well explained in several of Jack's books with data/simulations regarding ERs and returns and it is certainly a huge difference compounded over time. Once one is at lowest ER as possible with additional 0.8%-2.2% extra returns annually can make the difference between Big Mac or Lobster in retirement. :sharebeer
" Simplicity is the ultimate sophistication" Leonardo Da Vinci.

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DueDiligence
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Re: What does 20% extra of portfolio allocated to equities get you?

Post by DueDiligence » Sat Jan 19, 2019 6:02 pm

Longer time periods show +0.6% CAGR for each 20% increment of US stocks and -0.1% CAGR for each 20% increment of exUS stocks.
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Re: What does 20% extra of portfolio allocated to equities get you?

Post by bluquark » Sat Jan 19, 2019 6:07 pm

livesoft wrote:
Sat Jan 19, 2019 4:49 pm
^Another way to think of it is that increasing equities by 10% to 20% doesn't increase your possible losses that much. Sure, there is Adrian's idea of 50% drop in equities kills you, but there are ways to get out of the extra 10% to 20% before you get killed.
The main problem is if you retire with a large equity allocation, and then stocks are down and stay down for a decade or more. During your early years of retirement you rapidly spend down cheap equities that you ideally would be keeping in the market waiting for the rise. Your portfolio losses really come out of this consumption spending rather than anything that happens specifically in the market. By reducing your volatility with bonds you also stabilize the ratio of your cost of living to your portfolio.

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Re: What does 20% extra of portfolio allocated to equities get you?

Post by livesoft » Sat Jan 19, 2019 6:12 pm

bluquark wrote:
Sat Jan 19, 2019 6:07 pm
The main problem is if you retire with a large equity allocation, ....
You went the wrong a different direction with this, but that's OK.
Last edited by livesoft on Sat Jan 19, 2019 6:44 pm, edited 1 time in total.
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Re: What does 20% extra of portfolio allocated to equities get you?

Post by aristotelian » Sat Jan 19, 2019 6:17 pm

KlangFool wrote:
Sat Jan 19, 2019 4:38 pm
arcticpineapplecorp,

I am doing a lousy job explaining this. I need to go back to find the research material on the efficient frontier.

KlangFool
Klangfool, I believe the EF research is about getting a disproportionate reduction in volatility. I don't think it denies that you get lower long term returns with bonds, in pretty much linear fashion.

You are right about needing to survive, but long term the SWR research shows that over pretty much any 30+ year timeframe, bonds have increased the risk of failure. For example, for 4% WR, 100% stocks beats 50% stocks in success rate over 30, 40, 50, and 60 year periods. It is only going to be over short timeframes that bonds actually reduce your failure rate.

I am sure you have seen this before:
https://earlyretirementnow.com/2016/12/ ... t-1-intro/

I will still hold bonds because I don't think I can handle 100% stocks psychologically, as well as to hedge against "black swan" risk. But it is important to realize that bonds reduce your long term returns and there are risks to that even if they protect against short term market risk.

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Re: What does 20% extra of portfolio allocated to equities get you?

Post by KlangFool » Sat Jan 19, 2019 6:21 pm

aristotelian wrote:
Sat Jan 19, 2019 6:17 pm
KlangFool wrote:
Sat Jan 19, 2019 4:38 pm
arcticpineapplecorp,

I am doing a lousy job explaining this. I need to go back to find the research material on the efficient frontier.

KlangFool
Klangfool, I believe the EF research is about getting a disproportionate reduction in volatility. I don't think it denies that you get lower long term returns with bonds, in pretty much linear fashion.

You are right about needing to survive, but long term the SWR research shows that over pretty much any 30+ year timeframe, bonds have increased the risk of failure. For example, for 4% WR, 100% stocks beats 50% stocks in success rate over 30, 40, 50, and 60 year periods. It is only going to be over short timeframes that bonds actually increase your success rate.

I am sure you have seen this before:
https://earlyretirementnow.com/2016/12/ ... t-1-intro/

I will still hold bonds because I don't think I can handle 100% stocks psychologically, as well as to hedge against "black swan" risk. But it is important to realize that bonds reduce your long term returns and there are risks to that even if they protect against short term market risk.
aristotelian,

Yes, but a person needs to have enough fixed income and the emergency fund to survive short-term employment in a recession. Or else, the person may not survive long enough for the long-term return to show up.

KlangFool

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Re: What does 20% extra of portfolio allocated to equities get you?

Post by aristotelian » Sat Jan 19, 2019 6:21 pm

Davinci wrote:
Sat Jan 19, 2019 5:56 pm

staythecourse, aristotelian,

Excellent points, thank you for clarifying! This is very well explained in several of Jack's books with data/simulations regarding ERs and returns and it is certainly a huge difference compounded over time. Once one is at lowest ER as possible with additional 0.8%-2.2% extra returns annually can make the difference between Big Mac or Lobster in retirement. :sharebeer
I don't need lobster. I am more worried about Big Mac vs dog food.

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Re: What does 20% extra of portfolio allocated to equities get you?

Post by samsdad » Sat Jan 19, 2019 6:29 pm

Investing $10k in 1987 with a 100% AA to the Vanguard 500 would’ve gotten you 46% more money today than a 60/40 500:TBM mix. Of course you would have had a 66%ish bigger drop during its worst times. https://www.portfoliovisualizer.com/bac ... tion2_3=40
THAT SAID, during the 2008 fun you would have had roughly same amount of money in your pocket at the nadir (appears on my phone as February 28, 2009) of either portfolio: $49k for the 500 port, and $51k for the 60:40. During the tech crunch you would have had more money in the 500 port ($48k) than the 60:40 (43k) on their nadir of September 30, 2002.

However, these results don’t hold with a DCAed port. For example on February 28, 2009 with your DCA port, you’d have 614k for your 500 port, and the 60:40 guy would have $732k.
https://www.portfoliovisualizer.com/bac ... tion2_3=40
The September 30, 2002 results were tighter, with $514k vs $526k respectively.

The 100% guy would’ve had 26% more today (2.9mm vs 2.3mm) had he just listened to me and invested $1k a month since 1987 thru last month. That’s a lot more lobster and cushion.

I don’t know if you’d become a Purina connoisseur under either scenario, especially if you started gliding.

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Re: What does 20% extra of portfolio allocated to equities get you?

Post by Davinci » Sat Jan 19, 2019 6:38 pm

SWR research shows that over pretty much any 30+ year timeframe, bonds have increased the risk of failure
I have seen this justification used on many threads about why is better to be 100% stocks for those in their 20s/30s and even some in their 40s.

Is the believe to own Stock/bonds based on age, age-10, age-20 to reduce portfolio risk then a fallacy?

So we only hold bonds to hedge for a black swan event and sleep well at night? If someone does not care about black swan and can sleep well at night at 100% equities, why have any bonds?
" Simplicity is the ultimate sophistication" Leonardo Da Vinci.

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Re: What does 20% extra of portfolio allocated to equities get you?

Post by aristotelian » Sat Jan 19, 2019 6:38 pm

KlangFool wrote:
Sat Jan 19, 2019 6:21 pm
aristotelian,

Yes, but a person needs to have enough fixed income and the emergency fund to survive short-term employment in a recession. Or else, the person may not survive long enough for the long-term return to show up.

KlangFool
Don't get me wrong. I am close to 30% in bonds and cash.

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Re: What does 20% extra of portfolio allocated to equities get you?

Post by KlangFool » Sat Jan 19, 2019 6:46 pm

aristotelian wrote:
Sat Jan 19, 2019 6:38 pm
KlangFool wrote:
Sat Jan 19, 2019 6:21 pm
aristotelian,

Yes, but a person needs to have enough fixed income and the emergency fund to survive short-term employment in a recession. Or else, the person may not survive long enough for the long-term return to show up.

KlangFool
Don't get me wrong. I am close to 30% in bonds and cash.
aristotelian,

I know that. But, folks need to hear this again and again. You could only think about long-term return if you can survive the multiple recessions across that long period.

Unfortunately, many folks will discover what risk actually means in the next recession. It is real. It is not an emotional construct.

KlangFool

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Re: What does 20% extra of portfolio allocated to equities get you?

Post by KlangFool » Sat Jan 19, 2019 6:48 pm

Davinci wrote:
Sat Jan 19, 2019 6:38 pm
SWR research shows that over pretty much any 30+ year timeframe, bonds have increased the risk of failure
I have seen this justification used on many threads about why is better to be 100% stocks for those in their 20s/30s and even some in their 40s.

Is the believe to own Stock/bonds based on age, age-10, age-20 to reduce portfolio risk then a fallacy?

So we only hold bonds to hedge for a black swan event and sleep well at night? If someone does not care about black swan and can sleep well at night at 100% equities, why have any bonds?
Davinci,

Recession/economy crisis is a normal regular occurrence. Hence, it is not a black swan event.

KlangFool

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Re: What does 20% extra of portfolio allocated to equities get you?

Post by nisiprius » Sat Jan 19, 2019 7:00 pm

Instead of looking at return, as if it were guaranteed, let's at least take a cursory look at risk-adjusted return as measured by Sharpe and Sortino ratios.

Source for VASIX
Source for VSCGX, VSMGX, VASGX

VASGX (about 20/80), Sharpe 0.84, Sortino 1.28
VSCGX (about 40/60), Sharpe 0.64, Sortino 0.93
VSMGX (about 60/40), Sharpe 0.54, Sortino 0.77
VASGX (about 80/20), Sharpe 0.47, Sortino 0.66

So the pattern, over that time period, is pretty regular: each 20% increment in equities allocation resulted in more return, but also more risk--and the increases faster than the return, so less risk-adjusted return. So more stocks means a higher expected or average return, but also less certainty of actually getting that return, and the increases in return weren't commensurate with the increases in risk.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

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Re: What does 20% extra of portfolio allocated to equities get you?

Post by livesoft » Sat Jan 19, 2019 7:02 pm

^Is that not expected from an Efficient Frontier chart?
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Re: What does 20% extra of portfolio allocated to equities get you?

Post by dogagility » Sat Jan 19, 2019 7:06 pm

aristotelian wrote:
Sat Jan 19, 2019 6:17 pm
KlangFool wrote:
Sat Jan 19, 2019 4:38 pm
arcticpineapplecorp,

I am doing a lousy job explaining this. I need to go back to find the research material on the efficient frontier.

KlangFool
Klangfool, I believe the EF research is about getting a disproportionate reduction in volatility. I don't think it denies that you get lower long term returns with bonds, in pretty much linear fashion.

You are right about needing to survive, but long term the SWR research shows that over pretty much any 30+ year timeframe, bonds have increased the risk of failure. For example, for 4% WR, 100% stocks beats 50% stocks in success rate over 30, 40, 50, and 60 year periods. It is only going to be over short timeframes that bonds actually reduce your failure rate.

I am sure you have seen this before:
https://earlyretirementnow.com/2016/12/ ... t-1-intro/

I will still hold bonds because I don't think I can handle 100% stocks psychologically, as well as to hedge against "black swan" risk. But it is important to realize that bonds reduce your long term returns and there are risks to that even if they protect against short term market risk.
Thank you for that cogent response, Ari.
"The stock market is a device for transferring money from the impatient to the patient" -- Warren Buffett

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Re: What does 20% extra of portfolio allocated to equities get you?

Post by dogagility » Sat Jan 19, 2019 7:21 pm

nisiprius wrote:
Sat Jan 19, 2019 7:00 pm
Instead of looking at return, as if it were guaranteed, let's at least take a cursory look at risk-adjusted return as measured by Sharpe and Sortino ratios.

Source for VASIX
Source for VSCGX, VSMGX, VASGX

VASGX (about 20/80), Sharpe 0.84, Sortino 1.28
VSCGX (about 40/60), Sharpe 0.64, Sortino 0.93
VSMGX (about 60/40), Sharpe 0.54, Sortino 0.77
VASGX (about 80/20), Sharpe 0.47, Sortino 0.66

So the pattern, over that time period, is pretty regular: each 20% increment in equities allocation resulted in more return, but also more risk--and the increases faster than the return, so less risk-adjusted return. So more stocks means a higher expected or average return, but also less certainty of actually getting that return, and the increases in return weren't commensurate with the increases in risk.
I could be wrong, but I think this is equating risk with volatility. While that is typical in the financial world, I think of equity risk more as a function of volatility and time. It seems that increasing time mitigates the typical concept of risk.
"The stock market is a device for transferring money from the impatient to the patient" -- Warren Buffett

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Re: What does 20% extra of portfolio allocated to equities get you?

Post by willthrill81 » Sat Jan 19, 2019 7:21 pm

livesoft wrote:
Sat Jan 19, 2019 7:02 pm
^Is that not expected from an Efficient Frontier chart?
Yes, it is.

After all this time hearing discussion about it, I still fail to see why the efficient frontier should matter at all to the retail investor. You can't 'eat' a risk-adjusted return, only a real one. What does it matter if your risk-adjusted return was very high but your real returns were insufficient to help you reach your goals?

The more that time goes on, the more I'm attracted to the concept of regret minimization than return, risk-adjusted or absolute, maximization. I believe that the former is much more in line with human being's mental processes.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: What does 20% extra of portfolio allocated to equities get you?

Post by willthrill81 » Sat Jan 19, 2019 7:27 pm

dogagility wrote:
Sat Jan 19, 2019 7:21 pm
nisiprius wrote:
Sat Jan 19, 2019 7:00 pm
Instead of looking at return, as if it were guaranteed, let's at least take a cursory look at risk-adjusted return as measured by Sharpe and Sortino ratios.

Source for VASIX
Source for VSCGX, VSMGX, VASGX

VASGX (about 20/80), Sharpe 0.84, Sortino 1.28
VSCGX (about 40/60), Sharpe 0.64, Sortino 0.93
VSMGX (about 60/40), Sharpe 0.54, Sortino 0.77
VASGX (about 80/20), Sharpe 0.47, Sortino 0.66

So the pattern, over that time period, is pretty regular: each 20% increment in equities allocation resulted in more return, but also more risk--and the increases faster than the return, so less risk-adjusted return. So more stocks means a higher expected or average return, but also less certainty of actually getting that return, and the increases in return weren't commensurate with the increases in risk.
I could be wrong, but I think this is equating risk with volatility. While that is typical in the financial world, I think of equity risk more as a function of volatility and time. It seems that increasing time mitigates the typical concept of risk.
My view of risk is that the biggest risk, whatever we could call it, is the likelihood that the money that you will need will not be there when you need it. Viewed in this light, bonds are generally safer in the short-term, but stocks are generally safer in the long-term.

The likelihood of maintaining purchasing power (Buffet's risk) is another type of risk, an important one but not as important as the one above.

The likelihood of one's assets fluctuating in value between the time of the investment purchase and sale is not a meaningful risk apart from whether the investor can tolerate the fluctuation.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: What does 20% extra of portfolio allocated to equities get you?

Post by Davinci » Sat Jan 19, 2019 7:39 pm

Davinci,

Recession/economy crisis is a normal regular occurrence. Hence, it is not a black swan event.

KlangFool
Klangfool,

I completely agree with this, without sounding pessimist I think that I will need to overcome 3-4 Recession/economy crisis before I am in early retirement and FI mode in 15-20 years. You are absolutely correct, when the next one occurs many people will find what their true risk tolerance is and will be caught with their pants down. :oops: I certainly do not want to be in that space so lets call bonds for me the belt holding my pants. :beer

If I had pensions as cushion I wold not sweat it and be more aggressive for higher returns but I don't so I need this money to feed the family.

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Re: What does 20% extra of portfolio allocated to equities get you?

Post by Davinci » Sat Jan 19, 2019 7:40 pm

My view of risk is that the biggest risk, whatever we could call it, is the likelihood that the money that you will need will not be there when you need it. Viewed in this light, bonds are generally safer in the short-term, but stocks are generally safer in the long-term.
+1000
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Re: What does 20% extra of portfolio allocated to equities get you?

Post by samsdad » Sat Jan 19, 2019 7:41 pm

willthrill81 wrote:
Sat Jan 19, 2019 7:27 pm
dogagility wrote:
Sat Jan 19, 2019 7:21 pm
nisiprius wrote:
Sat Jan 19, 2019 7:00 pm
Instead of looking at return, as if it were guaranteed, let's at least take a cursory look at risk-adjusted return as measured by Sharpe and Sortino ratios.

Source for VASIX
Source for VSCGX, VSMGX, VASGX

VASGX (about 20/80), Sharpe 0.84, Sortino 1.28
VSCGX (about 40/60), Sharpe 0.64, Sortino 0.93
VSMGX (about 60/40), Sharpe 0.54, Sortino 0.77
VASGX (about 80/20), Sharpe 0.47, Sortino 0.66

So the pattern, over that time period, is pretty regular: each 20% increment in equities allocation resulted in more return, but also more risk--and the increases faster than the return, so less risk-adjusted return. So more stocks means a higher expected or average return, but also less certainty of actually getting that return, and the increases in return weren't commensurate with the increases in risk.
I could be wrong, but I think this is equating risk with volatility. While that is typical in the financial world, I think of equity risk more as a function of volatility and time. It seems that increasing time mitigates the typical concept of risk.
My view of risk is that the biggest risk, whatever we could call it, is the likelihood that the money that you will need will not be there when you need it. Viewed in this light, bonds are generally safer in the short-term, but stocks are generally safer in the long-term.

The likelihood of maintaining purchasing power (Buffet's risk) is another type of risk, an important one but not as important as the one above.

The likelihood of one's assets fluctuating in value between the time of the investment purchase and sale is not a meaningful risk apart from whether the investor can tolerate the fluctuation.
Exactly.

Consider three investors with the same portfolio, who invested exactly the same, and have the same terminal amount (say 2.5MM). Now it’s time to “retire.”

Investor A was born into money and doesn’t need to live off this portfolio. He couldn’t care what happens to it, how much it fluctuates, etc. What’s his risk?

Investor B needs to live off this port. for the next 25 years and has 100k annual expenses. What’s his risk?

Investor C also needs to live off this port. for the next 25 years but only has 10k annual expenses. What’s his risk?

Please tell me no one thinks the risks in this portfolio are the same for all.

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Re: What does 20% extra of portfolio allocated to equities get you?

Post by FOGU » Sat Jan 19, 2019 7:42 pm

sambb wrote:
Sat Jan 19, 2019 4:42 pm
saving and investing in yourself to raise income is far more important than allocations changes of 20-30%, but not often discussed
And cutting expenses. 100% tax-free gain, plus market returns, on every dollar saved.

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Re: What does 20% extra of portfolio allocated to equities get you?

Post by aristotelian » Sat Jan 19, 2019 7:46 pm

willthrill81 wrote:
Sat Jan 19, 2019 7:21 pm
After all this time hearing discussion about it, I still fail to see why the efficient frontier should matter at all to the retail investor. You can't 'eat' a risk-adjusted return, only a real one. What does it matter if your risk-adjusted return was very high but your real returns were insufficient to help you reach your goals?
I think it is interesting to know that reducing your volatility by, say, 20%, only reduces your annual returns by perhaps 10%. If you value stability, you don't have to give up that much return to get some. It is still a meaningful concept.

That said, absolute returns matter too. It's all a question of balance, triangulating various goals, risks, and timeframes.

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Re: What does 20% extra of portfolio allocated to equities get you?

Post by willthrill81 » Sat Jan 19, 2019 7:53 pm

aristotelian wrote:
Sat Jan 19, 2019 7:46 pm
willthrill81 wrote:
Sat Jan 19, 2019 7:21 pm
After all this time hearing discussion about it, I still fail to see why the efficient frontier should matter at all to the retail investor. You can't 'eat' a risk-adjusted return, only a real one. What does it matter if your risk-adjusted return was very high but your real returns were insufficient to help you reach your goals?
I think it is interesting to know that reducing your volatility by, say, 20%, only reduces your annual returns by perhaps 10%. If you value stability, you don't have to give up that much return to get some. It is still a meaningful concept.

That said, absolute returns matter too. It's all a question of balance, triangulating various goals, risks, and timeframes.
There is certainly a balancing act involved. We can agree on that point. It's called personal finance for good reason.

I suppose my problem with focusing on volatility is that the likelihood of a fluctuating value of an investment between the time of purchase and sale is only meaningful to the extent that it impacts whether the investor can stay the course. For investors who aren't concerned about the intervening fluctuation, volatility and, in turn, risk-adjusted returns are literally pointless. Granted, there probably aren't many such investors at that end of the spectrum, but there are a lot out there who don't care much about volatility.

To the extent then that an investor is unconcerned about volatility, modern portfolio theory's usefulness, along with the concept of risk-adjusted returns, diminishes rapidly.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: What does 20% extra of portfolio allocated to equities get you?

Post by dogagility » Sat Jan 19, 2019 7:56 pm

willthrill81 wrote:
Sat Jan 19, 2019 7:27 pm
dogagility wrote:
Sat Jan 19, 2019 7:21 pm
I could be wrong, but I think this is equating risk with volatility. While that is typical in the financial world, I think of equity risk more as a function of volatility and time. It seems that increasing time mitigates the typical concept of risk.
My view of risk is that the biggest risk, whatever we could call it, is the likelihood that the money that you will need will not be there when you need it. Viewed in this light, bonds are generally safer in the short-term, but stocks are generally safer in the long-term.

The likelihood of maintaining purchasing power (Buffet's risk) is another type of risk, an important one but not as important as the one above.

The likelihood of one's assets fluctuating in value between the time of the investment purchase and sale is not a meaningful risk apart from whether the investor can tolerate the fluctuation.
Thanks, Will. That's my view as well but stated better.
"The stock market is a device for transferring money from the impatient to the patient" -- Warren Buffett

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