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

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

Post by KlangFool » Sat Jan 19, 2019 8:00 pm

willthrill81 wrote:
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.
willthrill81,

<<To the extent then that an investor is unconcerned unaffected by volatility, modern portfolio theory's usefulness, along with the concept of risk-adjusted returns, diminishes rapidly.>>

We need to change one word from your statement. A lot of folks are unconcerned about volatility. But, it is not good enough. They have to be unaffected by volatility.

For example, just because someone is unconcerned about unemployment, it does not mean that they would not be unemployed and unemployment cannot affect them.

KlangFool

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

Post by juliewongferra » Sat Jan 19, 2019 8:10 pm

samsdad wrote:
Sat Jan 19, 2019 1:07 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 obvious failing. Miss that guy...
livesoft is not a guy! livesoft is female!

cheers,
jwf
If you aren't familiar with Mr. Bogle and his investment philosophy, then you don't know Jack!

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willthrill81
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Re: What does 20% extra of portfolio allocated to equities get you?

Post by willthrill81 » Sat Jan 19, 2019 8:11 pm

KlangFool wrote:
Sat Jan 19, 2019 8:00 pm
willthrill81 wrote:
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.
willthrill81,

<<To the extent then that an investor is unconcerned unaffected by volatility, modern portfolio theory's usefulness, along with the concept of risk-adjusted returns, diminishes rapidly.>>

We need to change one word from your statement. A lot of folks are unconcerned about volatility. But, it is not good enough. They have to be unaffected by volatility.

For example, just because someone is unconcerned about unemployment, it does not mean that they would not be unemployed and unemployment cannot affect them.

KlangFool
What you're describing is what an investor should do. My statement pertains to what they actually do.
“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

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

Post by KlangFool » Sat Jan 19, 2019 8:15 pm

willthrill81 wrote:
Sat Jan 19, 2019 8:11 pm
KlangFool wrote:
Sat Jan 19, 2019 8:00 pm
willthrill81 wrote:
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.
willthrill81,

<<To the extent then that an investor is unconcerned unaffected by volatility, modern portfolio theory's usefulness, along with the concept of risk-adjusted returns, diminishes rapidly.>>

We need to change one word from your statement. A lot of folks are unconcerned about volatility. But, it is not good enough. They have to be unaffected by volatility.

For example, just because someone is unconcerned about unemployment, it does not mean that they would not be unemployed and unemployment cannot affect them.

KlangFool
What you're describing is what an investor should do. My statement pertains to what they actually do.
And, they will change their mind after the first major round of lay off.

KlangFool

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willthrill81
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Re: What does 20% extra of portfolio allocated to equities get you?

Post by willthrill81 » Sat Jan 19, 2019 8:18 pm

KlangFool wrote:
Sat Jan 19, 2019 8:15 pm
willthrill81 wrote:
Sat Jan 19, 2019 8:11 pm
KlangFool wrote:
Sat Jan 19, 2019 8:00 pm
willthrill81 wrote:
Sat Jan 19, 2019 7:53 pm
aristotelian wrote:
Sat Jan 19, 2019 7:46 pm


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.
willthrill81,

<<To the extent then that an investor is unconcerned unaffected by volatility, modern portfolio theory's usefulness, along with the concept of risk-adjusted returns, diminishes rapidly.>>

We need to change one word from your statement. A lot of folks are unconcerned about volatility. But, it is not good enough. They have to be unaffected by volatility.

For example, just because someone is unconcerned about unemployment, it does not mean that they would not be unemployed and unemployment cannot affect them.

KlangFool
What you're describing is what an investor should do. My statement pertains to what they actually do.
And, they will change their mind after the first major round of lay off.

KlangFool
Perhaps. I have a self-employed friend whose business is seemingly on the rocks right now, but his investment portfolio is 100% stock. He has enough liquidity to get through a rough period, he is very 'employable', and his investment horizon is decades long. He isn't concerned at all about risk-adjusted returns.
“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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nisiprius
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Re: What does 20% extra of portfolio allocated to equities get you?

Post by nisiprius » Sat Jan 19, 2019 8:24 pm

dogagility wrote:
Sat Jan 19, 2019 7:56 pm
...I could be wrong, but I think this is equating risk with volatility....
Well, I suggest that you tell us some numeric measure of risk you prefer, and see how the LifeStrategy funds compare with each other according to your favorite measure.

My favorite measure is "maximum drawdown." So I looked once at a collection of mutual funds representing a wide variety of asset classes and compositions, and plotted maximum drawdown against standard deviation. Details here. This is what I found:

Image

I don't believe logic-chopping about the definition of risk matters much. Things that are risky in one way are apt to be risky in other ways as well.

But, as I say, if you don't like Sharpe or Sortino ratios as measures of risk-adjusted reward, tell us what measure you think is appropriate and find out how it varies across the four LifeStrategy funds.

For the LifeStrategy funds, using max. drawdown as an alternative measure of risk:

VASIX (about 20/80), -15.50%
VSMGX (about 40/60) -27.96%
VSCGX (about 60/40) -37.84%
VASGX (about 80/20) -47.55%
Last edited by nisiprius on Sat Jan 19, 2019 8:29 pm, edited 1 time in total.
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 samsdad » Sat Jan 19, 2019 8:26 pm

juliewongferra wrote:
Sat Jan 19, 2019 8:10 pm
samsdad wrote:
Sat Jan 19, 2019 1:07 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 obvious failing. Miss that guy...
livesoft is not a guy! livesoft is female!

cheers,
jwf
OMG, I can’t believe I made that mistake, lol. Didn’t (she) post a hiking pic once in some discussion about shoes or hiking gear? Coulda swore I saw some dark headed dude...

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

Post by TropikThunder » Sat Jan 19, 2019 8:36 pm

samsdad wrote:
Sat Jan 19, 2019 8:26 pm
juliewongferra wrote:
Sat Jan 19, 2019 8:10 pm
samsdad wrote:
Sat Jan 19, 2019 1:07 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 obvious failing. Miss that guy...
livesoft is not a guy! livesoft is female!

cheers,
jwf
OMG, I can’t believe I made that mistake, lol. Didn’t (she) post a hiking pic once in some discussion about shoes or hiking gear? Coulda swore I saw some dark headed dude...
You and I can't be the only ones who have made that mistake then, since I clearly remember multiple references from livesoft to a wife/female spouse, which (even in the 21st century) implies livesoft is male. :(

Not that it matters really ...

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

Post by samsdad » Sat Jan 19, 2019 8:39 pm

TropikThunder wrote:
Sat Jan 19, 2019 8:36 pm
samsdad wrote:
Sat Jan 19, 2019 8:26 pm
juliewongferra wrote:
Sat Jan 19, 2019 8:10 pm
samsdad wrote:
Sat Jan 19, 2019 1:07 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 obvious failing. Miss that guy...
livesoft is not a guy! livesoft is female!

cheers,
jwf
OMG, I can’t believe I made that mistake, lol. Didn’t (she) post a hiking pic once in some discussion about shoes or hiking gear? Coulda swore I saw some dark headed dude...
You and I can't be the only ones who have made that mistake then, since I clearly remember multiple references from livesoft to a wife/female spouse, which (even in the 21st century) implies livesoft is male. :(

Not that it matters really ...
Treading lightly right now. Sent livesoft a PM. Check back later!

james7777
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Re: What does 20% extra of portfolio allocated to equities get you?

Post by james7777 » Sat Jan 19, 2019 8:52 pm

the most dangerous thing I read here every day is these huge assumptions of "well, Im 30, have a great job & family with a good 40 years more earning time ahead of me". Im reminded of my 2 brothers who in thier late 20's back in 1985 told me they were going to both be millionaires by the time they were 40, well one dropped dead at 36 of a heart attack, the other brother became a millionaire in his 40's then lost it all in his 50's with a bad business deal, then hepititus, alcoholism which led to his losing his wife and home, he now lives on disability. NO ONE knows the future of your health or lifespan OR of the future job market or economy. you may get alzheimers at 50 or a stroke at 45 and live the rest of your life in a nursing home. when you are young , healthy, and have a good job you automatically assume that you will always have that, you may or may not..

I agree with klangfool here, and IMO the best stock/bond risk factors are 30/70 to 50/50. I believe this allocation is best for everyone whether you are 25 or 86.

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willthrill81
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Re: What does 20% extra of portfolio allocated to equities get you?

Post by willthrill81 » Sat Jan 19, 2019 9:01 pm

nisiprius wrote:
Sat Jan 19, 2019 8:24 pm
I don't believe logic-chopping about the definition of risk matters much. Things that are risky in one way are apt to be risky in other ways as well.
I'm really surprised to hear this from you nisi because it can be easily demonstrated to be false. Historically, T-bills have been the essentially lowest volatility investment option available and have had a maximum drawdown of zero. Yet their inflation risk has been significant. An investment of $10k in 1 month T-bills in January of 1972 left you with an inflation-adjusted $8,713 in June of 1980. And a $10k in January of 2009 in 1 month T-bills left you with $8,629 at the end of 2018. Is it logical for us to call such an investment "risk-free?"
“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 randomguy » Sat Jan 19, 2019 9:12 pm

james7777 wrote:
Sat Jan 19, 2019 8:52 pm

I agree with klangfool here, and IMO the best stock/bond risk factors are 30/70 to 50/50. I believe this allocation is best for everyone whether you are 25 or 86.
The math clearly shows that 70/30 is pretty much the optimal AA. The only question is if you can handle the swings or not mentally.

And before discounding 1 or 2% being minor do the math on what having 20% more money does when you hit retirement age. Compare the safety of 4% to 3.3%.

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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 9:22 pm

willthrill81 wrote:
Sat Jan 19, 2019 7:21 pm
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.
Although I am not attracted to the concept of regret minimization, I do believe that a vast majority of investors have their judgement clouded by minimization of regret. Yesterday I even posted:
livesoft wrote:
Fri Jan 18, 2019 2:39 pm
I am thinking that most people want to "Minimize Regret." That's my new replacement for the Swedroe need, ability, willingness for risk thing.
But maybe I was channelling what you had posted the day before. :)
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KlangFool
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Re: What does 20% extra of portfolio allocated to equities get you?

Post by KlangFool » Sat Jan 19, 2019 9:24 pm

willthrill81 wrote:
Sat Jan 19, 2019 8:18 pm

Perhaps. I have a self-employed friend whose business is seemingly on the rocks right now, but his investment portfolio is 100% stock. He has enough liquidity to get through a rough period, he is very 'employable', and his investment horizon is decades long. He isn't concerned at all about risk-adjusted returns.
willthrill81,

"only when the tide goes out do you discover who has been swimming naked"?
- Warren Buffett

You will know who is prepared when the next recession hits. I had been through too many of them to take anyone's word at face value.

KlangFool

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

Post by nisiprius » Sat Jan 19, 2019 9:32 pm

willthrill81 wrote:
Sat Jan 19, 2019 9:01 pm
nisiprius wrote:
Sat Jan 19, 2019 8:24 pm
I don't believe logic-chopping about the definition of risk matters much. Things that are risky in one way are apt to be risky in other ways as well.
I'm really surprised to hear this from you nisi because it can be easily demonstrated to be false. Historically, T-bills have been the essentially lowest volatility investment option available and have had a maximum drawdown of zero. Yet their inflation risk has been significant. An investment of $10k in 1 month T-bills in January of 1972 left you with an inflation-adjusted $8,713 in June of 1980. And a $10k in January of 2009 in 1 month T-bills left you with $8,629 at the end of 2018. Is it logical for us to call such an investment "risk-free?"
Good point. Valid.
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 Beensabu » Sat Jan 19, 2019 9:36 pm

livesoft wrote:Do you read that the same way?
With the Jan 18, 2019 date, the 15-year return is what to look at it, as it includes the outperformance of ex-US vs US in the middish 00s, the crash, and the outperformance of US vs ex-US in the mid to laterish 10s. Broader time periods are more likely to include all the relevant "stuff" that happened and give you more "maybe you can do something with this" historical data.

The 3-month CAGR is also of interest, because it shows the effect of a short-term (fingers crossed) dip in equities. And the 1-year CAGR because that's how long we've had the dip in ex-US equities with the US equity dip for only about 1/4 of that time.

It would be nice to see this data with the Jan 18, 2018 date, because then the 10-year return would also be something to look at vs. the 15-year return.

Honestly, all signs point to VSMGX when looking for a hands-off all-in-one fund to hopefully get you there. But that's nothing new.

Also, you kind of have to consider all factors and date ranges involved when looking at this type of data for a fund of funds or a specific portfolio allocation. Just a general "expect XX if XX difference in equity allocation" isn't really getting the whole picture, is it? It's always going to be, "It depends..."
"The only thing that makes life possible is permanent, intolerable uncertainty; not knowing what comes next."

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

Post by samsdad » Sat Jan 19, 2019 9:38 pm

Just got off the PM with livesoft, who’s permitted me to let juliewongferra and the rest of you know that:
Livesoft’s a duuude!!! :sharebeer

Thanks be the gods I didn’t screw that up!

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

Post by willthrill81 » Sat Jan 19, 2019 9:54 pm

randomguy wrote:
Sat Jan 19, 2019 9:12 pm
james7777 wrote:
Sat Jan 19, 2019 8:52 pm

I agree with klangfool here, and IMO the best stock/bond risk factors are 30/70 to 50/50. I believe this allocation is best for everyone whether you are 25 or 86.
The math clearly shows that 70/30 is pretty much the optimal AA.
Optimal in what way? No investment or AA is optimal in every way.
“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 cryptormorf » Sat Jan 19, 2019 10:34 pm

randomguy wrote:
Sat Jan 19, 2019 9:12 pm

The math clearly shows that 70/30 is pretty much the optimal AA. The only question is if you can handle the swings or not mentally.

And before discounding 1 or 2% being minor do the math on what having 20% more money does when you hit retirement age. Compare the safety of 4% to 3.3%.
What math are you referring to? (don't take this as argumentative, just genuinely interested in the source for that statement)

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

Post by AlohaJoe » Sat Jan 19, 2019 10:51 pm

james7777 wrote:
Sat Jan 19, 2019 1:21 pm
2) U.S. interest rates are currently the highest in the world
What a strange thing to claim. The US does not have the highest rates in the world -- Mexico is over 8% and it is nowhere close to the highest rate in the world.

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

Post by AlohaJoe » Sat Jan 19, 2019 10:59 pm

willthrill81 wrote:
Sat Jan 19, 2019 9:54 pm
randomguy wrote:
Sat Jan 19, 2019 9:12 pm
james7777 wrote:
Sat Jan 19, 2019 8:52 pm

I agree with klangfool here, and IMO the best stock/bond risk factors are 30/70 to 50/50. I believe this allocation is best for everyone whether you are 25 or 86.
The math clearly shows that 70/30 is pretty much the optimal AA.
Optimal in what way? No investment or AA is optimal in every way.
While I am a strong proponent for heavy equities allocations, I agree with the pushback about calling it "optimal" in any meaningful way.

One of my favorite papers on asset allocation is from Gordon Irlam (who authored two or three of the most innovative papers in recent memory and then moved on to other pursuits)....

"Asset Allocation Confidence Intervals in Retirement" shows that to be 95% sure (not even 100% sure!) all you can say is the equity allocation should be between 10% and 82%. Bogle once quipped about Arnott "I wish I were as confident about anything as he is about everything". But something similar applies to any discussion of asset allocations. None of us -- not even Bogle or any other well-known author -- should have any real confidence in the asset allocations we suggest.

(nb some will read this as "since there's no proof 82% is right, we should recommend 10-20%". And others will look at the same exact evidence and say "since there's no proof that 10-20% is right, we should recommend 80%". I guess we all see what we want to see, when new evidence comes to light.)

From the abstract of Irlam's paper:
The confidence intervals arise as a result of uncertainty in the true value of the equity premium given the limited historical data and its considerable volatility. The confidence intervals are substantial. For the scenario I study the 95% confidence interval for a 65 year old retiree with $400k in assets allocated between stocks and bonds is 10 to 82% stocks. Larger confidence intervals apply to retirees with small or large portfolio sizes. I explore the reasons for this.

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Taylor Larimore
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"misleading article?"

Post by Taylor Larimore » Sat Jan 19, 2019 11:12 pm

That is why the article I know Taylor always quotes is a bad one.
I try not to post misleading articles and I have not posted in this thread until now. What article are you referring too? Why is it a "bad one?"

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

Post by sambb » Sat Jan 19, 2019 11:22 pm

FOGU wrote:
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.
Yes, far far more valuable than worrying about the rest of the issues often discussed here (international, expense ratios, allocations, munis, tax efficient fund placement, etc.)

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

Post by sf_tech_saver » Sat Jan 19, 2019 11:41 pm

Every dollar I invest in municipals bonds I worry about the real risk of inflation adjusted returns. Even intermediate funds like VTEB have 5 year + durations for their bonds.

Every dollar I invest in VTI I worry about how terrifically long it *might* potentially take to realize a return and capture a safe withdrawal if I needed it.

As we know blending these two risks together helps reduce volatility.

But this leads me to my ideal portfolio (which I have not yet achieved)-- enough in bonds to live off the yields if I had to, and the rest in equities to reduce the inflation risk of the bonds and provide lifestyle upside.

I think this looks something like 50/50 portfolio through $4-5M in assets and 90/10 equities after that for my HCOL situation.

I'm always excited about the idea of investing to gain more steady bond income OR long term upside and inflation barricade. Since I can't decide which is better I enjoy 50/50. It allows me to not have an opinion on which is more valuable.
VTI is a modern marvel

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

Post by willthrill81 » Sat Jan 19, 2019 11:57 pm

nisiprius wrote:
Sat Jan 19, 2019 8:24 pm
dogagility wrote:
Sat Jan 19, 2019 7:56 pm
...I could be wrong, but I think this is equating risk with volatility....
Well, I suggest that you tell us some numeric measure of risk you prefer, and see how the LifeStrategy funds compare with each other according to your favorite measure.
I still believe that the most meaningful measure of risk is the likelihood that a particular investment/AA will enable you to have the money you need when you need it. But this is obviously very dependent on the individual investor, making it impossible to quantify on a generalizable level (despite it still being extremely relevant).

However, I've thought about this issue more, and I believe that another numeric measure of risk that would likely be more relevant to investors than volatility, one related to how Buffet defines risk: the historic likelihood of an investment at least matching inflation over X years (e.g. 5, 10, 20). Many would think that TIPS are a slam dunk in this regard, but that's obviously false since TIPS have had negative real yields over significant periods in their relatively short history.

With regard to stocks, this calculator indicates that the S&P 500 has historically at least matched inflation over 80% of the 5 year periods on record, 88% of the 10 year periods, 95% of the 15 year periods, and 99% of the 20 year periods.

I'm sure that you (and others) possess the ability to do a similar analysis with other asset classes. I believe that this could be very interesting and helpful.
“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 randomguy » Sun Jan 20, 2019 12:42 am

cryptormorf wrote:
Sat Jan 19, 2019 10:34 pm
randomguy wrote:
Sat Jan 19, 2019 9:12 pm

The math clearly shows that 70/30 is pretty much the optimal AA. The only question is if you can handle the swings or not mentally.

And before discounding 1 or 2% being minor do the math on what having 20% more money does when you hit retirement age. Compare the safety of 4% to 3.3%.
What math are you referring to? (don't take this as argumentative, just genuinely interested in the source for that statement)
Maximizing the money you have while also supporting the ability to withdrawal money. And yes I should add qualifiers. If you expect to be taking out 10%+ of the money in the near future, then things like 70/30 don't work as well. If you know that you aren't going to need the money for 30+ years, 100% stocks is fine. It was just pointing out the idea that 30-50% equities being the best allocation for everyone isn't remotely true. It is far too conservative for young investors. And as much as I can say that 70/30 is the best allocation if I only had to pick one, you obviously don't have to do to that. You can adjust to fit you needs. Most people do that naturally. They hold say an 80/20 retirement portfolio and when saving for a short term need like a house, they hold that extra money in CDs or cash.

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

Post by msk » Sun Jan 20, 2019 12:47 am

If long term history is any indicator, in semi round numbers:
100% US stocks: 5% real
100% US bonds: 2.5% real
Mix to taste.

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

Post by Darwin » Sun Jan 20, 2019 1:36 am

I like to think of investments as a sail boat, with stocks being the sails and bonds the keel. You can go all sail with great performance, but you're likely to flip unexpectedly. Too much keel slows you down. Both are necessary, and depending on a person's situation and proximity to the goal our choices can vary The analogy works on many levels. :happy
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Re: What does 20% extra of portfolio allocated to equities get you?

Post by alpine_boglehead » Sun Jan 20, 2019 1:43 am

james7777 wrote:
Sat Jan 19, 2019 8:52 pm
I agree with klangfool here, and IMO the best stock/bond risk factors are 30/70 to 50/50. I believe this allocation is best for everyone whether you are 25 or 86.
Whatever the equity allocation, the message that KlangFool is trying to get through here and in countless other posts is to me that you need a buffer. A buffer that lets you sleep well, supports your family when times get tough, protects the equity portion of your portfolio from drawing from it in bad times, and gives you a better negotiating position. You might call it the KlangFool-sized emergency fund (which provides for X years rather than months of expenses).

I think there's some merit to the mental buckets approach. Unless your portfolio is quite sizeable, having X years in expenses outside of what you call your investment portfolio seems a good idea. In really bad scenarios for stocks, rebalancing your life belt of bonds into equities would be problematic.

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

Post by TropikThunder » Sun Jan 20, 2019 3:00 am

samsdad wrote:
Sat Jan 19, 2019 9:38 pm
Just got off the PM with livesoft, who’s permitted me to let juliewongferra and the rest of you know that:
Livesoft’s a duuude!!! :sharebeer

Thanks be the gods I didn’t screw that up!
That’s the take-home lesson of this thread as far as I’m concerned. :P

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

Post by abc132 » Sun Jan 20, 2019 5:57 am

If I didn't miss any years, here are the worst 5 years of the SP 500 equivalent since 1928:
-43.84%
-36.55%
-35.34%
-25.90%
-25.12%

If you compare 10.3% (100/0) to 7.8% (40/60) compounded for 30 years, you would have more than twice as much money when invested in 100/0 as compared to 40/60. With a 30 year time frame, if the market drops 50% in year one of retirement (a 1% event historically), you would still be ahead with a historical 100/0 portfolio due to all of the additional growth from stocks.

If I didn't miss any years, let's look at a sequence of bad years. The worst are
1928-1932 -64.77%
2000-2002 -37.43%
2008 -36.55%
1973-1974 -36.50%

The picture gets a little muddier here. For simplicity, I will assume bonds get 0% return during the sequence of initial bad years. With -64.77% initial stock return, the 80/20 portfolio still beats the 60/40 and 40/60 returns. 30 years later, the 100/0 portfolio loses, but it still has 94.5% of the value of the 40/60 portfolio.

In every other case, the 100/0 beats the 40/60 quite handily.

Throw in that a 70/30 portfolio has beaten a 30/70 portfolio for every 30 year period since 1928, and it appears that historically, you are taking on more risk by going too bond heavy.

All the prior results were without withdrawals.

If you use an expected 30 year retirement withdrawal rate of say 3-4% in addition to a very bad initial sequence, the outcome is much worse for all the stock heavy portfolios. The break even point when preparing for the worst sequence of returns we have ever had (-64.77%) between the (100/0) and (40/60) portfolios is 8 years before those 3-4% withdrawals.

If we believe the future will look something like the past, and for those planning for a 30 year time horizon in retirement, staying stock heavy until 10 years before retirement seems to be a reasonable break point between maximizing potential gains and preparing for the worst.

The expected cost in growth over 30 years of dropping from 100/0 to
80/20 is 17% less wealth
60/40 is 34% less wealth
40/60 is 50% less wealth

If you invest continually and evenly over 30 years, not all your deposits receive the full growth. The expected cost over 30 years of dropping from 100/0 to
80/20 is 12% less wealth
60/40 is 25% less wealth
40/60 is 37% less wealth

I look at the cost/benefit analysis of stocks vs bonds by looking at their historical impact during accumulation, their historical impact in the 10 years before retirement, and their historical impact in retirement.

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

Post by dogagility » Sun Jan 20, 2019 7:18 am

abc132 wrote:
Sun Jan 20, 2019 5:57 am
If we believe the future will look something like the past, and for those planning for a 30 year time horizon in retirement, staying stock heavy until 10 years before retirement seems to be a reasonable break point between maximizing potential gains and preparing for the worst.
Agree and this largely mirrors what I did/am doing with my retirement kitty.

Others will point out that you might need to sell your retirement kitty prior to retirement for swiss-cheese worst case scenarios: stock market crash, plus losing your job, plus depleting your emergency fund, plus not finding work for an extended period (e.g. five years).

For my personal situation, I didn't (and don't) find this swiss-cheese scenario very likely... and am glad I took what many would consider excessive "risk" with my retirement AA.
"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 KlangFool » Sun Jan 20, 2019 8:08 am

dogagility wrote:
Sun Jan 20, 2019 7:18 am
abc132 wrote:
Sun Jan 20, 2019 5:57 am
If we believe the future will look something like the past, and for those planning for a 30 year time horizon in retirement, staying stock heavy until 10 years before retirement seems to be a reasonable break point between maximizing potential gains and preparing for the worst.
Agree and this largely mirrors what I did/am doing with my retirement kitty.

Others will point out that you might need to sell your retirement kitty prior to retirement for swiss-cheese worst case scenarios: stock market crash, plus losing your job, plus depleting your emergency fund, plus not finding work for an extended period (e.g. five years).

For my personal situation, I didn't (and don't) find this swiss-cheese scenario very likely... and am glad I took what many would consider excessive "risk" with my retirement AA.
1) You got lucky. Don't confused luck with good strategy.

2) What was your longest unemployment period?

KlangFool

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

Post by dogagility » Sun Jan 20, 2019 9:51 am

KlangFool wrote:
Sun Jan 20, 2019 8:08 am
dogagility wrote:
Sun Jan 20, 2019 7:18 am
abc132 wrote:
Sun Jan 20, 2019 5:57 am
If we believe the future will look something like the past, and for those planning for a 30 year time horizon in retirement, staying stock heavy until 10 years before retirement seems to be a reasonable break point between maximizing potential gains and preparing for the worst.
Agree and this largely mirrors what I did/am doing with my retirement kitty.

Others will point out that you might need to sell your retirement kitty prior to retirement for swiss-cheese worst case scenarios: stock market crash, plus losing your job, plus depleting your emergency fund, plus not finding work for an extended period (e.g. five years).

For my personal situation, I didn't (and don't) find this swiss-cheese scenario very likely... and am glad I took what many would consider excessive "risk" with my retirement AA.
1) You got lucky. Don't confused luck with good strategy.

2) What was your longest unemployment period?

KlangFool
You might call it luck; I've never been unemployed within the last 25 years. Lots of reasons for why this is true. Same thing with my circle of friends.

Of course, I know this doesn't apply to all people and you will say I'm utterly mistaken, that your life history should (and will) apply to everybody on this board.

Here's an analogy: Just because you are a sky diver and wear a parachute to work, doesn't mean it's mandatory that I wear a parachute to my indoor job.
"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 KlangFool » Sun Jan 20, 2019 10:29 am

dogagility wrote:
Sun Jan 20, 2019 9:51 am
KlangFool wrote:
Sun Jan 20, 2019 8:08 am
dogagility wrote:
Sun Jan 20, 2019 7:18 am
abc132 wrote:
Sun Jan 20, 2019 5:57 am
If we believe the future will look something like the past, and for those planning for a 30 year time horizon in retirement, staying stock heavy until 10 years before retirement seems to be a reasonable break point between maximizing potential gains and preparing for the worst.
Agree and this largely mirrors what I did/am doing with my retirement kitty.

Others will point out that you might need to sell your retirement kitty prior to retirement for swiss-cheese worst case scenarios: stock market crash, plus losing your job, plus depleting your emergency fund, plus not finding work for an extended period (e.g. five years).

For my personal situation, I didn't (and don't) find this swiss-cheese scenario very likely... and am glad I took what many would consider excessive "risk" with my retirement AA.
1) You got lucky. Don't confused luck with good strategy.

2) What was your longest unemployment period?

KlangFool
You might call it luck; I've never been unemployed within the last 25 years. Lots of reasons for why this is true. Same thing with my circle of friends.
dogagility,

There is a choice here:

A) Adopt a plan where it will only work out if there is not significant unemployment across 25 to 30 years.

B) Adopt a plan where it will work out even if there are short-term unemployment across multiple recessions.

There are many millionaires within my family. My older brother and older sister early retired at 49 years old. We survived and thrived across multiple recessions and economic crisis. We did not have continuous employment and business successes.

KlangFool

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

Post by randomguy » Sun Jan 20, 2019 11:40 am

dogagility wrote:
Sun Jan 20, 2019 9:51 am
KlangFool wrote:
Sun Jan 20, 2019 8:08 am
dogagility wrote:
Sun Jan 20, 2019 7:18 am
abc132 wrote:
Sun Jan 20, 2019 5:57 am
If we believe the future will look something like the past, and for those planning for a 30 year time horizon in retirement, staying stock heavy until 10 years before retirement seems to be a reasonable break point between maximizing potential gains and preparing for the worst.
Agree and this largely mirrors what I did/am doing with my retirement kitty.

Others will point out that you might need to sell your retirement kitty prior to retirement for swiss-cheese worst case scenarios: stock market crash, plus losing your job, plus depleting your emergency fund, plus not finding work for an extended period (e.g. five years).

For my personal situation, I didn't (and don't) find this swiss-cheese scenario very likely... and am glad I took what many would consider excessive "risk" with my retirement AA.
1) You got lucky. Don't confused luck with good strategy.

2) What was your longest unemployment period?

KlangFool
You might call it luck; I've never been unemployed within the last 25 years. Lots of reasons for why this is true. Same thing with my circle of friends.

Of course, I know this doesn't apply to all people and you will say I'm utterly mistaken, that your life history should (and will) apply to everybody on this board.

Here's an analogy: Just because you are a sky diver and wear a parachute to work, doesn't mean it's mandatory that I wear a parachute to my indoor job.
You weren't lucky. It is more that Klangfool was unlucky. He has managed to invested in a sector tha lost tons of money, had tons of jobs losses, and had friends who all managed to lose money on houses despite there only be like a 24 month window in the past 30 years where that is possible. That is some horrible luck:)

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

Post by KlangFool » Sun Jan 20, 2019 11:50 am

randomguy wrote:
Sun Jan 20, 2019 11:40 am

and had friends who all managed to lose money on houses despite there only be like a 24 month window in the past 30 years where that is possible. That is some horrible luck:)
randomguy,

<< He has managed to invested in a sector tha lost tons of money, had tons of jobs losses,>>

https://www.princeton.edu/~starr/articl ... n-9-02.htm

<<The Great Telecom Implosion

It's not just individual companies that are going bankrupt. The industry as a whole has gone from market reform to market ruin.
By Paul Starr
The American Prospect, September 8, 2002

The dimensions of the collapse in the telecommunications industry during the past two years have been staggering. Half a million people have lost their jobs. In that time, the Dow Jones communication technology index has dropped 86 percent; the wireless communications index, 89 percent. These are declines in value worthy of comparison to the great crash of 1929. Out of the $7 trillion decline in the stock market since its peak, about $2 trillion have disappeared in the capitalization of telecom companies. Twenty-three telecom companies have gone bankrupt in a wave capped off by the July 21 collapse of WorldCom, the single largest bankruptcy in American history.>>

<< had friends who all managed to lose money on houses despite there only be like a 24 month window in the past 30 years where that is possible. That is some horrible luck:)>>

The house in my neighborhood is still down from the 2004/2005 level. As far as I can tell, only folks buy their houses after 2012 make money.

KlangFool

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

Post by EfficientInvestor » Sun Jan 20, 2019 12:42 pm

A number of posts in this thread have referenced the fact that as you go more towards 100% stock, your return/risk efficiency (Sharpe or Sortino ratio) decreases. Let's assume that no one will refute that fact. Therefore, it seems that the question is whether or not it is worth taking on that inefficiency to get marginal additional return. As some have correctly pointed out, this marginal additional return can make a big difference over an extended period of time. For some, they either have time on their side or have the risk tolerance, and the trade-off is worth it. Others, even some with long time horizons, don't like the trade-off. Therefore, they are content somewhere between 60/40 - 70/30 and just know that they won't have quite as good long-term returns. Some don't even want to go beyond 30/70 because they realized that it is the most efficient return/risk and they don't want to get too far away from that point.

I have made this case on other threads, but I think it is useful to this conversation as well. If you apply leverage to a more efficient AA (e.g. 30/70), you can realize greater returns with less risk than a stock-heavy AA (70/30+). The backtest at the link below compares various blends of S&P 500 and 7-10 year treasury bonds. For the unleveraged portfolios (P1 and P2), a 60/40 blend of VFITX and VUSTX was used as an approximation of IEF, the 7-10 year treasury bond index ETF. For the 2X leveraged portfoilo (P3), VUSTX was used as an approximation of UST, a 2X 7-10 year treasury bond index ETF.

https://www.portfoliovisualizer.com/bac ... tion4_3=30

Dec 1997 - Dec 2018
P1 (30/70) - CAGR = 6.3%, Max DD = -9.3%
P2 (70/30) - CAGR = 6.8%, Max DD = -33.8%
P3 (2X 30/70) - CAgR = 7.7%, Max DD = -21.7%
100/0 - CAGR = 6.6%, Max DD = -51.0%

As some of you will point out, volatility drag does occur and needs to be accounted for. 2018 was definitely hard to stomach. However, how is accepting the occurrence of volatility drag any different than a stock-heavy investor accepting the inefficiencies associated with their AA selection? They justify it by pointing out the additional money they will have when it's all said and done. I view this the same way. You may have some years when volatility drags you down. However, in the long run, you could have better returns than a 100/0 portfolio with less max drawdown than a 70/30 portfolio.

Justification for substitutions:
VFITX/VUSTX for IEF: https://www.portfoliovisualizer.com/bac ... ion3_2=100
VUSTX for UST: https://www.portfoliovisualizer.com/bac ... ion2_2=100

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

Post by KlangFool » Sun Jan 20, 2019 12:46 pm

EfficientInvestor wrote:
Sun Jan 20, 2019 12:42 pm

I have made this case on other threads, but I think it is useful to this conversation as well. If you apply leverage to a more efficient AA (e.g. 30/70), you can realize greater returns with less risk than a stock-heavy AA (70/30+).
EfficientInvestor,

Do you actually use this strategy? How well does it work out for you?

KlangFool

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

Post by EfficientInvestor » Sun Jan 20, 2019 1:06 pm

KlangFool wrote:
Sun Jan 20, 2019 12:46 pm
EfficientInvestor wrote:
Sun Jan 20, 2019 12:42 pm

I have made this case on other threads, but I think it is useful to this conversation as well. If you apply leverage to a more efficient AA (e.g. 30/70), you can realize greater returns with less risk than a stock-heavy AA (70/30+).
EfficientInvestor,

Do you actually use this strategy? How well does it work out for you?

KlangFool
Yes, I do. I started in fall 2017, so it has not been that great for me so far. But I believe in the theory behind it and I'm sticking with it. I used 2X funds in my post to explain the theory because they have been around the longest. However, for my investments, I use 3X funds. My current allocation is similar to this:

TQQQ (3X Nasdaq) - 14%
CURE (3X Healthcare) - 13%
RETL (3X Retail) - 13% (May change this out with WANT soon, which is a relatively new Consumer Discretionary ETF)
DRN (3X REIT) - 10%
TYD (3X 7-10 year Treasury) - 40% (I'm torn between the 7-10 year and 20 year fund, TMF. TYD is more appropriate for rising interest rates, but I like the additional stock hedge that TMF would offer)
UGLD (3X gold) - 10%

A backtest since inception in Nov 2011 is below. P1 has TYD for bonds, P2 uses TMF. I also added a 3rd portfolio that is the non-leveraged version of P1. Click on the "Metrics" tab and compare the "Arithmetic Mean (Annualized)" of P1 and P3. In theory, the mean for P1 should be the average of P3 times 3 minus expense ratio (1.0) minus volatility drag. Therefore, if I don't account for the drag, I would expect the average for P1 to be 7.1*3 - 1.0 = 20.3%. The actual average has been 21.2%. Therefore, the outperformance due to the daily reset during the good years has made up for the volatility drag during years like 2018. Who knows if that trend will continue.

https://www.portfoliovisualizer.com/bac ... ion13_3=10

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

Post by willthrill81 » Sun Jan 20, 2019 1:17 pm

EfficientInvestor wrote:
Sun Jan 20, 2019 1:06 pm
KlangFool wrote:
Sun Jan 20, 2019 12:46 pm
EfficientInvestor wrote:
Sun Jan 20, 2019 12:42 pm

I have made this case on other threads, but I think it is useful to this conversation as well. If you apply leverage to a more efficient AA (e.g. 30/70), you can realize greater returns with less risk than a stock-heavy AA (70/30+).
EfficientInvestor,

Do you actually use this strategy? How well does it work out for you?

KlangFool
Yes, I do. I started in fall 2017, so it has not been that great for me so far. But I believe in the theory behind it and I'm sticking with it. I used 2X funds in my post to explain the theory because they have been around the longest. However, for my investments, I use 3X funds. My current allocation is similar to this:

TQQQ (3X Nasdaq) - 14%
CURE (3X Healthcare) - 13%
RETL (3X Retail) - 13% (May change this out with WANT soon, which is a relatively new Consumer Discretionary ETF)
DRN (3X REIT) - 10%
TYD (3X 7-10 year Treasury) - 40% (I'm torn between the 7-10 year and 20 year fund, TMF. TYD is more appropriate for rising interest rates, but I like the additional stock hedge that TMF would offer)
UGLD (3X gold) - 10%

A backtest since inception in Nov 2011 is below. P1 has TYD for bonds, P2 uses TMF. I also added a 3rd portfolio that is the non-leveraged version of P1. Click on the "Metrics" tab and compare the "Arithmetic Mean (Annualized)" of P1 and P3. In theory, the mean for P1 should be the average of P3 times 3 minus expense ratio (1.0) minus volatility drag. Therefore, if I don't account for the drag, I would expect the average for P1 to be 7.1*3 - 1.0 = 20.3%. The actual average has been 21.2%. Therefore, the outperformance due to the daily reset during the good years has made up for the volatility drag during years like 2018. Who knows if that trend will continue.

https://www.portfoliovisualizer.com/bac ... ion13_3=10
What you're doing seems to basically be a risk parity portfolio. There have been many threads about the approach, including this one. While it sounds good on paper, the actual results have been lackluster I believe.
“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 sf_tech_saver » Sun Jan 20, 2019 1:52 pm

abc132 wrote:
Sun Jan 20, 2019 5:57 am
I look at the cost/benefit analysis of stocks vs bonds by looking at their historical impact during accumulation, their historical impact in the 10 years before retirement, and their historical impact in retirement.
Think this is very well said.

Often at 40 with a reasonable nest egg accumulated I find myself torn between the younger accumulation thinking, and the income protection retirement thinkers.

Most of the objections to equity heavy portfolios seem to amount to potential need for income (job/economic security) and psychology (which I believe relates back to income demand on portfolio).

The truly ideal portfolio would seem to be a stable and increasing salary/income, aggressive savings all DCA'ed into equities. In this case salary growth + DCA equities play the role that bonds normally play in rebalancing and psychology.
VTI is a modern marvel

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

Post by EfficientInvestor » Sun Jan 20, 2019 1:53 pm

willthrill81 wrote:
Sun Jan 20, 2019 1:17 pm
What you're doing seems to basically be a risk parity portfolio. There have been many threads about the approach, including this one. While it sounds good on paper, the actual results have been lackluster I believe.
Yes, that is essentially what it is. As for the returns, what do you mean by lackluster? And over what time period? I would agree that the last 7-8 years has been a shadow of the returns of this portfolio during the bull bond run. However, it has still outperformed a typical stock portfolio since 2011/2012 while only having 40% of funds in stocks (50% if you count REITS).

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

Post by randomguy » Sun Jan 20, 2019 2:03 pm

KlangFool wrote:
Sun Jan 20, 2019 11:50 am
randomguy wrote:
Sun Jan 20, 2019 11:40 am

and had friends who all managed to lose money on houses despite there only be like a 24 month window in the past 30 years where that is possible. That is some horrible luck:)
randomguy,

<< He has managed to invested in a sector tha lost tons of money, had tons of jobs losses,>>

https://www.princeton.edu/~starr/articl ... n-9-02.htm

<<The Great Telecom Implosion

It's not just individual companies that are going bankrupt. The industry as a whole has gone from market reform to market ruin.
By Paul Starr
The American Prospect, September 8, 2002

The dimensions of the collapse in the telecommunications industry during the past two years have been staggering. Half a million people have lost their jobs. In that time, the Dow Jones communication technology index has dropped 86 percent; the wireless communications index, 89 percent. These are declines in value worthy of comparison to the great crash of 1929. Out of the $7 trillion decline in the stock market since its peak, about $2 trillion have disappeared in the capitalization of telecom companies. Twenty-three telecom companies have gone bankrupt in a wave capped off by the July 21 collapse of WorldCom, the single largest bankruptcy in American history.>>

<< had friends who all managed to lose money on houses despite there only be like a 24 month window in the past 30 years where that is possible. That is some horrible luck:)>>

The house in my neighborhood is still down from the 2004/2005 level. As far as I can tell, only folks buy their houses after 2012 make money.

KlangFool
As I said bad luck with industry. That was one of the larger implosions in US history among largish companies. The point is not to mistake that rare event for a comon one. It shouldn't be pointed out thought that a lot of those companies had stupid run ups before hand. Lucent went from something like 8 bucks to 80 bucks in like 4 years before plummeting to about zero. If you joined at the peak it sucks. If your road it up and down it isn't anywhere near as bad. And if you were a good boglehead and you were selling your ESPP and stock grants when they vested, you were selling high (and higher:)) along the way.

As far as houses, how are all the people that bought houses in 1985,1990, 1995 or even 2000 doing? Their experience matters as much as the 2004-6 (or whenever the bubble happened to explode and pop up in your area). Feel free to look at a chart and tell me that it is actually 30 months not 24 when buying a house was a bad idea.:)

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

Post by KlangFool » Sun Jan 20, 2019 2:12 pm

randomguy wrote:
Sun Jan 20, 2019 2:03 pm
KlangFool wrote:
Sun Jan 20, 2019 11:50 am
randomguy wrote:
Sun Jan 20, 2019 11:40 am

and had friends who all managed to lose money on houses despite there only be like a 24 month window in the past 30 years where that is possible. That is some horrible luck:)
randomguy,

<< He has managed to invested in a sector tha lost tons of money, had tons of jobs losses,>>

https://www.princeton.edu/~starr/articl ... n-9-02.htm

<<The Great Telecom Implosion

It's not just individual companies that are going bankrupt. The industry as a whole has gone from market reform to market ruin.
By Paul Starr
The American Prospect, September 8, 2002

The dimensions of the collapse in the telecommunications industry during the past two years have been staggering. Half a million people have lost their jobs. In that time, the Dow Jones communication technology index has dropped 86 percent; the wireless communications index, 89 percent. These are declines in value worthy of comparison to the great crash of 1929. Out of the $7 trillion decline in the stock market since its peak, about $2 trillion have disappeared in the capitalization of telecom companies. Twenty-three telecom companies have gone bankrupt in a wave capped off by the July 21 collapse of WorldCom, the single largest bankruptcy in American history.>>

<< had friends who all managed to lose money on houses despite there only be like a 24 month window in the past 30 years where that is possible. That is some horrible luck:)>>

The house in my neighborhood is still down from the 2004/2005 level. As far as I can tell, only folks buy their houses after 2012 make money.

KlangFool
As I said bad luck with industry. That was one of the larger implosions in US history among largish companies. The point is not to mistake that rare event for a comon one.
randomguy,

Then, the financial industry crashes and burn during 2008/2009.

Those who do not learn from history...

KlangFool

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

Post by sergeant » Sun Jan 20, 2019 2:21 pm

Darwin wrote:
Sun Jan 20, 2019 1:36 am
I like to think of investments as a sail boat, with stocks being the sails and bonds the keel. You can go all sail with great performance, but you're likely to flip unexpectedly. Too much keel slows you down. Both are necessary, and depending on a person's situation and proximity to the goal our choices can vary The analogy works on many levels. :happy
Would that be the HMS Beagle? :)
Lincoln 3 EOW! AA 40/60.

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

Post by abc132 » Sun Jan 20, 2019 2:33 pm

dogagility wrote:
Sun Jan 20, 2019 7:18 am
abc132 wrote:
Sun Jan 20, 2019 5:57 am
If we believe the future will look something like the past, and for those planning for a 30 year time horizon in retirement, staying stock heavy until 10 years before retirement seems to be a reasonable break point between maximizing potential gains and preparing for the worst.
Agree and this largely mirrors what I did/am doing with my retirement kitty.

Others will point out that you might need to sell your retirement kitty prior to retirement for swiss-cheese worst case scenarios: stock market crash, plus losing your job, plus depleting your emergency fund, plus not finding work for an extended period (e.g. five years).

For my personal situation, I didn't (and don't) find this swiss-cheese scenario very likely... and am glad I took what many would consider excessive "risk" with my retirement AA.
I think you can insure (disability, term life) for some of these scenarios.

If you only end up working until age 35, or in some swiss cheese scenario, the only answer that works is a huge savings rate, or working longer.

Since you can't count on working longer, those with worst case scenario fears should consider going FIRE instead of giving themselves what is historically very likely to be much worse returns.

Another way to look at AA is how many years earlier you would be expected to retire.

100/0 (around 7 years?) (note: these were not calculated)
80/20 (around 4 years?)
60/40 (around 2 years?)
40/60 (default = 0 years)

Being able to retire 7 years earlier reduces the risk of having to retire unexpectedly early. You can drop back your stock allocation 7-10 year before retirement, and historically you get the best of both worlds.

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

Post by willthrill81 » Sun Jan 20, 2019 3:06 pm

EfficientInvestor wrote:
Sun Jan 20, 2019 1:53 pm
willthrill81 wrote:
Sun Jan 20, 2019 1:17 pm
What you're doing seems to basically be a risk parity portfolio. There have been many threads about the approach, including this one. While it sounds good on paper, the actual results have been lackluster I believe.
Yes, that is essentially what it is. As for the returns, what do you mean by lackluster? And over what time period? I would agree that the last 7-8 years has been a shadow of the returns of this portfolio during the bull bond run. However, it has still outperformed a typical stock portfolio since 2011/2012 while only having 40% of funds in stocks (50% if you count REITS).
In a simple world where we have only equities and bonds, following such an approach would have resulted in a 28/72 equity/bond allocation. Of course, this would have had a significant impact upon returns. Instead of the +9.4% return achieved on a 60/40 portfolio, the risk parity portfolio returned +8.8% from 1973 to 2009.
http://news.morningstar.com/pdfs/GMOHiddenRisks.pdf

Historically, this would have improved the risk-adjusted return of the portfolio, but that alone is not a worthwhile goal IMHO. You cannot 'eat' a risk-adjusted return, only a real one.
“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 EfficientInvestor » Mon Jan 21, 2019 1:18 pm

willthrill81 wrote:
Sun Jan 20, 2019 3:06 pm
EfficientInvestor wrote:
Sun Jan 20, 2019 1:53 pm
willthrill81 wrote:
Sun Jan 20, 2019 1:17 pm
What you're doing seems to basically be a risk parity portfolio. There have been many threads about the approach, including this one. While it sounds good on paper, the actual results have been lackluster I believe.
Yes, that is essentially what it is. As for the returns, what do you mean by lackluster? And over what time period? I would agree that the last 7-8 years has been a shadow of the returns of this portfolio during the bull bond run. However, it has still outperformed a typical stock portfolio since 2011/2012 while only having 40% of funds in stocks (50% if you count REITS).
In a simple world where we have only equities and bonds, following such an approach would have resulted in a 28/72 equity/bond allocation. Of course, this would have had a significant impact upon returns. Instead of the +9.4% return achieved on a 60/40 portfolio, the risk parity portfolio returned +8.8% from 1973 to 2009.
http://news.morningstar.com/pdfs/GMOHiddenRisks.pdf

Historically, this would have improved the risk-adjusted return of the portfolio, but that alone is not a worthwhile goal IMHO. You cannot 'eat' a risk-adjusted return, only a real one.
Thanks for the article link. The quote you included was referencing an unleveraged version of a risk parity portfolio (at least one that just used stocks and bonds). The next paragraph, included below, states that if you would have leveraged up the 28/72 portfolio until volatility is equal to an unleveraged 60/40 portfolio, you would have had a better return with less risk than 60/40.
In this example, ensuring that the
risk parity portfolio and the 60/40 portfolio had the same
volatility would have resulted in a +10.6% return on the
risk parity portfolio. And so, we would have acquired a
1.2% higher return for the same risk as 60/40, with a lower
drawdown than that portfolio over the period to boot (27%
loss versus 33% for 60/40).
The below backtest attempts to do the same thing suggested in this paragraph and looks at results since the article was published in March 2010. P1 is a 60/40 portfolio. P2 is a 2X 28/72 portfolio, but I used cash to adjust the SD until it matched SD of the 60/40. The P2 CAGR was 0.45% better over the time period and the Max DD was essentially the same as the 60/40. P3 is a 3X 28/72 portfolio that I added in for the sake of comparison with a 100/0 portfolio. CAGR for the 3X portfolio over the time period would have been 4.75% better per year than the 100/0 portfolio and Max DD would have been better by 4.18%. Interestingly enough, the SD of P3 and a 100/0 portfolio were the same over the time period.

https://www.portfoliovisualizer.com/bac ... tion7_3=72

While I understand the cautions that they are trying to lay out in the article, it doesn't appear that they have played out since it was published. The last 8-9 years have continued to show that you can get better returns with less or similar risk than a 60/40 (or 100/0) by using a risk parity portfolio with leverage. This becomes more true the closer you get to 100/0.

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

Post by One Ping » Mon Jan 21, 2019 1:56 pm

sergeant wrote:
Sun Jan 20, 2019 2:21 pm
Darwin wrote:
Sun Jan 20, 2019 1:36 am
I like to think of investments as a sail boat, with stocks being the sails and bonds the keel. You can go all sail with great performance, but you're likely to flip unexpectedly. Too much keel slows you down. Both are necessary, and depending on a person's situation and proximity to the goal our choices can vary The analogy works on many levels. :happy
Would that be the HMS Beagle? :)
I saw what you did there ... :beer
"Re-verify our range to target ... one ping only."

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