manlymatt83 wrote: ↑Tue Sep 22, 2020 3:05 pm
Steve Reading wrote: ↑Tue Sep 22, 2020 2:58 pm
manlymatt83 wrote: ↑Tue Sep 22, 2020 2:50 pm
Day9 wrote: ↑Tue Sep 22, 2020 2:44 pm
manlymatt83 wrote: ↑Tue Sep 22, 2020 1:36 pm
Will everyone's transition from TSM/SCV (say 50% TSM and 50% SCV) to something more conservative as they near retirement be linear, or exponential?
For example, is it possible to formulate 80 - age as your SCV allocation so the number drops 1% each year until you hit 0%, or will it be better to pick a percentage (30% for example) and keep that fixed while dropping the total equity % in relation to bonds as you near retirement?
Paul Merriman has creative formulas (like 1.5x age in TSM, everything else in SCV) that essentially shrinks SCV exposure over time.
Others say stay fixed for life (70/30) and then just increase bond allocation.
Larry Swedroe says when time horizons are short is precisely when it becomes most important to diversify among factors and not just put all your eggs in the Market Beta basket.
Following his logic one would keep their strong tilts and increase their safe bond allocation. Known as the "Larry Portfolio".
Interesting. So sounds like I need to get on portfolio visualizer and somehow calculate a percentage allocation of VTI/VXUS + AVUV/AVDV/DGS that gets me through age 100, and then add in bonds over time.
What you really should do is figure out your beliefs about factors. That is the vital step that will dictate how you un-tilt your portfolio near retirement (or whether you should do that at all!).
Here's a post with some of the questions you'll want to ponder. This is the hard part. Managing your portfolio given your answers is actually the easy part:
In having listened to almost all of Paul Merriman's podcast episodes over the years, this is what I know/believe:
- Small & Value over time beat, but only in the sense of higher risk, higher reward. I do believe max drawdowns on SCV *will* remain larger than TSM over the next 50 years. Small Cap Growth doesn't interest me.
- I am not smart enough to know where that higher risk, higher reward stands when it comes to risk adjusted returns. I am willing to learn. But I also know that I only avoid buying individual stocks (other than BRK-B) because of my SCV holdings... I need to "be different" somewhere, or I change my mind over time. If for some reason I got out of AVUV/AVDV, I'd probably buy a few hundred shares of TWTR instead... just to have something to watch. But I am 37. When I am 50 or 60, I may want less risk.... will definitely add bonds by then, but may also reduce SCV exposure no matter what (whether it has been doing great, or poorly).
- Drawdowns don't bother me. I watched my portfolio drop from S&P 3300 to S&P 2200 in March and just bought more. Didn't sell, didn't lose sleep.
Like I said, figuring out your own personal beliefs is by far the hardest part. Holding a lot of SCV when young is consistent with either view but holding some SCV when retired can only be consistent with a view that you believe you will obtain higher utility than the average market participant by tilting.
Here's a very quick and dirty way to figure out how to ramp down. It's not optimal but it'll be close actually. Probably closer than the age rules of thumb above.
1) Estimate your target final retirement portfolio nest egg in future dollars (say that's $3M, in 2050 dollars).
2) Discount that value to the present. The discount rate you use should be the portfolio's own rate of return. That obviously depends on your retirement AA. Say you want a 50/50 stock/bond split, with the stocks 80/20 TSM/SCV. Call it a 4% rate of return just as a first-order approximation. So that's $920k in today's dollars.
3) You want to invest that $920K today with your retirement allocation. So you'd want $460K in stocks, out of which $92K is in SCV.
Every year, re-do the above. Take the following action based on your results:
1) If you have more in SCV but less in stocks in general than above, do nothing. This is saying that yes, you have more SCV than you'd want but that's OK because you're trying to make your portfolio riskier as a young investor (pseudo-leverage).
2) If you have less in SCV and less in stocks, do nothing as well.
3) If you have more in stocks but less in SCV as above, then you could do nothing as well. Technically you should sell stocks (but not SCV stocks) and since you're asking specifically about SCV, we can ignore this.
4) If you have more in SCV and more in stocks than above, then sell SCV and buy bonds, until you achieve level 3 right above.
What this creates is a personalized glidepath. If SCV does very well, you'll de-tilt faster. If SCV does very poorly, you'll de-tilt slower. And the above is crude of course, so I'd only sell if the SCV portion seems much higher than what you calculated in step 4. If it's reasonably close, just don't bother.
"... so high a present discounted value of wealth, it is only prudent for him to put more into common stocks compared to his present tangible wealth, borrowing if necessary" - Paul Samuelson