In accumulation phase, should you ever need more than 10% fixed income?

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ChinchillaWhiplash
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In accumulation phase, should you ever need more than 10% fixed income?

Post by ChinchillaWhiplash »

Is there really any need to ever have more than 10% bonds/fixed income in your retirement portfolio during accumulation? If you want the most growth potential and just need something not correlated to equities to rebalance with, this seems like the best strategy. Why push risk tolerance when you know it will hurt your performance overall? 10% and let it roll. Adjust close to the time you need to preserve it (when you are ready to retire).
Actin
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Re: In accumulation phase, should you ever need more than 10% fixed income?

Post by Actin »

If you have the ability to see long periods of negative returns without panic selling or taking the money out to FOMO into something.

People here have posted graphs showing the returns highs are higher with 100% equities, but the lows are also lower, compared to a portfolio with bonds.

Can you stay the course and keep buying one a five plus year downturn?
Dandy
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Re: In accumulation phase, should you ever need more than 10% fixed income?

Post by Dandy »

My concerns would be several.

1. Retirement date seems to be more governed by the employer than the individual. It happened to me 2X both with large brand name companies. I happened to my father too. But I don't think it is genetic. :D Seriously, you can plan to retire at 60 only to get a pink slip at 50.

2. Usually, the employer generated retirement occurs when the economy (and equity market) is in decline. So, try to moderate your equity allocation based on your desired retirement age can be ruined by your employer. You can be out of work with a portfolio in significant decline and may need to start withdrawing since re employment if it occurs may take some time.

3. I never had an equity allocation above 55% but made sure to keep increasing my contributions -- getting to at least a percentage in the mid teens in early my 40's. I lost first job at 52 with two kids colleges to tend to. The next came at age 60. my luck is that I worked the first job long enough for a pension and medical insurance and the second with a small pension.

My fixed income helped me through some difficult times and to delay SS until age 70.

So my suggestion is to look to a more moderate allocation by the age of 40 or earlier.

Good Luck
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JoMoney
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Re: In accumulation phase, should you ever need more than 10% fixed income?

Post by JoMoney »

Allocation questions can be very subjective, and really need to look at the individual, and their need/ability/willingness... to take risk.
There isn't some clear answer for what everyone/anyone in particular "should" do, especially if you haven't identified the goal(s) whatever allocation is supposed to achieve for that individual.

In the past, there have been plenty of time periods where maximizing returns would have been better to be SHORT fixed income and leveraged up in stocks, real estate, personal business enterprise. There have been time periods and situations where that would have been disastrous. Different people will have different ability/willingness to deal with the consequences of losing their money or being unable to pay their bills. Even the same person in a different time period/phase of their life could be in a different position then they were earlier.
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Leif
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Re: In accumulation phase, should you ever need more than 10% fixed income?

Post by Leif »

There are, of course, edge cases we could come up with where a higher FI percentage would be prudent.

However, in general, I think 90-100% stocks in early accumulation, may be wise. Some find this difficult when fear kicks in during down markets. When you want to cook in the kitchen prepare for some heat.

Also we should draw a distinction between early and late accumulation. Perhaps 5-10 years prior to planned retirement it would be wise to reduce your risk so the portfolio can better support your withdrawals (as you mentioned).
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Re: In accumulation phase, should you ever need more than 10% fixed income?

Post by whereskyle »

ChinchillaWhiplash wrote: Sun Sep 06, 2020 8:26 am Is there really any need to ever have more than 10% bonds/fixed income in your retirement portfolio during accumulation? If you want the most growth potential and just need something not correlated to equities to rebalance with, this seems like the best strategy. Why push risk tolerance when you know it will hurt your performance overall? 10% and let it roll. Adjust close to the time you need to preserve it (when you are ready to retire).
There is no way my current investments could sustain me if I were to liquidate them. Only when my holdings could sustain me for 10+ years would I consider putting some of my $ into bonds. For now, if I lose my job, I need to find another job. Simple as that. I can't rely on the current value of my portfolio, whether that value is in stable fixed income or in volatile stocks, so there's no reason for me to protect any of it.

Another way of saying this is: the risks to me of not generating a high enough return are greater than the risks of losing my principal. So long as this is true, I need to be 100% in stocks.
"I am better off than he is – for he knows nothing and thinks that he knows. I neither know nor think that I know." - Socrates. "Nobody knows nothing." - Jack Bogle
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BeBH65
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Re: In accumulation phase, should you ever need more than 10% fixed income?

Post by BeBH65 »

ChinchillaWhiplash wrote: Sun Sep 06, 2020 8:26 am Is there really any need to ever have more than 10% bonds/fixed income in your retirement portfolio during accumulation? If you want the most growth potential and just need something not correlated to equities to rebalance with, this seems like the best strategy. Why push risk tolerance when you know it will hurt your performance overall? 10% and let it roll. Adjust close to the time you need to preserve it (when you are ready to retire).
Have a look at the posts of all the people that panicked in Feb-Merch when the stock market crashed.
Many people have learned their real risk tolerance at that time.

Remember the stock market can stay down a long time after a crash, and can even go down more subsequently.
BeBH65. (only an investment enthusiast, not a financial adviser, perform your due diligence). | Have a look at https://www.bogleheads.org/wiki/Outline_of_Non-US_domiciles
Whakamole
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Re: In accumulation phase, should you ever need more than 10% fixed income?

Post by Whakamole »

whereskyle wrote: Sun Sep 06, 2020 10:45 am There is no way my current investments could sustain me if I were to liquidate them. Only when my holdings could sustain me for 10+ years would I consider putting some of my $ into bonds. For now, if I lose my job, I need to find another job. Simple as that. I can't rely on the current value of my portfolio, whether that value is in stable fixed income or in volatile stocks, so there's no reason for me to protect any of it.

Another way of saying this is: the risks to me of not generating a high enough return are greater than the risks of losing my principal. So long as this is true, I need to be 100% in stocks.
You may not be able to find another job.
langlands
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Re: In accumulation phase, should you ever need more than 10% fixed income?

Post by langlands »

whereskyle wrote: Sun Sep 06, 2020 10:45 am
ChinchillaWhiplash wrote: Sun Sep 06, 2020 8:26 am Is there really any need to ever have more than 10% bonds/fixed income in your retirement portfolio during accumulation? If you want the most growth potential and just need something not correlated to equities to rebalance with, this seems like the best strategy. Why push risk tolerance when you know it will hurt your performance overall? 10% and let it roll. Adjust close to the time you need to preserve it (when you are ready to retire).
There is no way my current investments could sustain me if I were to liquidate them. Only when my holdings could sustain me for 10+ years would I consider putting some of my $ into bonds. For now, if I lose my job, I need to find another job. Simple as that. I can't rely on the current value of my portfolio, whether that value is in stable fixed income or in volatile stocks, so there's no reason for me to protect any of it.

Another way of saying this is: the risks to me of not generating a high enough return are greater than the risks of losing my principal. So long as this is true, I need to be 100% in stocks.
Yes, I agree and it's also a good psychological mindset to keep yourself comfortable with a 100% equity allocation. You do need to make sure you have enough to pay next month's/next year's rent though.
langlands
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Re: In accumulation phase, should you ever need more than 10% fixed income?

Post by langlands »

Whakamole wrote: Sun Sep 06, 2020 12:31 pm
whereskyle wrote: Sun Sep 06, 2020 10:45 am There is no way my current investments could sustain me if I were to liquidate them. Only when my holdings could sustain me for 10+ years would I consider putting some of my $ into bonds. For now, if I lose my job, I need to find another job. Simple as that. I can't rely on the current value of my portfolio, whether that value is in stable fixed income or in volatile stocks, so there's no reason for me to protect any of it.

Another way of saying this is: the risks to me of not generating a high enough return are greater than the risks of losing my principal. So long as this is true, I need to be 100% in stocks.
You may not be able to find another job.
The point is that in that case, you're in a tough pickle either way. If you can't find another job, you're going to need to go on unemployment, food stamps etc. The portfolio won't sustain you. I suppose if you lean far enough towards the poverty mindset, there is a case to be made to be ultra-conservative with your portfolio even while accumulating. But in that case, you must be very pessimistic about your economic prospects (thinking the great depression is around the corner and it's time to stock up on canned food).
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Re: In accumulation phase, should you ever need more than 10% fixed income?

Post by whereskyle »

Whakamole wrote: Sun Sep 06, 2020 12:31 pm
whereskyle wrote: Sun Sep 06, 2020 10:45 am There is no way my current investments could sustain me if I were to liquidate them. Only when my holdings could sustain me for 10+ years would I consider putting some of my $ into bonds. For now, if I lose my job, I need to find another job. Simple as that. I can't rely on the current value of my portfolio, whether that value is in stable fixed income or in volatile stocks, so there's no reason for me to protect any of it.

Another way of saying this is: the risks to me of not generating a high enough return are greater than the risks of losing my principal. So long as this is true, I need to be 100% in stocks.
You may not be able to find another job.
And then I'd do what exactly with my insufficient holdings? The only reason for a low net worth accumulator to hold bonds is a psychological one: if a portfolio with bonds prevents panic selling, it may be superior for such an accumulator, but it is almost certainly inferior to an all-stock portfolio that the accumulator does not panic sell. If one accepts that there is actually higher risk in not having enough at the end of one's working years as a result of holding bonds, then the rational choice is to stay in stocks until a glide path can enable the accumulator to reach the target number. Also, I don't consider panic selling a risk. If the market goes down and I go from an insufficient number to another insufficient number, why in the world would I move to cash? My mindset is: once I reach 10 years of expenses in stocks, consider adding bonds. I've got a ways to go before I reach that point.
Last edited by whereskyle on Sun Sep 06, 2020 12:56 pm, edited 1 time in total.
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Re: In accumulation phase, should you ever need more than 10% fixed income?

Post by TropikThunder »

Whakamole wrote: Sun Sep 06, 2020 12:31 pm
whereskyle wrote: Sun Sep 06, 2020 10:45 am There is no way my current investments could sustain me if I were to liquidate them. Only when my holdings could sustain me for 10+ years would I consider putting some of my $ into bonds. For now, if I lose my job, I need to find another job. Simple as that. I can't rely on the current value of my portfolio, whether that value is in stable fixed income or in volatile stocks, so there's no reason for me to protect any of it.

Another way of saying this is: the risks to me of not generating a high enough return are greater than the risks of losing my principal. So long as this is true, I need to be 100% in stocks.
You may not be able to find another job.
And 20% bonds will save him?
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Re: In accumulation phase, should you ever need more than 10% fixed income?

Post by Whakamole »

whereskyle wrote: Sun Sep 06, 2020 12:42 pm
Whakamole wrote: Sun Sep 06, 2020 12:31 pm
whereskyle wrote: Sun Sep 06, 2020 10:45 am There is no way my current investments could sustain me if I were to liquidate them. Only when my holdings could sustain me for 10+ years would I consider putting some of my $ into bonds. For now, if I lose my job, I need to find another job. Simple as that. I can't rely on the current value of my portfolio, whether that value is in stable fixed income or in volatile stocks, so there's no reason for me to protect any of it.

Another way of saying this is: the risks to me of not generating a high enough return are greater than the risks of losing my principal. So long as this is true, I need to be 100% in stocks.
You may not be able to find another job.
And then I'd do what exactly with my insufficient holdings?
Use the stable bond portion of your portfolio to help weather the storm, especially if stocks are way down?

It may depend on how far into accumulation you are, but 20% fixed income at (say) a half-million dollar portfolio would give you more breathing room.
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Re: In accumulation phase, should you ever need more than 10% fixed income?

Post by rascott »

Whakamole wrote: Sun Sep 06, 2020 12:55 pm
whereskyle wrote: Sun Sep 06, 2020 12:42 pm
Whakamole wrote: Sun Sep 06, 2020 12:31 pm
whereskyle wrote: Sun Sep 06, 2020 10:45 am There is no way my current investments could sustain me if I were to liquidate them. Only when my holdings could sustain me for 10+ years would I consider putting some of my $ into bonds. For now, if I lose my job, I need to find another job. Simple as that. I can't rely on the current value of my portfolio, whether that value is in stable fixed income or in volatile stocks, so there's no reason for me to protect any of it.

Another way of saying this is: the risks to me of not generating a high enough return are greater than the risks of losing my principal. So long as this is true, I need to be 100% in stocks.
You may not be able to find another job.
And then I'd do what exactly with my insufficient holdings?
Use the stable bond portion of your portfolio to help weather the storm, especially if stocks are way down?

It may depend on how far into accumulation you are, but 20% fixed income at (say) a half-million dollar portfolio would give you more breathing room.

Of which almost all of it is most likely to be in tax deferred vehicles.. so to access it requires paying taxes plus penalties. Most individuals aren't maxing out tax advantaged pls building substantial taxable accounts.

6 months of cash and the rest in equities is a good starting point for an accumulator. adjust upward/ downward the cash balance based upon job security.
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Re: In accumulation phase, should you ever need more than 10% fixed income?

Post by whereskyle »

Whakamole wrote: Sun Sep 06, 2020 12:55 pm
whereskyle wrote: Sun Sep 06, 2020 12:42 pm
Whakamole wrote: Sun Sep 06, 2020 12:31 pm
whereskyle wrote: Sun Sep 06, 2020 10:45 am There is no way my current investments could sustain me if I were to liquidate them. Only when my holdings could sustain me for 10+ years would I consider putting some of my $ into bonds. For now, if I lose my job, I need to find another job. Simple as that. I can't rely on the current value of my portfolio, whether that value is in stable fixed income or in volatile stocks, so there's no reason for me to protect any of it.

Another way of saying this is: the risks to me of not generating a high enough return are greater than the risks of losing my principal. So long as this is true, I need to be 100% in stocks.
You may not be able to find another job.
And then I'd do what exactly with my insufficient holdings?
Use the stable bond portion of your portfolio to help weather the storm, especially if stocks are way down?

It may depend on how far into accumulation you are, but 20% fixed income at (say) a half-million dollar portfolio would give you more breathing room.
Ideally and when the savings rate is high enough, adding bonds is a no-brainer and is an obvious choice to reduce behavioral risks. If one's income and savings rate is not high enough, however, the only reason for a low net worth accumulator to hold bonds, the psychological one, becomes irrational: if a portfolio with bonds prevents panic selling, it may seem superior for a low net worth accumulator, but it is almost certainly riskier than an all-stock portfolio even if the accumulator does not panic sell with the stock/bond portfolio because the rate of return will almost certainly be lower. Panic selling is always a risk, but if one accepts that there is actually higher risk in not having enough at the end of one's working years as a result of holding bonds, then the rational choice is to stay in stocks until (if ever) a glide path can enable the accumulator to reach the target number.

I don't consider panic selling a serious risk to me personally because of the cold hard truth of my current math. If the market goes down and I go from an insufficient number to another insufficient number, why in the world would I move to cash? My mindset is: once I reach 10 years of expenses in stocks, I will consider adding bonds. My income will, hopefully, be higher, and the added capital, above my currently scheduled contributions, will go to bonds. On my current calendar, I will reach my current all-stock target number before age 62 (assuming an 8% nominal annual return) and this does not account for the years in expenses I'll have sitting in fixed income once I earn more and can step up my contributions. Should be nice (so long as I don't panic sell!)
"I am better off than he is – for he knows nothing and thinks that he knows. I neither know nor think that I know." - Socrates. "Nobody knows nothing." - Jack Bogle
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Re: In accumulation phase, should you ever need more than 10% fixed income?

Post by rob »

I'd argue why bother with 90/10 vs 100... 10% is not changing anything. I moved from 100 to 75/25 and have been reducing over the years from 75 - I just don't agree that anything less than 25% bonds makes any real difference.
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Re: In accumulation phase, should you ever need more than 10% fixed income?

Post by Whakamole »

whereskyle wrote: Sun Sep 06, 2020 1:06 pm I don't consider panic selling a serious risk to me personally because of the cold hard truth of my current math. If the market goes down and I go from an insufficient number to another insufficient number, why in the world would I move to cash?
I'm not sure how long you have been investing, but it's difficult to say "why would I move to cash if the market goes down?" until you have lived through that. You can read a thread here that was posted in 2008 to get idea of what Bogleheads - probably the most disciplined investors - were thinking at the time: viewtopic.php?t=25126

Or this thread which was more of a retrospective: viewtopic.php?f=10&t=168261

It's very easy to say that you won't sell when it's academic, or the only market drop you've seen had a quick recovery like the hiccup we had in March.
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Re: In accumulation phase, should you ever need more than 10% fixed income?

Post by whereskyle »

Whakamole wrote: Sun Sep 06, 2020 1:18 pm
whereskyle wrote: Sun Sep 06, 2020 1:06 pm I don't consider panic selling a serious risk to me personally because of the cold hard truth of my current math. If the market goes down and I go from an insufficient number to another insufficient number, why in the world would I move to cash?
I'm not sure how long you have been investing, but it's difficult to say "why would I move to cash if the market goes down?" until you have lived through that. You can read a thread here that was posted in 2008 to get idea of what Bogleheads - probably the most disciplined investors - were thinking at the time: viewtopic.php?t=25126

Or this thread which was more of a retrospective: viewtopic.php?f=10&t=168261

It's very easy to say that you won't sell when it's academic, or the only market drop you've seen had a quick recovery like the hiccup we had in March.
If I were to earn enough such that holding a meaningful amount in bonds would not create a risk that I will never earn enough to retire, holding bonds would be an easy choice for me. For the reasons I've described, it currently is not.
"I am better off than he is – for he knows nothing and thinks that he knows. I neither know nor think that I know." - Socrates. "Nobody knows nothing." - Jack Bogle
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Re: In accumulation phase, should you ever need more than 10% fixed income?

Post by Whakamole »

whereskyle wrote: Sun Sep 06, 2020 1:20 pm
Whakamole wrote: Sun Sep 06, 2020 1:18 pm
whereskyle wrote: Sun Sep 06, 2020 1:06 pm I don't consider panic selling a serious risk to me personally because of the cold hard truth of my current math. If the market goes down and I go from an insufficient number to another insufficient number, why in the world would I move to cash?
I'm not sure how long you have been investing, but it's difficult to say "why would I move to cash if the market goes down?" until you have lived through that. You can read a thread here that was posted in 2008 to get idea of what Bogleheads - probably the most disciplined investors - were thinking at the time: viewtopic.php?t=25126

Or this thread which was more of a retrospective: viewtopic.php?f=10&t=168261

It's very easy to say that you won't sell when it's academic, or the only market drop you've seen had a quick recovery like the hiccup we had in March.
If I were to earn enough such that holding a meaningful amount in bonds would not create a risk that I will never earn enough to retire, holding bonds would be an easy choice for me. For the reasons I've described, it currently is not.
So let me ask this: it seems like you've already decided that owning bonds (at least during accumulation) is not feasible for you. What is the purpose of this thread, then?
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Re: In accumulation phase, should you ever need more than 10% fixed income?

Post by whereskyle »

Whakamole wrote: Sun Sep 06, 2020 1:36 pm
whereskyle wrote: Sun Sep 06, 2020 1:20 pm
Whakamole wrote: Sun Sep 06, 2020 1:18 pm
whereskyle wrote: Sun Sep 06, 2020 1:06 pm I don't consider panic selling a serious risk to me personally because of the cold hard truth of my current math. If the market goes down and I go from an insufficient number to another insufficient number, why in the world would I move to cash?
I'm not sure how long you have been investing, but it's difficult to say "why would I move to cash if the market goes down?" until you have lived through that. You can read a thread here that was posted in 2008 to get idea of what Bogleheads - probably the most disciplined investors - were thinking at the time: viewtopic.php?t=25126

Or this thread which was more of a retrospective: viewtopic.php?f=10&t=168261

It's very easy to say that you won't sell when it's academic, or the only market drop you've seen had a quick recovery like the hiccup we had in March.
If I were to earn enough such that holding a meaningful amount in bonds would not create a risk that I will never earn enough to retire, holding bonds would be an easy choice for me. For the reasons I've described, it currently is not.
So let me ask this: it seems like you've already decided that owning bonds (at least during accumulation) is not feasible for you. What is the purpose of this thread, then?
Not my thread
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Re: In accumulation phase, should you ever need more than 10% fixed income?

Post by texanghost »

I currently hold 30% bonds in my late 20s. Reasons:

1. I don't yet know how I'll behave in a huge downturn, as I started investing more heavily outside of tax advantaged space right after the market bounced back. If I see a large downturn and don't panic, I'll consider increasing the stock allocation to 80/20.

2. I don't have the need to take the additional risk at my current accumulation rate to meet my goals. I think I am likely to achieve at least a 6% nominal return with the current 70/30 portfolio, which is sufficient.

3. I have intermediate term goals. I might sell lower interest bonds to pay off mortgage debt when it exceeds the remaining value of the mortgage. However, I don't want to give up all liquidity along the way should something bad happen where needs exceed the value of my 9 month emergency fund. It would be "better" to draw bonds down than to sell stocks in a down market.

4. Rebalancing bonus, although I don't think this will be a huge factor.
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Re: In accumulation phase, should you ever need more than 10% fixed income?

Post by Kookaburra »

I think it’s prudent to consider the size of ones portfolio when setting a % bond floor. It’s a lot easier to watch 30% of a 100K portfolio evaporate than it is to watch 30% of a 1M portfolio evaporate. For stock heavy (>80%) investors, I believe the rule of thumb is to assume that a 50% portfolio haircut could happen at any time, so make sure you’re comfortable with the $ loss that occurs with that.
Last edited by Kookaburra on Sun Sep 06, 2020 3:09 pm, edited 1 time in total.
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Re: In accumulation phase, should you ever need more than 10% fixed income?

Post by wander »

Yes, I have more than 10% of fixed income.
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Re: In accumulation phase, should you ever need more than 10% fixed income?

Post by atdharris »

I hold 10% in fixed income at age 31, but sometimes I think that is pointless. Will that really save me in a huge downturn? TLT held up well this year, but it likely did not make that much of a difference when my portfolio was at its lowest in March.
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Re: In accumulation phase, should you ever need more than 10% fixed income?

Post by grabiner »

"Accumulation" is a long time. If you are still accumulating, but planning to retire in a few years, you should have a much higher bond allocation than 10%.

If you are at least ten years from retirement, then you don't "need" more than 10% fixed income, but that doesn't make it wrong to have more. A 100% stock portfolio in January 2020 was good for a young investor who still had a 100% stock portfolio in April, but many investors didn't stick with it. Therefore, I recommend no more than 80% stock until you know how you react to a bear market. (In my case, the bear market was 2000-2002, in which I lost a quarter of my 80%-stock portfolio. I changed to a more aggressive portfolio after the bear market, and still have a portfolio now similar to what I held in 2002.)
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Re: In accumulation phase, should you ever need more than 10% fixed income?

Post by Ferdinand2014 »

When I was younger, I had a smaller $ amount of fixed income (almost entirely cash for emergencies), but it was a larger percent of my total portfolio given its relative size. As my total portfolio has grown, my percent of fixed income has gone down. Reason being, I focus on an $X amount of safe assets instead of an allocation percent. I do not concern myself with what percent of my total portfolio is fixed income, but instead concern myself with a minimum X years of expenses that makes me feel comfortable. As my expenses have decreased the last 5 years (house paid off, student loans gone, kids college paid for, etc) and my total portfolio has gone up, the fixed income percent has gone below 10% as a consequence, not as a goal.
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Re: In accumulation phase, should you ever need more than 10% fixed income?

Post by Kaktus »

I think as Ferdinand2014. I look to the amount of Cash and bonds as a stash or bucket to take us through a stretch of unemployment or illness. I dont see any forcing argument to keep it a certain percentage. I hope Mr Bogle would be OK with that. I also think many tend to underestimate the time horizon for most of their stocks. At least for me most of my stock holdings can be visualized in a bucket labelled "start taking from this one in over 50 years of time". Inflation is the nr 1 enemy. It is easy for me I suppose to be cool since I expect a state pension to cover the bare minimum. About panicking, that can always happen. But I think much more likely to happen if I "woke up" in a couple of years to realize I am not at all on my way to a good position for old age. Then I could easily start to buy into all kinds of magic tricks to try to quickly increase wealth. I have seen that happen around me.
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Re: In accumulation phase, should you ever need more than 10% fixed income?

Post by burritoLover »

It makes no sense to me why a knowledgeable DIY investor would need to have more than 10% bonds in the accumulation phase for behavioral reasons. You know it is beyond stupid to lock in your losses during a downturn, yet you need a higher bond allocation anyway to "sleep well at night"? Makes sense for someone who doesn't care to know anything about investing, but if you are knowledgeable, I don't understand why you can't stop yourself from cashing-out in a down-turn. It's like not keeping any matches in your house because your afraid you might purposefully burn it to the ground.
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