7 Reasons Not to Use a 100% Stock Portfolio - The White Coat Investor

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000
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Re: 7 Reasons Not to Use a 100% Stock Portfolio - The White Coat Investor

Post by 000 »

kimura king wrote: Fri Oct 23, 2020 8:38 pm Thank you 000 for basically saying bonds are risky. That was all I was trying to point out with my previous post. Bonds don't help me sleep at all. I have 20k in bonds but not buying more until I am in my 50's, in the meantime I'm all cash and total market index funds.

roth evangelist - If you don't count emergency funds as part of the portfolio, do you count bonds? I only ask since I expect 0-1% real return from bonds over the foreseeable future.
:sharebeer

I will note that I hold a small cash emergency fund... but once I had "enough" months of necessary expenses saved up, I didn't see the point continuing to add bonds. Cash is much better for actual emergencies.
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Re: 7 Reasons Not to Use a 100% Stock Portfolio - The White Coat Investor

Post by KlangFool »

000 wrote: Fri Oct 23, 2020 8:27 pm
KlangFool wrote: Fri Oct 23, 2020 7:59 pm We are not a statistic. We only get one shot in life.
And putting 30%+ of my portfolio in stuff that is very likely to return less than inflation does not make sense.
000,

I know that I cannot predict the future.


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Last edited by KlangFool on Fri Oct 23, 2020 9:06 pm, edited 1 time in total.
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Re: 7 Reasons Not to Use a 100% Stock Portfolio - The White Coat Investor

Post by dml130 »

willthrill81 wrote: Fri Oct 23, 2020 8:13 pm
dml130 wrote: Fri Oct 23, 2020 7:26 pm
willthrill81 wrote: Fri Oct 23, 2020 7:05 pm
In some situations, investors probably need 100% stocks. In others, they probably don't. But some here are claiming that nobody needs a 100% stock allocation, which is prima facie ridiculous.
It's possible I'm missing something, but I'm having a hard time imagining a situation in which somebody needs 100% in stocks vs a more standard 70-80%.
It's easy if you assume that bonds' real return going forward will be zero, which is very plausible for the next 20 years at least (especially in total since bonds are likely to lose to inflation over the next decade). If stocks have a 5% real return, that would mean that a 70/30 would have a 3.5% real return. Compounded over 30 years with just maxing out a 401k, the difference in values would be nearly $300k. That's another $1,000 every month in retirement, assuming 4% withdrawals.
But I think it's still a stretch to use this point to argue that some investors need to be 100% stocks vs bonds/cash equivalents. First of all, even though I agree that your numbers are plausible, we can't assume (as you are doing) that this will be the reality, as the future can be very hard for even the experts to predict...the returns could be much different. And even if you've forecasted the numbers to perfection, a person that needs that extra 1.5% return to just to survive may not be in a position to withstand the volatility that could come with that (job loss, etc.). So I think in just about every situation it very much comes down to a personal decision and risk tolerance, rather than any apparent necessity to be 100% stocks.
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Re: 7 Reasons Not to Use a 100% Stock Portfolio - The White Coat Investor

Post by KlangFool »

nigel_ht wrote: Fri Oct 23, 2020 8:30 pm

Over 30 years $100K at 10.1% is $1,793,162.17 vs $1,363,774.35 at 9.1%. $429K strikes me as a difference worth noting. $17K more annual income using the 4% WR.

Yeah, you aren't likely to have $100K in your portfolio at the start of your career but at the end of the day if your early career portfolio is large enough that 30% bonds gives you a cushion then your early portfolio is large enough where 1% a year delta over 30 years is significant.

nigel_ht,

<<Yeah, you aren't likely to have $100K in your portfolio at the start of your career but at the end of the day if your early career portfolio is large enough that 30% bonds gives you a cushion then your early portfolio is large enough where 1% a year delta over 30 years is significant.>>


Do the following calculation: start with nothing and add 1K per month.


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Re: 7 Reasons Not to Use a 100% Stock Portfolio - The White Coat Investor

Post by whodidntante »

absolute zero wrote: Fri Oct 23, 2020 10:42 am If your 100% stock allocation feels a bit aggressive and you start feeling nervous, go read about the people on other threads implementing leveraged portfolios. Play around in portfolio visualizer with leveraged ETF’s and study them for a little while. And then when you look back at your own holdings, you’ll say “oh thank goodness I have a nice conservative 100% stock portfolio.”

It’s all relative. :happy
That depends on the specifics of the portfolio. Risk parity portfolios tend to be built off investments that don't have huge standard deviations, and then you use leverage to increase the risk and the return. So you might prefer EAFE to EM in a risk parity portfolio, for example.
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Re: 7 Reasons Not to Use a 100% Stock Portfolio - The White Coat Investor

Post by roth evangelist »

kimura king wrote: Fri Oct 23, 2020 8:38 pm Thank you 000 for basically saying bonds are risky. That was all I was trying to point out with my previous post. Bonds don't help me sleep at all. I have 20k in bonds but not buying more until I am in my 50's, in the meantime I'm all cash and total market index funds.

roth evangelist - If you don't count emergency funds as part of the portfolio, do you count bonds? I only ask since I expect 0-1% real return from bonds over the foreseeable future.
The only bonds I own are in my Roth IRA (10%) and my HSA (10%). I count them because they are held in those accounts. But a savings account to me is either for emergencies or for a short-term savings goal, and thus not part of my invested net worth. I only have 10% bonds in my Roth because I use a robo advisor that recommended that allocation when I started investing not long ago, but I'm planning on moving it into 100% stocks at some point soon.
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Re: 7 Reasons Not to Use a 100% Stock Portfolio - The White Coat Investor

Post by willthrill81 »

dml130 wrote: Fri Oct 23, 2020 8:55 pm
willthrill81 wrote: Fri Oct 23, 2020 8:13 pm
dml130 wrote: Fri Oct 23, 2020 7:26 pm
willthrill81 wrote: Fri Oct 23, 2020 7:05 pm
In some situations, investors probably need 100% stocks. In others, they probably don't. But some here are claiming that nobody needs a 100% stock allocation, which is prima facie ridiculous.
It's possible I'm missing something, but I'm having a hard time imagining a situation in which somebody needs 100% in stocks vs a more standard 70-80%.
It's easy if you assume that bonds' real return going forward will be zero, which is very plausible for the next 20 years at least (especially in total since bonds are likely to lose to inflation over the next decade). If stocks have a 5% real return, that would mean that a 70/30 would have a 3.5% real return. Compounded over 30 years with just maxing out a 401k, the difference in values would be nearly $300k. That's another $1,000 every month in retirement, assuming 4% withdrawals.
But I think it's still a stretch to use this point to argue that some investors need to be 100% stocks vs bonds/cash equivalents. First of all, even though I agree that your numbers are plausible, we can't assume (as you are doing) that this will be the reality, as the future can be very hard for even the experts to predict...the returns could be much different. And even if you've forecasted the numbers to perfection, a person that needs that extra 1.5% return to just to survive may not be in a position to withstand the volatility that could come with that (job loss, etc.). So I think in just about every situation it very much comes down to a personal decision and risk tolerance, rather than any apparent necessity to be 100% stocks.
Part of the problem is that we don't know in advance what returns will be, so it's impossible to say what AA an investor needs. We don't know a priori that an investor needs any stock exposure at all, nor do we know that the investor needs any bond exposure at all. But we do know that the historic record very strongly indicates that stocks have led to significantly higher returns than bonds.

I entirely agree that it's a personal decision.
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Re: 7 Reasons Not to Use a 100% Stock Portfolio - The White Coat Investor

Post by JBTX »

I'm not a big fan of bonds right now with negative real yields. By the same token, overweighting stocks, which are also driven by interest rates, and are more volatile, seems like a dangerous proposition in itself.

I find it interesting that many seem to think fundamental drivers of bonds are completely independent of the drivers of stocks. It isn't a coincidence that a 40 year bull market took place during 40 years of falling interest rates.
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Re: 7 Reasons Not to Use a 100% Stock Portfolio - The White Coat Investor

Post by idiotinvestor2 »

absolute zero wrote: Fri Oct 23, 2020 10:42 am If your 100% stock allocation feels a bit aggressive and you start feeling nervous, go read about the people on other threads implementing leveraged portfolios. Play around in portfolio visualizer with leveraged ETF’s and study them for a little while. And then when you look back at your own holdings, you’ll say “oh thank goodness I have a nice conservative 100% stock portfolio.”

It’s all relative. :happy
haha so true!!!
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Re: 7 Reasons Not to Use a 100% Stock Portfolio - The White Coat Investor

Post by White Coat Investor »

flaccidsteele wrote: Fri Oct 23, 2020 12:29 pm The content would be more interesting if it was “7 reasons to use a 100% stock portfolio” than the conventional/predictable fear/volatility driven stuff
That's VERY unlikely. Spend more time on the internet. :) Headline writing (i.e. how to write clickbait) is a true art. :)

But I can try that post next, just to confuse people.
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Re: 7 Reasons Not to Use a 100% Stock Portfolio - The White Coat Investor

Post by kimura king »

I like that idea. :sharebeer
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Re: 7 Reasons Not to Use a 100% Stock Portfolio - The White Coat Investor

Post by nigel_ht »

KlangFool wrote: Fri Oct 23, 2020 8:57 pm
nigel_ht wrote: Fri Oct 23, 2020 8:30 pm

Over 30 years $100K at 10.1% is $1,793,162.17 vs $1,363,774.35 at 9.1%. $429K strikes me as a difference worth noting. $17K more annual income using the 4% WR.

Yeah, you aren't likely to have $100K in your portfolio at the start of your career but at the end of the day if your early career portfolio is large enough that 30% bonds gives you a cushion then your early portfolio is large enough where 1% a year delta over 30 years is significant.

nigel_ht,

<<Yeah, you aren't likely to have $100K in your portfolio at the start of your career but at the end of the day if your early career portfolio is large enough that 30% bonds gives you a cushion then your early portfolio is large enough where 1% a year delta over 30 years is significant.>>


Do the following calculation: start with nothing and add 1K per month.


KlangFool
Assuming you have your catastrophic event 5 years into your career during 2008 then using PV with a Jan 2004 start date and End date of Dec 2008 then 100/0 is worth $58K and 70/30 is worth $67K so your bonds are worth around $20K.

I don't think $20K will help you survive multi-year unemployment but let's say $20K is enough that you don't have to sell any stocks with 70/30. That just means 100/0 starts with $38K and 70/30 starts with $47K. 100/0 will still surpass 70/30 long before retirement.

Let's say your burn rate is $3K a month. 100/0 runs out of money October 2010. 70/30 still has $11K and runs out of money Feb 2011.

Is 70/30 better in a catastrophic event of losing your job during the GFC? Only if you can't find a job by October 2010 but can by Feb 2011. That's a mighty small window of superiority.
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Re: 7 Reasons Not to Use a 100% Stock Portfolio - The White Coat Investor

Post by EnjoyIt »

roth evangelist wrote: Fri Oct 23, 2020 8:18 pm
EnjoyIt wrote: Fri Oct 23, 2020 7:08 pm
flaccidsteele wrote: Fri Oct 23, 2020 11:11 am As a teenager I recognized that the US market always recovers (thanks Bogle and Buffett 👍)

I then recognized that I didn’t need a pre-set asset allocation or to conventionally rebalance (thanks to the same epiphany)

That simplified everything

No problem sleeping at night. Ever

It depends on the investors temperament

Some people are scared of everything - real or imagined
When one makes $100k a year and has a $100k in stocks and that gets cut in half in 2008, it is not that big of a deal.
When one has $1 million and it falls to $500k while still making the same $100k it makes a big difference. That difference becomes even bigger when that person also loses their job on top of it and is selling depressed equities to pay the mortgage and buy groceries. That is enough psychologically to take down many a stoics.

Ohh and if you say they should have an emergency fund, well then, they also are not 100% equities even if mental account for them ignores the cash.

Despite having a very secure job, I always believe in keeping a few years of my wealth in bonds. This is what will get me through the bad bear market years that last well over 6 months that we just recently experienced.

My advice to anyone who is 100% equities is to go back and read some of the old posts here from 2008. They paint a very grim picture of people who thought that they had the intestinal fortitude to stick with 100% equities and got severely burned. Darn, there have been plenty of those conversations here in March 2020.
I don't know what the consensus on the forum is about emergency funds, but I absolutely do not count it as part of my portfolio, because it's uninvested cash. It's cash that's sitting there in case of an unplanned expense or a job loss. It has nothing to do with my Roth IRA, for example, which is invested for retirement. There are many, many options I would exhaust before even touching my retirement accounts.

This is partly why I don't like the concept of thinking about all your investment as one portfolio, because my retirement accounts serve one purpose, and taxable accounts might serve another purpose. And my HSA might double as a medical emergency fund in addition to a retirement account, so naturally I would want to invest it more conservatively than my Roth IRA.
You can call it or allocate it any way you wish, but money is fungible and buckets is nothing more than mind games with yourself. Nothing wrong with playing those mind games if it serves a purpose that makes sense to you. But all your money, is your money. BTW, your cash has a negative return currently losing to inflation and is in fact a part of your portfolio even if your brain wants to choose otherwise.

BTW, I don't have an emergency fund. If I have an emergency I just sell some of my bonds. Hmmmm.
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Re: 7 Reasons Not to Use a 100% Stock Portfolio - The White Coat Investor

Post by willthrill81 »

nigel_ht wrote: Fri Oct 23, 2020 10:09 pm
KlangFool wrote: Fri Oct 23, 2020 8:57 pm
nigel_ht wrote: Fri Oct 23, 2020 8:30 pm

Over 30 years $100K at 10.1% is $1,793,162.17 vs $1,363,774.35 at 9.1%. $429K strikes me as a difference worth noting. $17K more annual income using the 4% WR.

Yeah, you aren't likely to have $100K in your portfolio at the start of your career but at the end of the day if your early career portfolio is large enough that 30% bonds gives you a cushion then your early portfolio is large enough where 1% a year delta over 30 years is significant.

nigel_ht,

<<Yeah, you aren't likely to have $100K in your portfolio at the start of your career but at the end of the day if your early career portfolio is large enough that 30% bonds gives you a cushion then your early portfolio is large enough where 1% a year delta over 30 years is significant.>>


Do the following calculation: start with nothing and add 1K per month.


KlangFool
Assuming you have your catastrophic event 5 years into your career during 2008 then using PV with a Jan 2004 start date and End date of Dec 2008 then 100/0 is worth $58K and 70/30 is worth $67K so your bonds are worth around $20K.

I don't think $20K will help you survive multi-year unemployment but let's say $20K is enough that you don't have to sell any stocks with 70/30. That just means 100/0 starts with $38K and 70/30 starts with $47K. 100/0 will still surpass 70/30 long before retirement.

Let's say your burn rate is $3K a month. 100/0 runs out of money October 2010. 70/30 still has $11K and runs out of money Feb 2011.

Is 70/30 better in a catastrophic event of losing your job during the GFC? Only if you can't find a job by October 2010 but can by Feb 2011. That's a mighty small window of superiority.
That's a very good example. The seemingly intuitive 'safety' of bonds turns out to be mostly illusory when you put real numbers to it. It's only late in one's career, when you're starting to approach retirement, when reduced volatility could really help you.

Also, it's practically impossible for most to be prepared for multiple years of zero employment income early in their careers unless they have a very high saving rate, and most on this forum would likely agree that it's unreasonable to expect everyone to save 50% or more of their income. It's simply not feasible for many.
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Re: 7 Reasons Not to Use a 100% Stock Portfolio - The White Coat Investor

Post by 000 »

KlangFool wrote: Fri Oct 23, 2020 8:51 pm
000 wrote: Fri Oct 23, 2020 8:27 pm
KlangFool wrote: Fri Oct 23, 2020 7:59 pm We are not a statistic. We only get one shot in life.
And putting 30%+ of my portfolio in stuff that is very likely to return less than inflation does not make sense.
000,

I know that I cannot predict the future.

KlangFool
If you really believe you don't have enough information to make the reasonable guess that investment grade bonds will likely return less than inflation, you should probably be in something like the Permanent Portfolio. i.e. why own more stocks than bonds? why own more bonds than gold?
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Re: 7 Reasons Not to Use a 100% Stock Portfolio - The White Coat Investor

Post by willthrill81 »

EnjoyIt wrote: Fri Oct 23, 2020 10:10 pm BTW, I don't have an emergency fund. If I have an emergency I just sell some of my bonds. Hmmmm.
So your bonds are your 'quasi-emergency fund'. :wink:

Many others have shown that the opportunity cost of a significant bond allocation has historically been rather steep in most instances. So even if you have to sell some of your stocks far off their peak, that alone doesn't mean that you have less than had you owned a big chunk of bonds all along.
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Re: 7 Reasons Not to Use a 100% Stock Portfolio - The White Coat Investor

Post by willthrill81 »

000 wrote: Fri Oct 23, 2020 10:42 pm
KlangFool wrote: Fri Oct 23, 2020 8:51 pm
000 wrote: Fri Oct 23, 2020 8:27 pm
KlangFool wrote: Fri Oct 23, 2020 7:59 pm We are not a statistic. We only get one shot in life.
And putting 30%+ of my portfolio in stuff that is very likely to return less than inflation does not make sense.
000,

I know that I cannot predict the future.

KlangFool
If you really believe you don't have enough information to make the reasonable guess that investment grade bonds will likely return less than inflation, you should probably be in something like the Permanent Portfolio. i.e. why own more stocks than bonds? why own more bonds than gold?
It's what we used to call 'talking out of both sides of your mouth'. KlangFool has often made claims about 70/30 being a superior allocation to 100/0 in various ways, but even if that were true (which it isn't), it would only be a historical artifact. Why is it acceptable to use historical information to make future projections but to completely ignore the bond market's easily observed inflation expectations and the Fed's own inflation target? The inconsistency is incredible.
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Re: 7 Reasons Not to Use a 100% Stock Portfolio - The White Coat Investor

Post by EnjoyIt »

willthrill81 wrote: Fri Oct 23, 2020 10:44 pm
EnjoyIt wrote: Fri Oct 23, 2020 10:10 pm BTW, I don't have an emergency fund. If I have an emergency I just sell some of my bonds. Hmmmm.
So your bonds are your 'quasi-emergency fund'. :wink:

Many others have shown that the opportunity cost of a significant bond allocation has historically been rather steep in most instances. So even if you have to sell some of your stocks far off their peak, that alone doesn't mean that you have less than had you owned a big chunk of bonds all along.
Understand that I have 25x investments and work part time. My portfolio currently is designed to allow me to retire at any time. I have no need for a dedicated emergency fund. If I need extra money I sell something from my portfolio.

And yes, my bonds and the rest of my portfolio is designed to sustain a certain amount of spending every year (give or take.) So yeah, my bonds are a quasi-emergency fund as is the rest of my portfolio. I can tell you this, I keep enough bonds to make sure I have 5-7.5 years of expenses in there. This is what makes me comfortable. This is also what allowed me to comfortably rebalance into stocks in March 2020.
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Re: 7 Reasons Not to Use a 100% Stock Portfolio - The White Coat Investor

Post by flaccidsteele »

JBTX wrote: Fri Oct 23, 2020 8:18 pm
flaccidsteele wrote: Fri Oct 23, 2020 3:02 pm
HomerJ wrote: Fri Oct 23, 2020 1:06 pm Yes, if you believe that nothing will ever go wrong (correctly or falsely), it's easy to sleep at night.

I'm glad you've lived a charmed life...
My charmed life has been through the exact same markets as everyone else

Those who can’t sleep well at night should spend some time to determine the root cause... it can’t be the US market because the US market always recovers. Always

Underlying cause must be something else
Until it doesn't.

How has that worked for Japan. But we are different right? Nothing bad ever happens to us.

People used to say housing prices never go down.
Going down is fine. The US stock market and US real estate market always recovers. Always. It’s never different this time.

Those statements are implicit in everything Bogle talked about

Why would I care about Japan? I don’t invest in Japan. Japan is irrelevant
The US market always recovers. It’s never different this time. Retired in my 40s. Investing is a simple game of rinse and repeat
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Re: 7 Reasons Not to Use a 100% Stock Portfolio - The White Coat Investor

Post by flaccidsteele »

nigel_ht wrote: Fri Oct 23, 2020 8:11 pm
flaccidsteele wrote: Fri Oct 23, 2020 3:02 pm
Those who can’t sleep well at night should spend some time to determine the root cause... it can’t be the US market because the US market always recovers. Always
That's kind of the crux right? If you believe the US market always recovers then you can go 100/0 if you have a long enough time horizon.

And most folks aren't 100/0 anyway because that usually doesn't count their EF. If I have a $450K portfolio and $50K EF I'm 90/10.
+1 agree
The US market always recovers. It’s never different this time. Retired in my 40s. Investing is a simple game of rinse and repeat
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Re: 7 Reasons Not to Use a 100% Stock Portfolio - The White Coat Investor

Post by flaccidsteele »

White Coat Investor wrote: Fri Oct 23, 2020 9:31 pm
flaccidsteele wrote: Fri Oct 23, 2020 12:29 pm The content would be more interesting if it was “7 reasons to use a 100% stock portfolio” than the conventional/predictable fear/volatility driven stuff
That's VERY unlikely. Spend more time on the internet. :) Headline writing (i.e. how to write clickbait) is a true art. :)

But I can try that post next, just to confuse people.
+1 you are correct

I should’ve said that it would be more interesting to me

But then you wouldn’t be able to monetize it as effectively
The US market always recovers. It’s never different this time. Retired in my 40s. Investing is a simple game of rinse and repeat
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Re: 7 Reasons Not to Use a 100% Stock Portfolio - The White Coat Investor

Post by otinkyad »

EnjoyIt wrote: Fri Oct 23, 2020 7:08 pm When one makes $100k a year and has a $100k in stocks and that gets cut in half in 2008, it is not that big of a deal.
When one has $1 million and it falls to $500k while still making the same $100k it makes a big difference.
The blog post seemed silly, but this point makes sense to me. It was actually in my IPS at $1 million or contributions significantly below 10%, and it triggered the start of my glide slope from 100% stocks to a planned 60/40 at 59-1/2.

In 2008, I had 250k fall to $160k, and it would have been worse if not for contributions. As you said, that wasn’t a big deal.
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Re: 7 Reasons Not to Use a 100% Stock Portfolio - The White Coat Investor

Post by nigel_ht »

flaccidsteele wrote: Fri Oct 23, 2020 11:28 pm
JBTX wrote: Fri Oct 23, 2020 8:18 pm
flaccidsteele wrote: Fri Oct 23, 2020 3:02 pm
HomerJ wrote: Fri Oct 23, 2020 1:06 pm Yes, if you believe that nothing will ever go wrong (correctly or falsely), it's easy to sleep at night.

I'm glad you've lived a charmed life...
My charmed life has been through the exact same markets as everyone else

Those who can’t sleep well at night should spend some time to determine the root cause... it can’t be the US market because the US market always recovers. Always

Underlying cause must be something else
Until it doesn't.

How has that worked for Japan. But we are different right? Nothing bad ever happens to us.

People used to say housing prices never go down.
Going down is fine. The US stock market and US real estate market always recovers. Always. It’s never different this time.

Those statements are implicit in everything Bogle talked about

Why would I care about Japan? I don’t invest in Japan. Japan is irrelevant
Heh, I just looked at some properties where the owners were still underwater from 2007...most US markets have recovered but some types of real estate in some markets haven't.
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Re: 7 Reasons Not to Use a 100% Stock Portfolio - The White Coat Investor

Post by roth evangelist »

EnjoyIt wrote: Fri Oct 23, 2020 10:10 pm
roth evangelist wrote: Fri Oct 23, 2020 8:18 pm
EnjoyIt wrote: Fri Oct 23, 2020 7:08 pm
flaccidsteele wrote: Fri Oct 23, 2020 11:11 am As a teenager I recognized that the US market always recovers (thanks Bogle and Buffett 👍)

I then recognized that I didn’t need a pre-set asset allocation or to conventionally rebalance (thanks to the same epiphany)

That simplified everything

No problem sleeping at night. Ever

It depends on the investors temperament

Some people are scared of everything - real or imagined
When one makes $100k a year and has a $100k in stocks and that gets cut in half in 2008, it is not that big of a deal.
When one has $1 million and it falls to $500k while still making the same $100k it makes a big difference. That difference becomes even bigger when that person also loses their job on top of it and is selling depressed equities to pay the mortgage and buy groceries. That is enough psychologically to take down many a stoics.

Ohh and if you say they should have an emergency fund, well then, they also are not 100% equities even if mental account for them ignores the cash.

Despite having a very secure job, I always believe in keeping a few years of my wealth in bonds. This is what will get me through the bad bear market years that last well over 6 months that we just recently experienced.

My advice to anyone who is 100% equities is to go back and read some of the old posts here from 2008. They paint a very grim picture of people who thought that they had the intestinal fortitude to stick with 100% equities and got severely burned. Darn, there have been plenty of those conversations here in March 2020.
I don't know what the consensus on the forum is about emergency funds, but I absolutely do not count it as part of my portfolio, because it's uninvested cash. It's cash that's sitting there in case of an unplanned expense or a job loss. It has nothing to do with my Roth IRA, for example, which is invested for retirement. There are many, many options I would exhaust before even touching my retirement accounts.

This is partly why I don't like the concept of thinking about all your investment as one portfolio, because my retirement accounts serve one purpose, and taxable accounts might serve another purpose. And my HSA might double as a medical emergency fund in addition to a retirement account, so naturally I would want to invest it more conservatively than my Roth IRA.
You can call it or allocate it any way you wish, but money is fungible and buckets is nothing more than mind games with yourself. Nothing wrong with playing those mind games if it serves a purpose that makes sense to you. But all your money, is your money. BTW, your cash has a negative return currently losing to inflation and is in fact a part of your portfolio even if your brain wants to choose otherwise.

BTW, I don't have an emergency fund. If I have an emergency I just sell some of my bonds. Hmmmm.
If I withdraw from the growth in my Roth, I have to pay taxes and penalties on that money. I don't have to pay taxes or penalties on emergency fund withdrawals. It's not just some mental accounting trick. There's something real going on with the differences between those accounts.

I understand that I'm getting a negative return on my cash, and I accept that risk because by having 6 months of expenses saved up, I reduce the risk that I have to raid my retirement accounts and fork over taxes and penalties. And raiding retirement accounts early on in your investing life dramatically reduces the size of your portfolio when you're ready to retire.

Case in point: If I take out $2,000 from my emergency fund, I'm withdrawing money that would have a negative rate of return over, say, 30 years. But if I take out $2,000 from my Roth IRA, I'm taking out money that would have doubled at least three times over 30 years.
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Re: 7 Reasons Not to Use a 100% Stock Portfolio - The White Coat Investor

Post by White Coat Investor »

flaccidsteele wrote: Fri Oct 23, 2020 11:30 pm
White Coat Investor wrote: Fri Oct 23, 2020 9:31 pm
flaccidsteele wrote: Fri Oct 23, 2020 12:29 pm The content would be more interesting if it was “7 reasons to use a 100% stock portfolio” than the conventional/predictable fear/volatility driven stuff
That's VERY unlikely. Spend more time on the internet. :) Headline writing (i.e. how to write clickbait) is a true art. :)

But I can try that post next, just to confuse people.
+1 you are correct

I should’ve said that it would be more interesting to me

But then you wouldn’t be able to monetize it as effectively
Nor help as many people with it. Nor create as many jobs with it. Nor support as many charities with it. :)
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course
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Re: 7 Reasons Not to Use a 100% Stock Portfolio - The White Coat Investor

Post by EnjoyIt »

roth evangelist wrote: Sat Oct 24, 2020 12:23 am
EnjoyIt wrote: Fri Oct 23, 2020 10:10 pm
roth evangelist wrote: Fri Oct 23, 2020 8:18 pm
EnjoyIt wrote: Fri Oct 23, 2020 7:08 pm
flaccidsteele wrote: Fri Oct 23, 2020 11:11 am As a teenager I recognized that the US market always recovers (thanks Bogle and Buffett 👍)

I then recognized that I didn’t need a pre-set asset allocation or to conventionally rebalance (thanks to the same epiphany)

That simplified everything

No problem sleeping at night. Ever

It depends on the investors temperament

Some people are scared of everything - real or imagined
When one makes $100k a year and has a $100k in stocks and that gets cut in half in 2008, it is not that big of a deal.
When one has $1 million and it falls to $500k while still making the same $100k it makes a big difference. That difference becomes even bigger when that person also loses their job on top of it and is selling depressed equities to pay the mortgage and buy groceries. That is enough psychologically to take down many a stoics.

Ohh and if you say they should have an emergency fund, well then, they also are not 100% equities even if mental account for them ignores the cash.

Despite having a very secure job, I always believe in keeping a few years of my wealth in bonds. This is what will get me through the bad bear market years that last well over 6 months that we just recently experienced.

My advice to anyone who is 100% equities is to go back and read some of the old posts here from 2008. They paint a very grim picture of people who thought that they had the intestinal fortitude to stick with 100% equities and got severely burned. Darn, there have been plenty of those conversations here in March 2020.
I don't know what the consensus on the forum is about emergency funds, but I absolutely do not count it as part of my portfolio, because it's uninvested cash. It's cash that's sitting there in case of an unplanned expense or a job loss. It has nothing to do with my Roth IRA, for example, which is invested for retirement. There are many, many options I would exhaust before even touching my retirement accounts.

This is partly why I don't like the concept of thinking about all your investment as one portfolio, because my retirement accounts serve one purpose, and taxable accounts might serve another purpose. And my HSA might double as a medical emergency fund in addition to a retirement account, so naturally I would want to invest it more conservatively than my Roth IRA.
You can call it or allocate it any way you wish, but money is fungible and buckets is nothing more than mind games with yourself. Nothing wrong with playing those mind games if it serves a purpose that makes sense to you. But all your money, is your money. BTW, your cash has a negative return currently losing to inflation and is in fact a part of your portfolio even if your brain wants to choose otherwise.

BTW, I don't have an emergency fund. If I have an emergency I just sell some of my bonds. Hmmmm.
If I withdraw from the growth in my Roth, I have to pay taxes and penalties on that money. I don't have to pay taxes or penalties on emergency fund withdrawals. It's not just some mental accounting trick. There's something real going on with the differences between those accounts.

I understand that I'm getting a negative return on my cash, and I accept that risk because by having 6 months of expenses saved up, I reduce the risk that I have to raid my retirement accounts and fork over taxes and penalties. And raiding retirement accounts early on in your investing life dramatically reduces the size of your portfolio when you're ready to retire.

Case in point: If I take out $2,000 from my emergency fund, I'm withdrawing money that would have a negative rate of return over, say, 30 years. But if I take out $2,000 from my Roth IRA, I'm taking out money that would have doubled at least three times over 30 years.
I’m not saying you should not keep an emergency fund. I think it’s a great idea to hedge some serious risks out there and it is worth having cash on hand even if it decreases in value due to inflation. It is your insurance policy. This in affect makes you not 100% equities. This doesn’t even include the 10% bonds you have sitting in your Roth. This is exactly also the point why someone might have bonds. It is their insurance policy.

Next, you have cash as an emergency fund sitting in a taxable account collecting barely any interest and losing to inflation. You may call it a savings account or checking account but it is your cash that you chose to invest very conservatively as cash as your insurance policy. At any time you can buy stocks, bonds, CDs with that cash.

Also, you can sell the 10% bonds in your Roth and buy equities there while at the same time selling some equities in your 401k and buying an equivalent amount in bonds. Since no cash is withdrawn, no taxes or penalties are being paid. Since money is fungible and all of it is yours, your AA has not changed, but you placed a higher expected returning asset class into your Roth which most around here would argue is a good thing.
A time to EVALUATE your jitters: | https://www.bogleheads.org/forum/viewtopic.php?f=10&t=79939&start=400#p5275418
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Re: 7 Reasons Not to Use a 100% Stock Portfolio - The White Coat Investor

Post by flaccidsteele »

White Coat Investor wrote: Sat Oct 24, 2020 1:04 am
flaccidsteele wrote: Fri Oct 23, 2020 11:30 pm
White Coat Investor wrote: Fri Oct 23, 2020 9:31 pm
flaccidsteele wrote: Fri Oct 23, 2020 12:29 pm The content would be more interesting if it was “7 reasons to use a 100% stock portfolio” than the conventional/predictable fear/volatility driven stuff
That's VERY unlikely. Spend more time on the internet. :) Headline writing (i.e. how to write clickbait) is a true art. :)

But I can try that post next, just to confuse people.
+1 you are correct

I should’ve said that it would be more interesting to me

But then you wouldn’t be able to monetize it as effectively
Nor help as many people with it. Nor create as many jobs with it. Nor support as many charities with it. :)
+1 all that

I think I’m going to try and monetize my 60k social media followers. I’ve slept on this internet thing for too long
The US market always recovers. It’s never different this time. Retired in my 40s. Investing is a simple game of rinse and repeat
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Re: 7 Reasons Not to Use a 100% Stock Portfolio - The White Coat Investor

Post by flaccidsteele »

nigel_ht wrote: Fri Oct 23, 2020 11:45 pm
flaccidsteele wrote: Fri Oct 23, 2020 11:28 pm
JBTX wrote: Fri Oct 23, 2020 8:18 pm
flaccidsteele wrote: Fri Oct 23, 2020 3:02 pm
HomerJ wrote: Fri Oct 23, 2020 1:06 pm Yes, if you believe that nothing will ever go wrong (correctly or falsely), it's easy to sleep at night.

I'm glad you've lived a charmed life...
My charmed life has been through the exact same markets as everyone else

Those who can’t sleep well at night should spend some time to determine the root cause... it can’t be the US market because the US market always recovers. Always

Underlying cause must be something else
Until it doesn't.

How has that worked for Japan. But we are different right? Nothing bad ever happens to us.

People used to say housing prices never go down.
Going down is fine. The US stock market and US real estate market always recovers. Always. It’s never different this time.

Those statements are implicit in everything Bogle talked about

Why would I care about Japan? I don’t invest in Japan. Japan is irrelevant
Heh, I just looked at some properties where the owners were still underwater from 2007...most US markets have recovered but some types of real estate in some markets haven't.
I’m interested. Can you link some pls?
The US market always recovers. It’s never different this time. Retired in my 40s. Investing is a simple game of rinse and repeat
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Re: 7 Reasons Not to Use a 100% Stock Portfolio - The White Coat Investor

Post by nigel_ht »

flaccidsteele wrote: Sat Oct 24, 2020 5:11 am
nigel_ht wrote: Fri Oct 23, 2020 11:45 pm
flaccidsteele wrote: Fri Oct 23, 2020 11:28 pm
JBTX wrote: Fri Oct 23, 2020 8:18 pm
flaccidsteele wrote: Fri Oct 23, 2020 3:02 pm

My charmed life has been through the exact same markets as everyone else

Those who can’t sleep well at night should spend some time to determine the root cause... it can’t be the US market because the US market always recovers. Always

Underlying cause must be something else
Until it doesn't.

How has that worked for Japan. But we are different right? Nothing bad ever happens to us.

People used to say housing prices never go down.
Going down is fine. The US stock market and US real estate market always recovers. Always. It’s never different this time.

Those statements are implicit in everything Bogle talked about

Why would I care about Japan? I don’t invest in Japan. Japan is irrelevant
Heh, I just looked at some properties where the owners were still underwater from 2007...most US markets have recovered but some types of real estate in some markets haven't.
I’m interested. Can you link some pls?
Shenandoah VA. One on a golf course, purchased at peak and sold for a loss. Another was nice lot with a great view. A couple others. I didn’t keep the Zillow links...but vacation properties that got sold in the RE boom never recovered out here even with the recent covid sales boom.
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Re: 7 Reasons Not to Use a 100% Stock Portfolio - The White Coat Investor

Post by flaccidsteele »

nigel_ht wrote: Sat Oct 24, 2020 7:18 am
flaccidsteele wrote: Sat Oct 24, 2020 5:11 am
nigel_ht wrote: Fri Oct 23, 2020 11:45 pm
flaccidsteele wrote: Fri Oct 23, 2020 11:28 pm
JBTX wrote: Fri Oct 23, 2020 8:18 pm

Until it doesn't.

How has that worked for Japan. But we are different right? Nothing bad ever happens to us.

People used to say housing prices never go down.
Going down is fine. The US stock market and US real estate market always recovers. Always. It’s never different this time.

Those statements are implicit in everything Bogle talked about

Why would I care about Japan? I don’t invest in Japan. Japan is irrelevant
Heh, I just looked at some properties where the owners were still underwater from 2007...most US markets have recovered but some types of real estate in some markets haven't.
I’m interested. Can you link some pls?
Shenandoah VA. One on a golf course, purchased at peak and sold for a loss. Another was nice lot with a great view. A couple others. I didn’t keep the Zillow links...but vacation properties that got sold in the RE boom never recovered out here even with the recent covid sales boom.
Now that you mention it, I think the detached homes and condos that I bought sub-$50k haven’t yet reached their peak 2006 prices, but they will soon enough

The US market always recovers
The US market always recovers. It’s never different this time. Retired in my 40s. Investing is a simple game of rinse and repeat
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Re: 7 Reasons Not to Use a 100% Stock Portfolio - The White Coat Investor

Post by nigel_ht »

flaccidsteele wrote: Sat Oct 24, 2020 8:10 am
nigel_ht wrote: Sat Oct 24, 2020 7:18 am
flaccidsteele wrote: Sat Oct 24, 2020 5:11 am
nigel_ht wrote: Fri Oct 23, 2020 11:45 pm
flaccidsteele wrote: Fri Oct 23, 2020 11:28 pm

Going down is fine. The US stock market and US real estate market always recovers. Always. It’s never different this time.

Those statements are implicit in everything Bogle talked about

Why would I care about Japan? I don’t invest in Japan. Japan is irrelevant
Heh, I just looked at some properties where the owners were still underwater from 2007...most US markets have recovered but some types of real estate in some markets haven't.
I’m interested. Can you link some pls?
Shenandoah VA. One on a golf course, purchased at peak and sold for a loss. Another was nice lot with a great view. A couple others. I didn’t keep the Zillow links...but vacation properties that got sold in the RE boom never recovered out here even with the recent covid sales boom.
Now that you mention it, I think the detached homes and condos that I bought sub-$50k haven’t yet reached their peak 2006 prices, but they will soon enough

The US market always recovers
Heh...recovering 14 years later isn’t exactly a win. :)

Id much rather be you than be the guy that bought at 2006 prices. :)
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Re: 7 Reasons Not to Use a 100% Stock Portfolio - The White Coat Investor

Post by KlangFool »

Folks,


My recommendation is not to take an extreme position and try to optimize. If you do, you are assuming that you can predict your future.

A) Have an emergency fund in CASH of appropriate size depending on your comfort level

i) 3 to 6 months

ii) 6 to 12 months.

iii) 12 to 24 months.


B) Keep an AA between 70/30 to 30/70.

i) Historically, this range gives you the best risk versus reward

ii) We cannot predict our future. We do not know whether we might need to withdraw from our portfolio.

iii) In a RECESSION, unemployment, financial emergency, stock market crash, and housing market crash all can happen at the same time.


My young niece got married. They bought a house. Then, she was divorced. She rented out the house and rented an apartment for herself. The house was flooded in a hurricane. That location was never flooded over the past one hundred years. The house suffered 50K worth of damage. The house had no flood insurance and does not qualify for federal assistance because she rented out the house. Please note that this was in Houston. It is not an isolated incident.

In this case, we, the uncle and auntie, pooled 50K and give that money to her to fix the house. But, for someone else, they probably have to withdraw from their portfolio.


100% stock may have a higher expected return if you have no withdrawal over the long run. But, we cannot predict our future and life happened. It is not possible to satisfy the no withdrawal requirement. Hence, a balanced AA of 70/30 to 30/70 is a more reasonable approach.


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Re: 7 Reasons Not to Use a 100% Stock Portfolio - The White Coat Investor

Post by White Coat Investor »

flaccidsteele wrote: Sat Oct 24, 2020 5:10 am
White Coat Investor wrote: Sat Oct 24, 2020 1:04 am
flaccidsteele wrote: Fri Oct 23, 2020 11:30 pm
White Coat Investor wrote: Fri Oct 23, 2020 9:31 pm
flaccidsteele wrote: Fri Oct 23, 2020 12:29 pm The content would be more interesting if it was “7 reasons to use a 100% stock portfolio” than the conventional/predictable fear/volatility driven stuff
That's VERY unlikely. Spend more time on the internet. :) Headline writing (i.e. how to write clickbait) is a true art. :)

But I can try that post next, just to confuse people.
+1 you are correct

I should’ve said that it would be more interesting to me

But then you wouldn’t be able to monetize it as effectively
Nor help as many people with it. Nor create as many jobs with it. Nor support as many charities with it. :)
+1 all that

I think I’m going to try and monetize my 60k social media followers. I’ve slept on this internet thing for too long
I hope it works out for you. I know someone with nothing but a Facebook Group of about that many with a 7 figure income from it.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course
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Re: 7 Reasons Not to Use a 100% Stock Portfolio - The White Coat Investor

Post by YRT70 »

White Coat Investor wrote: Sat Oct 24, 2020 8:59 am
flaccidsteele wrote: Sat Oct 24, 2020 5:10 am
White Coat Investor wrote: Sat Oct 24, 2020 1:04 am
flaccidsteele wrote: Fri Oct 23, 2020 11:30 pm
White Coat Investor wrote: Fri Oct 23, 2020 9:31 pm

That's VERY unlikely. Spend more time on the internet. :) Headline writing (i.e. how to write clickbait) is a true art. :)

But I can try that post next, just to confuse people.
+1 you are correct

I should’ve said that it would be more interesting to me

But then you wouldn’t be able to monetize it as effectively
Nor help as many people with it. Nor create as many jobs with it. Nor support as many charities with it. :)
+1 all that

I think I’m going to try and monetize my 60k social media followers. I’ve slept on this internet thing for too long
I hope it works out for you. I know someone with nothing but a Facebook Group of about that many with a 7 figure income from it.
Who's that?
BigMoneyNoWhammies
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Re: 7 Reasons Not to Use a 100% Stock Portfolio - The White Coat Investor

Post by BigMoneyNoWhammies »

roth evangelist wrote: Fri Oct 23, 2020 8:18 pm
EnjoyIt wrote: Fri Oct 23, 2020 7:08 pm
flaccidsteele wrote: Fri Oct 23, 2020 11:11 am As a teenager I recognized that the US market always recovers (thanks Bogle and Buffett 👍)

I then recognized that I didn’t need a pre-set asset allocation or to conventionally rebalance (thanks to the same epiphany)

That simplified everything

No problem sleeping at night. Ever

It depends on the investors temperament

Some people are scared of everything - real or imagined
When one makes $100k a year and has a $100k in stocks and that gets cut in half in 2008, it is not that big of a deal.
When one has $1 million and it falls to $500k while still making the same $100k it makes a big difference. That difference becomes even bigger when that person also loses their job on top of it and is selling depressed equities to pay the mortgage and buy groceries. That is enough psychologically to take down many a stoics.

Ohh and if you say they should have an emergency fund, well then, they also are not 100% equities even if mental account for them ignores the cash.

Despite having a very secure job, I always believe in keeping a few years of my wealth in bonds. This is what will get me through the bad bear market years that last well over 6 months that we just recently experienced.

My advice to anyone who is 100% equities is to go back and read some of the old posts here from 2008. They paint a very grim picture of people who thought that they had the intestinal fortitude to stick with 100% equities and got severely burned. Darn, there have been plenty of those conversations here in March 2020.
I don't know what the consensus on the forum is about emergency funds, but I absolutely do not count it as part of my portfolio, because it's uninvested cash. It's cash that's sitting there in case of an unplanned expense or a job loss. It has nothing to do with my Roth IRA, for example, which is invested for retirement. There are many, many options I would exhaust before even touching my retirement accounts.

This is partly why I don't like the concept of thinking about all your investment as one portfolio, because my retirement accounts serve one purpose, and taxable accounts might serve another purpose. And my HSA might double as a medical emergency fund in addition to a retirement account, so naturally I would want to invest it more conservatively than my Roth IRA.
I find this way of thinking valid to an extent and I personally don't take into account my EF when discussing my sum investment portfolio because as you said, it will sit there untouched for an actual emergency. I don't put my EF in short term bonds or CDs as some mentioned because if an actual emergency arises, that money may not be available in time and defeats the purpose of having it. But everything else is considered part of my portfolio regardless of use.

Setting aside your EF, If you're doing your asset allocation based on the totals across all your various accounts ex-EF, how can you rationally not consider them as part of one pot of $ regardless of their use? By default if your AA takes into consideration multiple accounts, what you're investing in one account impacts the others.
Last edited by BigMoneyNoWhammies on Sat Oct 24, 2020 10:32 am, edited 1 time in total.
Dennisl
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Re: 7 Reasons Not to Use a 100% Stock Portfolio - The White Coat Investor

Post by Dennisl »

roth evangelist wrote: Fri Oct 23, 2020 9:37 am IMO the only good reason to not go 100% in stocks is it's easier to stay the course with some bonds. But even then, if you're younger than say, 40, and you have to add bonds just to keep from selling, I think it's unfortunate that behavioral issues are hindering your portfolio growth.
I think that’s the reason target date funds all start 90/10, although it doesn’t really help the 20 something who is just starting to save.
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Re: 7 Reasons Not to Use a 100% Stock Portfolio - The White Coat Investor

Post by nigel_ht »

KlangFool wrote: Sat Oct 24, 2020 8:49 am B) Keep an AA between 70/30 to 30/70.

i) Historically, this range gives you the best risk versus reward

ii) We cannot predict our future. We do not know whether we might need to withdraw from our portfolio.

iii) In a RECESSION, unemployment, financial emergency, stock market crash, and housing market crash all can happen at the same time.

My young niece got married. They bought a house. Then, she was divorced. She rented out the house and rented an apartment for herself. The house was flooded in a hurricane. That location was never flooded over the past one hundred years. The house suffered 50K worth of damage. The house had no flood insurance and does not qualify for federal assistance because she rented out the house. Please note that this was in Houston. It is not an isolated incident.
You asked for math and then ignored it. The difference in security of 70/30 vs 100/0 for early career was minimal for the 2008 crash...both could survive a year and a half of no employment. 70/30 could last a quarter more.

In the case of your niece the scenario would be her house flooded during the GFC...and by the time she retired 100/0 would handily beat 70/30 even though with 100/0 she only has $8K left in her portfolio but had $17K with 70/30 after withdrawing $50K from her portfolio.

$50K is a tough loss but she’s young and even without the family network it would be fine.

If the flood happens before the crash then 100/0 wins even more in both short and long term.

If you want to be 70/30 great. That’s what I’d do to have some dry powder during a melt down but not to have some super redundant conservative strategy to safe guard against 4 simultaneous financial disasters.

In many ways 100/0 reduces overall lifetime risk because you reach FI faster. If you reach FI 10% quicker that’s multiple years of zeroing out unemployment, financial emergency, stock market and real estate crash risks.

But whatever...stop asking for “da maths” and then blithely ignoring it because it shows that your strategy isn’t based on anything but personal preferences on which trade offs to make and not some fundamental fact of finance.
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Re: 7 Reasons Not to Use a 100% Stock Portfolio - The White Coat Investor

Post by KlangFool »

nigel_ht wrote: Sat Oct 24, 2020 10:15 am

You asked for math and then ignored it. The difference in security of 70/30 vs 100/0 for early career was minimal for the 2008 crash...both could survive a year and a half of no employment. 70/30 could last a quarter more.

In the case of your niece the scenario would be her house flooded during the GFC...and by the time she retired 100/0 would handily beat 70/30 even though with 100/0 she only has $8K left in her portfolio but had $17K with 70/30 after withdrawing $50K from her portfolio.

$50K is a tough loss but she’s young and even without the family network it would be fine.

If the flood happens before the crash then 100/0 wins even more in both short and long term.

If you want to be 70/30 great. That’s what I’d do to have some dry powder during a melt down but not to have some super redundant conservative strategy to safe guard against 4 simultaneous financial disasters.

In many ways 100/0 reduces overall lifetime risk because you reach FI faster. If you reach FI 10% quicker that’s multiple years of zeroing out unemployment, financial emergency, stock market and real estate crash risks.

But whatever...stop asking for “da maths” and then blithely ignoring it because it shows that your strategy isn’t based on anything but personal preferences on which trade offs to make and not some fundamental fact of finance.
nigel_ht,


<<You asked for math and then ignored it. The difference in security of 70/30 vs 100/0 for early career was minimal for the 2008 crash...both could survive a year and a half of no employment. 70/30 could last a quarter more.>>

And, it is only minimal if the person does not need that additional quarter to find a job. How do we know that to be true? We don't.


<<In the case of your niece the scenario would be her house flooded during the GFC...and by the time she retired 100/0 would handily beat 70/30 even though with 100/0 she only has $8K left in her portfolio but had $17K with 70/30 after withdrawing $50K from her portfolio.

$50K is a tough loss but she’s young and even without the family network it would be fine.>>


What if she cannot raise the 50K with 100% stock? Your base assumption is someone with 100% stock can survive any sequence of financial emergencies even if the stock market crashes. Is that realistic?

I had been through too many recessions and economic crises over 30+ years. Bad things tend to happen together in a recession.

KlangFool
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Re: 7 Reasons Not to Use a 100% Stock Portfolio - The White Coat Investor

Post by JackoC »

Ben Mathew wrote: Fri Oct 23, 2020 3:08 pm Re: # 1 Why Not 130% Stocks?

It's easier and cheaper to go from 90% stocks to 100% stocks than it is to go from 100% stocks to 110% stocks. So 100% stocks is a natural corner solution:

HIGHER RATES

From 90 to 100, you are implicitly borrowing at the risk free rate offered by the treasuries you give up. From 100 to 110, you are explicitly borrowing at the higher margin rate offered by the brokerage.
MISMATCHED DURATION

From 90 to 100, there is no big mismatch in duration of portfolio because you are reducing long term bonds and increasing stocks which are also of long duration. From 100 to 110, you are borrowing short term (because the debt is callable) but investing in stocks with long duration. If interest rates rise, the value of the stocks fall a lot, but the value of the debt does not fall. Financing long term assets with short term debt introduces interest rate risk. You are compensated for it some because of the upward sloping yield curve, but you'll have to decide whether it's worth it for you.

If someone created a product like a closed end fund that is financed by long term non-callable debt, a leveraged portfolio at younger ages might become a more compelling and mainstream option.
That's somewhat valid for many people. It's not as valid considering all instruments available which are usable by only somewhat sophisticated retail investors. The most efficient way to go from 100%>110% would be some position in stock index futures, implicit borrowing rate now ~0.40%. The 'riskless' treasury bill rate is lower than that, but the best rates on similarly 'riskless' FDIC insured bank deposits are actually higher than that. IOW right now there is a modest arbitrage for retail investors to go long via the index futures and put the excess cash on deposit at a rate > than the implicit financing cost embedded in the futures prices, rather than investing the cash in stocks (subject to limits of liquidity management, tax considerations etc. but this actually works in some real cases).

On duration mismatch, I think it could be debated how much of a net increase in risk if any you have in financing short term to buy stocks, in contrast to financing short to buy bonds which is definitely a duration mismatch. In the current environment of persistent headwinds to growth (worldwide) a pick up in growth, inflation and therefore short rates is probably a positive for stocks, up to some point. In general the short term rate/stock relationship is too loose to consider financing bonds with short term borrowing anything like the same as financing stocks with short term borrowing. But, if convinced of the risk argument you make, the investor could just go short treasury note futures to hedge this assumed rate mismatch.

Big picture, I'd agree with article author there's nothing completely special about 100% stock, especially considering that most people claiming this position don't really have it. They often have 'emergency funds' and home equity which 'don't count' in their mental accounting, though in the real world they both count. So even to get an actual 100% stock position, these investors would have to use leverage (ie 100% stock+30% house+10% 'emergency fund'-40% borrowing, or whatever).
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Re: 7 Reasons Not to Use a 100% Stock Portfolio - The White Coat Investor

Post by EnjoyIt »

nigel_ht wrote: Sat Oct 24, 2020 10:15 am
KlangFool wrote: Sat Oct 24, 2020 8:49 am B) Keep an AA between 70/30 to 30/70.

i) Historically, this range gives you the best risk versus reward

ii) We cannot predict our future. We do not know whether we might need to withdraw from our portfolio.

iii) In a RECESSION, unemployment, financial emergency, stock market crash, and housing market crash all can happen at the same time.

My young niece got married. They bought a house. Then, she was divorced. She rented out the house and rented an apartment for herself. The house was flooded in a hurricane. That location was never flooded over the past one hundred years. The house suffered 50K worth of damage. The house had no flood insurance and does not qualify for federal assistance because she rented out the house. Please note that this was in Houston. It is not an isolated incident.
You asked for math and then ignored it. The difference in security of 70/30 vs 100/0 for early career was minimal for the 2008 crash...both could survive a year and a half of no employment. 70/30 could last a quarter more.

In the case of your niece the scenario would be her house flooded during the GFC...and by the time she retired 100/0 would handily beat 70/30 even though with 100/0 she only has $8K left in her portfolio but had $17K with 70/30 after withdrawing $50K from her portfolio.

$50K is a tough loss but she’s young and even without the family network it would be fine.

If the flood happens before the crash then 100/0 wins even more in both short and long term.

If you want to be 70/30 great. That’s what I’d do to have some dry powder during a melt down but not to have some super redundant conservative strategy to safe guard against 4 simultaneous financial disasters.

In many ways 100/0 reduces overall lifetime risk because you reach FI faster. If you reach FI 10% quicker that’s multiple years of zeroing out unemployment, financial emergency, stock market and real estate crash risks.

But whatever...stop asking for “da maths” and then blithely ignoring it because it shows that your strategy isn’t based on anything but personal preferences on which trade offs to make and not some fundamental fact of finance.
I don't think anyone can argue with you that 100% equites has the highest expected return.

All I can tell you is that this forum houses some very bright and successful investors. Despite that, I constantly see examples of these very intelligent people freak out during market turmoil because they thought they were far more risk tolerant than they really are. You were on these threads I saw you posting. Check out those threads from 2008/2009 where people sold everything from their 100% equities portfolio. Who knows how long it took them to get back in. They would have been far better off holding 70/30 and just holding on.

To each their own. I have been 100% equities for many years and I did not flinch in the dot com or financial crisis. Today I have bonds. My portfolio is large (for me.) I work part time and can not tolerate a significant loss while at the same time don't have the need to take on additional risk. Having bonds works for me.
A time to EVALUATE your jitters: | https://www.bogleheads.org/forum/viewtopic.php?f=10&t=79939&start=400#p5275418
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Re: 7 Reasons Not to Use a 100% Stock Portfolio - The White Coat Investor

Post by willthrill81 »

EnjoyIt wrote: Sat Oct 24, 2020 10:39 am
nigel_ht wrote: Sat Oct 24, 2020 10:15 am
KlangFool wrote: Sat Oct 24, 2020 8:49 am B) Keep an AA between 70/30 to 30/70.

i) Historically, this range gives you the best risk versus reward

ii) We cannot predict our future. We do not know whether we might need to withdraw from our portfolio.

iii) In a RECESSION, unemployment, financial emergency, stock market crash, and housing market crash all can happen at the same time.

My young niece got married. They bought a house. Then, she was divorced. She rented out the house and rented an apartment for herself. The house was flooded in a hurricane. That location was never flooded over the past one hundred years. The house suffered 50K worth of damage. The house had no flood insurance and does not qualify for federal assistance because she rented out the house. Please note that this was in Houston. It is not an isolated incident.
You asked for math and then ignored it. The difference in security of 70/30 vs 100/0 for early career was minimal for the 2008 crash...both could survive a year and a half of no employment. 70/30 could last a quarter more.

In the case of your niece the scenario would be her house flooded during the GFC...and by the time she retired 100/0 would handily beat 70/30 even though with 100/0 she only has $8K left in her portfolio but had $17K with 70/30 after withdrawing $50K from her portfolio.

$50K is a tough loss but she’s young and even without the family network it would be fine.

If the flood happens before the crash then 100/0 wins even more in both short and long term.

If you want to be 70/30 great. That’s what I’d do to have some dry powder during a melt down but not to have some super redundant conservative strategy to safe guard against 4 simultaneous financial disasters.

In many ways 100/0 reduces overall lifetime risk because you reach FI faster. If you reach FI 10% quicker that’s multiple years of zeroing out unemployment, financial emergency, stock market and real estate crash risks.

But whatever...stop asking for “da maths” and then blithely ignoring it because it shows that your strategy isn’t based on anything but personal preferences on which trade offs to make and not some fundamental fact of finance.
I don't think anyone can argue with you that 100% equites has the highest expected return.

All I can tell you is that this forum houses some very bright and successful investors. Despite that, I constantly see examples of these very intelligent people freak out during market turmoil because they thought they were far more risk tolerant than they really are. You were on these threads I saw you posting. Check out those threads from 2008/2009 where people sold everything from their 100% equities portfolio. Who knows how long it took them to get back in. They would have been far better off holding 70/30 and just holding on.

To each their own. I have been 100% equities for many years and I did not flinch in the dot com or financial crisis. Today I have bonds. My portfolio is large (for me.) I work part time and can not tolerate a significant loss while at the same time don't have the need to take on additional risk. Having bonds works for me.
That's a very fair point and goes back to the point that we've both tried to make: it's crucial to know yourself.

However, I have no doubt that many with a 70/30 AA still panic sold back in 2008. I really doubt that Taylor Larimore had more stock than that, but even he was talking about 'plan B', the 'maximum tolerable loss', etc. For most people, it's just really hard to see hundreds of thousands of dollars or more go poof, even if they are also holding a big chunk of bonds.
“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: 7 Reasons Not to Use a 100% Stock Portfolio - The White Coat Investor

Post by KlangFool »

willthrill81 wrote: Sat Oct 24, 2020 10:49 am

However, I have no doubt that many with a 70/30 AA still panic sold back in 2008. I really doubt that Taylor Larimore had more stock than that, but even he was talking about 'plan B', the 'maximum tolerable loss', etc. For most people, it's just really hard to see hundreds of thousands of dollars or more go poof, even if they are also holding a big chunk of bonds.
willthrill81,


Even if that is true, the 70/30 folks would have lost less money than the 100/0 folks.


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Re: 7 Reasons Not to Use a 100% Stock Portfolio - The White Coat Investor

Post by willthrill81 »

KlangFool wrote: Sat Oct 24, 2020 10:52 am
willthrill81 wrote: Sat Oct 24, 2020 10:49 am

However, I have no doubt that many with a 70/30 AA still panic sold back in 2008. I really doubt that Taylor Larimore had more stock than that, but even he was talking about 'plan B', the 'maximum tolerable loss', etc. For most people, it's just really hard to see hundreds of thousands of dollars or more go poof, even if they are also holding a big chunk of bonds.
willthrill81,


Even if that is true, the 70/30 folks would have lost less money than the 100/0 folks.


KlangFool
And those with a 50/50 would have lost even less. And so on.
“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: 7 Reasons Not to Use a 100% Stock Portfolio - The White Coat Investor

Post by KlangFool »

willthrill81 wrote: Sat Oct 24, 2020 10:56 am
KlangFool wrote: Sat Oct 24, 2020 10:52 am
willthrill81 wrote: Sat Oct 24, 2020 10:49 am

However, I have no doubt that many with a 70/30 AA still panic sold back in 2008. I really doubt that Taylor Larimore had more stock than that, but even he was talking about 'plan B', the 'maximum tolerable loss', etc. For most people, it's just really hard to see hundreds of thousands of dollars or more go poof, even if they are also holding a big chunk of bonds.
willthrill81,


Even if that is true, the 70/30 folks would have lost less money than the 100/0 folks.


KlangFool
And those with a 50/50 would have lost even less. And so on.

And, sometimes, it is a win when a person limits his/her losses. Aka, protecting ourselves from our overconfidence.


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Re: 7 Reasons Not to Use a 100% Stock Portfolio - The White Coat Investor

Post by geerhardusvos »

willthrill81 wrote: Sat Oct 24, 2020 10:56 am
KlangFool wrote: Sat Oct 24, 2020 10:52 am
willthrill81 wrote: Sat Oct 24, 2020 10:49 am

However, I have no doubt that many with a 70/30 AA still panic sold back in 2008. I really doubt that Taylor Larimore had more stock than that, but even he was talking about 'plan B', the 'maximum tolerable loss', etc. For most people, it's just really hard to see hundreds of thousands of dollars or more go poof, even if they are also holding a big chunk of bonds.
willthrill81,


Even if that is true, the 70/30 folks would have lost less money than the 100/0 folks.


KlangFool
And those with a 50/50 would have lost even less. And so on.
What KF never ever wants to talk about is that for every 1982, we have 1982 to 2000. After 2008 we have 2010 to present. We aren’t invested for the nasty times, but the good times. The more chips you take off the table, the less good the good times are. Making sure that you are invested during the good times has way more impact on the longevity of the portfolio than being defensive during the nasty times. Ironically, if KF wanted to play proper defense, he would have closer to a 100% stock portfolio.

KF will say well what if you lose a job in 2008, and we will say pick a career and be a performer that is employable through almost any market condition, and we have shown that recessions don’t always equal unemployment. Sure some people get unlucky, but the vast majority of people are able to find jobs again especially if they have a network and work hard. Most of my friends who have gotten laid off have gotten big raises when they found a new job less than a year later. Don’t tell KF.

KF will say well what if you are already retired. What about sequence of returns? Well, in almost every case, more equities = more success and security:

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Re: 7 Reasons Not to Use a 100% Stock Portfolio - The White Coat Investor

Post by KlangFool »

geerhardusvos wrote: Sat Oct 24, 2020 11:17 am

What KF never ever wants to talk about is that for every 1982, we have 1982 to 2000. After 2008 we have 2010 to present. We aren’t invested for the nasty times, but the good times. The more chips you take off the table, the less good the good times are. Making sure that you are invested during the good times has way more impact on the longevity of the portfolio than being defensive during the nasty times. Ironically, if KF wanted to play proper defense, he would have closer to a 100% stock portfolio.
geerhardusvos,


FYI. I was 100% stock and I used to think like you about 10+ years ago. Aka, before the Telecom Bust.


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Re: 7 Reasons Not to Use a 100% Stock Portfolio - The White Coat Investor

Post by flaccidsteele »

nigel_ht wrote: Sat Oct 24, 2020 8:15 am
flaccidsteele wrote: Sat Oct 24, 2020 8:10 am
nigel_ht wrote: Sat Oct 24, 2020 7:18 am
flaccidsteele wrote: Sat Oct 24, 2020 5:11 am
nigel_ht wrote: Fri Oct 23, 2020 11:45 pm

Heh, I just looked at some properties where the owners were still underwater from 2007...most US markets have recovered but some types of real estate in some markets haven't.
I’m interested. Can you link some pls?
Shenandoah VA. One on a golf course, purchased at peak and sold for a loss. Another was nice lot with a great view. A couple others. I didn’t keep the Zillow links...but vacation properties that got sold in the RE boom never recovered out here even with the recent covid sales boom.
Now that you mention it, I think the detached homes and condos that I bought sub-$50k haven’t yet reached their peak 2006 prices, but they will soon enough

The US market always recovers
Heh...recovering 14 years later isn’t exactly a win. :)

Id much rather be you than be the guy that bought at 2006 prices. :)
Same can be said for the US stock market over its history if someone selectively picks out dates (which BiggerPocket RE folks do all the time)

I ignore the noise. The US market always recovers. Collecting productive assets always wins long term. Always
The US market always recovers. It’s never different this time. Retired in my 40s. Investing is a simple game of rinse and repeat
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Re: 7 Reasons Not to Use a 100% Stock Portfolio - The White Coat Investor

Post by flaccidsteele »

YRT70 wrote: Sat Oct 24, 2020 9:06 am
White Coat Investor wrote: Sat Oct 24, 2020 8:59 am
flaccidsteele wrote: Sat Oct 24, 2020 5:10 am
White Coat Investor wrote: Sat Oct 24, 2020 1:04 am
flaccidsteele wrote: Fri Oct 23, 2020 11:30 pm
+1 you are correct

I should’ve said that it would be more interesting to me

But then you wouldn’t be able to monetize it as effectively
Nor help as many people with it. Nor create as many jobs with it. Nor support as many charities with it. :)
+1 all that

I think I’m going to try and monetize my 60k social media followers. I’ve slept on this internet thing for too long
I hope it works out for you. I know someone with nothing but a Facebook Group of about that many with a 7 figure income from it.
Who's that?
You would be shocked at how many are monetizing their social media

More shockingly, like investing it’s also not very hard to do
The US market always recovers. It’s never different this time. Retired in my 40s. Investing is a simple game of rinse and repeat
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Re: 7 Reasons Not to Use a 100% Stock Portfolio - The White Coat Investor

Post by YRT70 »

flaccidsteele wrote: Sat Oct 24, 2020 11:35 am
YRT70 wrote: Sat Oct 24, 2020 9:06 am
White Coat Investor wrote: Sat Oct 24, 2020 8:59 am
flaccidsteele wrote: Sat Oct 24, 2020 5:10 am
White Coat Investor wrote: Sat Oct 24, 2020 1:04 am

Nor help as many people with it. Nor create as many jobs with it. Nor support as many charities with it. :)
+1 all that

I think I’m going to try and monetize my 60k social media followers. I’ve slept on this internet thing for too long
I hope it works out for you. I know someone with nothing but a Facebook Group of about that many with a 7 figure income from it.
Who's that?
You would be shocked at how many are monetizing their social media

More shockingly, like investing it’s also not very hard to do
That doesn't shock me. I am curious who makes 7 figures off only a Facebook group though. To me, that sounds hard to believe.
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Re: 7 Reasons Not to Use a 100% Stock Portfolio - The White Coat Investor

Post by roth evangelist »

KlangFool wrote: Sat Oct 24, 2020 11:25 am
geerhardusvos wrote: Sat Oct 24, 2020 11:17 am

What KF never ever wants to talk about is that for every 1982, we have 1982 to 2000. After 2008 we have 2010 to present. We aren’t invested for the nasty times, but the good times. The more chips you take off the table, the less good the good times are. Making sure that you are invested during the good times has way more impact on the longevity of the portfolio than being defensive during the nasty times. Ironically, if KF wanted to play proper defense, he would have closer to a 100% stock portfolio.
geerhardusvos,


FYI. I was 100% stock and I used to think like you about 10+ years ago. Aka, before the Telecom Bust.


KlangFool
KlangFool,

You keep saying how you were 100% stock before the Telecom bust, and you've also implied that your portfolio was invested in individual stocks (or company stock?) within the telecom sector. Do I have that right? If not, what exactly did your portfolio look like?
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