Is it actually rational to have a higher stock allocation as you age and become richer?

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Topic Author
teuton33
Posts: 144
Joined: Fri Jun 04, 2021 9:24 am

Is it actually rational to have a higher stock allocation as you age and become richer?

Post by teuton33 »

Here me out.

Suppose you are retired at age 55 with a NW=X and you determined that a 50/50 allocation met your risk tolerance. A 50% drop in stocks leaves you with 75% of your assets. You we’re all set for a long retirement!

Now what if unexpectedly you received a windfall equal to X making your NW=2X. If you changed your AA to 100% stocks a 50% drop leaves you with X which is more than .75X assuming the old AA and no inheritance.

You might make the argument that your living standards would immediately scale to the doubled NW and therefore the original 50/50 risk tolerance would apply. But what if you left your living standards at 0.5X?

Initially you won’t reap the full benefits of higher living standards of the new NW but if you can hang in there for a long period of time, that other half of stock will grow and grow and leave you a lot better off with significantly higher living standards.

So this had me thinking. Maybe it’s wiser to scale up stock allocations once your NW creeps up?

I did this myself. A few years back at age 34 I received an unexpected windfall that was equal to my NW at the time. I threw it all in the market and went 100%.
Last edited by teuton33 on Wed Aug 11, 2021 8:12 pm, edited 1 time in total.
Marseille07
Posts: 5902
Joined: Fri Nov 06, 2020 1:41 pm

Re: Is it actually rational to have a higher stock allocation as you age and become richer?

Post by Marseille07 »

It is *generally* wise, except when we walk into 1929 or 1989-Japan.
Topic Author
teuton33
Posts: 144
Joined: Fri Jun 04, 2021 9:24 am

Re: Is it actually rational to have a higher stock allocation as you age and become richer?

Post by teuton33 »

Marseille07 wrote: Wed Aug 11, 2021 6:14 pm It is *generally* wise, except when we walk into 1929 or 1989-Japan.
With dividend reinvestment I think 1929 recovered in 15 years? Dividends were high then. And this assumes you put the money in at the peak.
RadAudit
Posts: 4132
Joined: Mon May 26, 2008 10:20 am
Location: Second star on the right and straight on 'til morning

Re: Is it actually rational to have a higher stock allocation as you age and become richer?

Post by RadAudit »

Not that it matters; but, I put the amount I didn't spend in the annual budget in to a total world stock mutual fund. So, if I live another 30 years it might make a difference in the AA. I'm 74.
FI is the best revenge. LBYM. Invest the rest. Stay the course. Die anyway. - PS: The cavalry isn't coming, kids. You are on your own.
User avatar
3CT_Paddler
Posts: 3361
Joined: Wed Feb 04, 2009 5:28 pm
Location: Marietta, GA

Re: Is it actually rational to have a higher stock allocation as you age and become richer?

Post by 3CT_Paddler »

Go back in time 10 years on the Bogleheads forum and nobody was talking like that. When the next correction inevitably occurs there is going to be a lot of paper wealth going up in smoke.

Edit: Agree on the wealth part not the as you age part.
Last edited by 3CT_Paddler on Wed Aug 11, 2021 6:28 pm, edited 1 time in total.
User avatar
HomerJ
Posts: 17506
Joined: Fri Jun 06, 2008 12:50 pm

Re: Is it actually rational to have a higher stock allocation as you age and become richer?

Post by HomerJ »

Yes, once you have 2x+ what you need to retire, you can start to take more risks again, because a stock market crash won't really affect you any more.

I probably wouldn't, because if I already have 2x "enough", why would I feel the need to risk even more for a chance of making even more? (with a possible chance of losing a good chunk)

Once I have "enough", by definition, I no longer need "more".

But it's certainly a rational move for others, especially if they are trying to max out inheritances for their kids (but taking a chance where the kids get less instead)
A Goldman Sachs associate provided a variety of detailed explanations, but then offered a caveat, “If I’m being dead-### honest, though, nobody knows what’s really going on.”
Trader Joe
Posts: 2634
Joined: Fri Apr 25, 2014 6:38 pm

Re: Is it actually rational to have a higher stock allocation as you age and become richer?

Post by Trader Joe »

teuton33 wrote: Wed Aug 11, 2021 6:11 pm Here me out.

Suppose you are retired at age 55 with a NW=X and you determined that a 50/50 allocation met your risk tolerance. A 50% drop in stocks leaves you with 75% of your assets. You we’re all set for a long retirement!

Now what if unexpectedly you received a windfall equal to X making your NW=2X. If you changed your AA to 100% stocks a 50% drop leaves you with X which is more than .75X assuming the old AA and no inheritance.

You might make the argument that your living standards would immediately scale to the doubled NW and therefore the original 50/50 risk tolerance would apply. But what if you left your living standards at 0.5X?

Initially you won’t reap the full benefits of higher living standards of the new NW but if you can hang in there for a long period of time, that other half of stock will grow and grow and leave you a lot better off with significantly higher living standards.

So this had me thinking. Maybe it’s wiser to scale up stock allocations once your NW creeps up?

I did this myself. A few years back I received an unexpected windfall that was equal to my NW at the time. I threw it all in the market and went 100%.
Yes. The more net worth that you have the greater level of risk that you can take. This is how $$$ Millionaires become $$$ Billionaires.
TJat
Posts: 296
Joined: Tue May 04, 2021 6:51 am

Re: Is it actually rational to have a higher stock allocation as you age and become richer?

Post by TJat »

I think it makes sense. I like the idea of moving towards a more conservative AA some +/- years before and after retirement to avoid sequence of returns risk and then gradually scale equities back up. With that strategy, you increase risk/returns once SORR diminishes (not disappears) and your retirement horizon is shorter. Your example is another one where if you can comfortably withstand a 50% drop, why not shoot for higher returns?
esteen
Posts: 385
Joined: Thu May 23, 2019 12:31 am

Re: Is it actually rational to have a higher stock allocation as you age and become richer?

Post by esteen »

HomerJ wrote: Wed Aug 11, 2021 6:27 pm But it's certainly a rational move for others, especially if they are trying to max out inheritances for their kids (but taking a chance where the kids get less instead)
Agree. Just wanted to add that the risk is lower than if that money were to be spent during retirement, because the kids' time horizons are much longer.
02nz
Posts: 7399
Joined: Wed Feb 21, 2018 3:17 pm

Re: Is it actually rational to have a higher stock allocation as you age and become richer?

Post by 02nz »

3CT_Paddler wrote: Wed Aug 11, 2021 6:23 pm Go back in time 10 years on the Bogleheads forum and nobody was talking like that. When the next correction inevitably occurs there is going to be a lot of paper wealth going up in smoke.

Edit: Agree on the wealth part not the as you age part.
Why not? If you have favorable returns, and you get to say age 80 with more money than you can spend in your remaining years, you're investing for heirs and/or charity. Then it can absolutely make sense to have a higher stock allocation. Here's a detailed discussion of "rising glidepaths": https://www.kitces.com/blog/should-equi ... ly-better/
User avatar
Svensk Anga
Posts: 920
Joined: Sun Dec 23, 2012 5:16 pm

Re: Is it actually rational to have a higher stock allocation as you age and become richer?

Post by Svensk Anga »

I retired 5.5 years ago with a 58/42 AA. I've been spending down the bonds and not rebalancing. Currently we're 77/28. I think I'm rational. :D

Bull markets in our last working years had us over-shoot our number. I put away enough fixed income to get us to age 70 and claiming maximal SS benefits. Still 8 years to go and we have plenty of fixed income left. Continuing strong stock returns have swelled the portfolio about 50% since we retired. I think of our portfolio as two parts: a very conservative one intended to see us through plus a very aggressive one intended for heirs or self -indulgent splurges. Dividends from the aggressive part are earmarked for our routine spending however, per the advice of Bill Bernstein in "Ages of the Investor".
Triple digit golfer
Posts: 8400
Joined: Mon May 18, 2009 5:57 pm

Re: Is it actually rational to have a higher stock allocation as you age and become richer?

Post by Triple digit golfer »

It is rational if you are willing to take the risk.

It is consistent with not holding in stocks money you'll need in say, 10 years.
Thesaints
Posts: 4316
Joined: Tue Jun 20, 2017 12:25 am

Re: Is it actually rational to have a higher stock allocation as you age and become richer?

Post by Thesaints »

One aspect of personal investing that is oftentimes overlooked is the dependency of financial objectives and risk tolerance on one's assets size.
With that in mind, getting into a riskier asset allocation following a windfall can certainly be a rational choice and getting into a less risky one can also be rational. It all depends one's targets.
Exchme
Posts: 588
Joined: Sun Sep 06, 2020 3:00 pm

Re: Is it actually rational to have a higher stock allocation as you age and become richer?

Post by Exchme »

There was an interesting thread by user "Uncorrelated" a couple years ago on this subject with some cool charts in it:
viewtopic.php?t=293469
MathWizard
Posts: 5057
Joined: Tue Jul 26, 2011 1:35 pm

Re: Is it actually rational to have a higher stock allocation as you age and become richer?

Post by MathWizard »

As your portfolio grows, your ability to take risk goes up, bit your need to take risk goes down.
KlangFool
Posts: 22422
Joined: Sat Oct 11, 2008 12:35 pm

Re: Is it actually rational to have a higher stock allocation as you age and become richer?

Post by KlangFool »

OP,

Only if your net worth is 50 times your current annual expense or higher. Then, you can do whatever you want. Until then, you are not rich enough.

KlangFool
40% VWENX | 12.5% VFWAX/VTIAX | 11.5% VTSAX | 16% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 40% Wellington 40% 3-funds 20% Mini-Larry
Blue456
Posts: 1528
Joined: Tue Jun 04, 2019 5:46 am

Re: Is it actually rational to have a higher stock allocation as you age and become richer?

Post by Blue456 »

Marseille07 wrote: Wed Aug 11, 2021 6:14 pm It is *generally* wise, except when we walk into 1929 or 1989-Japan.
Did Japan in 1929 really do that poorly?
User avatar
nisiprius
Advisory Board
Posts: 44800
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: Is it actually rational to have a higher stock allocation as you age and become richer?

Post by nisiprius »

It's not a question of "rationality." It's a question of whether you have increasing relative risk aversion or decreasing relative risk aversion.

There is no objectively correct amount of risk aversion. It is an input to financial economics equations, not an output.

If you have decreasing relative risk aversion, then as you reach the point where you have more than enough wealth to take care of your needs and your important wants, you say "I can afford to gamble the rest of it, because it doesn't matter if I lose it."

If you have increasing relative risk aversion, then you say "When you've won the game, why keep on playing? I don't need to take risk at this point, and I prefer not to."

If you have constant relative risk aversion, then you say "As best I can judge, losing half my wealth suddenly now would hurt just about as badly as it would have years ago. So nothing has really changed, and I prefer to maintain a constant risk profile."

What to do with the extra money that you do not "need" is a personal choice.
Last edited by nisiprius on Thu Aug 12, 2021 6:17 am, edited 1 time in total.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
User avatar
grabiner
Advisory Board
Posts: 30601
Joined: Tue Feb 20, 2007 11:58 pm
Location: Columbia, MD

Re: Is it actually rational to have a higher stock allocation as you age and become richer?

Post by grabiner »

It depends on the intended use of the money.

Suppose that you retire with the intention of using your whole portfolio. But after ten years of a bull market, your standard of living has not changed, and your portfolio is now twice what you need to retire. It would be rational at that point to invest half the portfolio with an asset allocation appropriate for your own retirement, and the other half with an asset allocation appropriate for your heirs (which could be all stock if it is for the retirement of your still-working children and the college funds of your not-yet-born great-grandchildren).
Wiki David Grabiner
TurtleBeatsHare
Posts: 87
Joined: Fri Jun 25, 2021 2:01 pm

Re: Is it actually rational to have a higher stock allocation as you age and become richer?

Post by TurtleBeatsHare »

Yes,but only if your net worth is large relative to the amount required to support your expenses. The core portion of your portfolio—the part that supports your lifestyle and expenses over retirement—should have an appropriate risk off investments to protect against sales during a down equities year and or to minimize volatility. The non-core portion of your portfolio is more or less money that you never expect to spend on yourself and basically is what your heirs should expect to inherit. Assuming your heirs are young, there’s an argument that the non-core portion should be invested entirely/heavily in equities. So it’s not that the portfolio should be invested more aggressively, it’s that as your NW grows, you in effect have two portfolios serving two purposes. One other way of basically saying the same point is that if your portfolio is large relative to your expenses, you can tolerate more volatility and sales in down years and still be able to meet your retirement needs.
hi_there
Posts: 1102
Joined: Sat Aug 29, 2020 7:00 pm

Re: Is it actually rational to have a higher stock allocation as you age and become richer?

Post by hi_there »

nisiprius wrote: Wed Aug 11, 2021 7:44 pm It's not a question of "rationality." It's a question of whether you have increasing relative risk aversion or decreasing relative risk aversion.

There is no objectively correct amount of risk aversion. It is an input to financial economics equations, not an output.

If you have decreasing relative risk aversion, then as you reach the point where you have more than enough wealth to take care of your needs and your important wants, you say "I can afford to gamble the rest of it, because it doesn't matter if I lose it."

If you have increasing relative risk aversion, then you say "When you've won the game, why keep on playing? I don't need to take risk at the point, and I prefer not to."

If you have constant relative risk aversion, then you say "As best I can judge, losing half my wealth suddenly now would hurt just about as badly as it would have years ago. So nothing has really changed, and I prefer to maintain a constant risk profile."

What to do with the extra money that you do not "need" is a personal choice.
Truly an educated response! Of course, I think it would be quite atypical for someone who has satisfied their life spending need to have increasing relative risk aversion. Since their need for incremental spending has been decreasing before that point of wealth, it seems that they would need a humped utility curve. This is not to say that it can't happen, just that it would be kind of a weird person. Increasing portfolio volatility also means that they must consider the slope between two distant points on the utility curve, not just the tangential slope, to find marginal utility.
User avatar
HomerJ
Posts: 17506
Joined: Fri Jun 06, 2008 12:50 pm

Re: Is it actually rational to have a higher stock allocation as you age and become richer?

Post by HomerJ »

grabiner wrote: Wed Aug 11, 2021 7:49 pm It depends on the intended use of the money.

Suppose that you retire with the intention of using your whole portfolio. But after ten years of a bull market, your standard of living has not changed, and your portfolio is now twice what you need to retire. It would be rational at that point to invest half the portfolio with an asset allocation appropriate for your own retirement, and the other half with an asset allocation appropriate for your heirs (which could be all stock if it is for the retirement of your still-working children and the college funds of your not-yet-born great-grandchildren).
But you might want to invest it in safe stuff if it's your grandchildren who are only 5 years from college-age.... :)
A Goldman Sachs associate provided a variety of detailed explanations, but then offered a caveat, “If I’m being dead-### honest, though, nobody knows what’s really going on.”
User avatar
9-5 Suited
Posts: 696
Joined: Thu Jun 23, 2016 12:14 pm

Re: Is it actually rational to have a higher stock allocation as you age and become richer?

Post by 9-5 Suited »

There is definitely some truth to this concept and I intend to follow it to a degree. As the marginal utility of money declines with higher net worth, you face a paradox of have higher ability to take risk and lower need to take risk. Everyone gets to decide for themselves on which of those will prevail.

One quibble with the extreme proposition in the post though: it makes that common cardinal sin of implicitly assuming a lower limit of 50% for stock declines. Use 80% instead and that hypothetical looks a lot scarier. So I wouldn’t go to 100% stock because you MUST consider not just the probability of loss but the potential catastrophic nature of the loss.
jello_nailer
Posts: 469
Joined: Sun Apr 07, 2019 10:20 pm

Re: Is it actually rational to have a higher stock allocation as you age and become richer?

Post by jello_nailer »

Triple digit golfer wrote: Wed Aug 11, 2021 6:55 pm It is rational if you are willing to take the risk.

It is consistent with not holding in stocks money you'll need in say, 10 years.
Sorry, meant to also quote this one too by Tjat:

I think it makes sense. I like the idea of moving towards a more conservative AA some +/- years before and after retirement to avoid sequence of returns risk and then gradually scale equities back up. With that strategy, you increase risk/returns once SORR diminishes (not disappears) and your retirement horizon is shorter. Your example is another one where if you can comfortably withstand a 50% drop, why not shoot for higher returns?

Based on memory, isn't this the Glide10 or Glide20 from the fiphysician?

I actually think his data is pretty compelling and supports what you're suggesting. Someone can chime in if I am wrong. Too tired to research.
Last edited by jello_nailer on Wed Aug 11, 2021 9:15 pm, edited 1 time in total.
User avatar
Taylor Larimore
Advisory Board
Posts: 30753
Joined: Tue Feb 27, 2007 8:09 pm
Location: Miami FL

Re: Is it actually rational to have a higher stock allocation as you age and become richer?

Post by Taylor Larimore »

Bogleheads:

About age 80, we bought two single-premium immediate annuities (SPIAs), which together with our Social Security and my government pension, provided more income than we needed. Since then (my wife died), I don't pay much attention to my asset-allocation which is heavy in stocks.

Best wishes.
Taylor
Jack Bogle's Words of Wisdom: “Successful investing doesn’t require sophistication and complexity; all that’s necessary is a healthy dose of common sense.”
"Simplicity is the master key to financial success." -- Jack Bogle
User avatar
spanky123
Posts: 144
Joined: Sun May 22, 2011 11:15 am

Re: Is it actually rational to have a higher stock allocation as you age and become richer?

Post by spanky123 »

Trader Joe wrote: Wed Aug 11, 2021 6:37 pm
teuton33 wrote: Wed Aug 11, 2021 6:11 pm Here me out.

Suppose you are retired at age 55 with a NW=X and you determined that a 50/50 allocation met your risk tolerance. A 50% drop in stocks leaves you with 75% of your assets. You we’re all set for a long retirement!

Now what if unexpectedly you received a windfall equal to X making your NW=2X. If you changed your AA to 100% stocks a 50% drop leaves you with X which is more than .75X assuming the old AA and no inheritance.

You might make the argument that your living standards would immediately scale to the doubled NW and therefore the original 50/50 risk tolerance would apply. But what if you left your living standards at 0.5X?

Initially you won’t reap the full benefits of higher living standards of the new NW but if you can hang in there for a long period of time, that other half of stock will grow and grow and leave you a lot better off with significantly higher living standards.

So this had me thinking. Maybe it’s wiser to scale up stock allocations once your NW creeps up?

I did this myself. A few years back I received an unexpected windfall that was equal to my NW at the time. I threw it all in the market and went 100%.
Yes. The more net worth that you have the greater level of risk that you can take. This is how $$$ Millionaires become $$$ Billionaires.
Yes, when you became $$$ Billionaires, the next step is $$$Trillionare and .... :happy
User avatar
spanky123
Posts: 144
Joined: Sun May 22, 2011 11:15 am

Re: Is it actually rational to have a higher stock allocation as you age and become richer?

Post by spanky123 »

nisiprius wrote: Wed Aug 11, 2021 7:44 pm It's not a question of "rationality." It's a question of whether you have increasing relative risk aversion or decreasing relative risk aversion.

There is no objectively correct amount of risk aversion. It is an input to financial economics equations, not an output.

If you have decreasing relative risk aversion, then as you reach the point where you have more than enough wealth to take care of your needs and your important wants, you say "I can afford to gamble the rest of it, because it doesn't matter if I lose it."

If you have increasing relative risk aversion, then you say "When you've won the game, why keep on playing? I don't need to take risk at the point, and I prefer not to."

If you have constant relative risk aversion, then you say "As best I can judge, losing half my wealth suddenly now would hurt just about as badly as it would have years ago. So nothing has really changed, and I prefer to maintain a constant risk profile."

What to do with the extra money that you do not "need" is a personal choice.
My preference is "when you have won the game, why keep on playing?".
dak
Posts: 74
Joined: Sat Feb 27, 2016 7:31 pm

Re: Is it actually rational to have a higher stock allocation as you age and become richer?

Post by dak »

One aspect I have not seen addressed: once you have your needs met, why not think of others? If I was in the position of having assets well in excess of my desired standard of living, I would happily take more risk with the remainder in order to generate funds for charitable giving.
User avatar
Beensabu
Posts: 1242
Joined: Sun Aug 14, 2016 3:22 pm

Re: Is it actually rational to have a higher stock allocation as you age and become richer?

Post by Beensabu »

Why wouldn't you invest the windfall according to your 50/50 AA?

Then a 50% drop in equities would still leave you with 1.5X.

You could immediately double your annual expenses, if you wanted to.
"The only thing that makes life possible is permanent, intolerable uncertainty; not knowing what comes next." ~Ursula LeGuin
skierincolorado
Posts: 887
Joined: Sat Mar 21, 2020 10:56 am

Re: Is it actually rational to have a higher stock allocation as you age and become richer?

Post by skierincolorado »

teuton33 wrote: Wed Aug 11, 2021 6:11 pm Here me out.

Suppose you are retired at age 55 with a NW=X and you determined that a 50/50 allocation met your risk tolerance. A 50% drop in stocks leaves you with 75% of your assets. You we’re all set for a long retirement!

Now what if unexpectedly you received a windfall equal to X making your NW=2X. If you changed your AA to 100% stocks a 50% drop leaves you with X which is more than .75X assuming the old AA and no inheritance.

You might make the argument that your living standards would immediately scale to the doubled NW and therefore the original 50/50 risk tolerance would apply. But what if you left your living standards at 0.5X?

Initially you won’t reap the full benefits of higher living standards of the new NW but if you can hang in there for a long period of time, that other half of stock will grow and grow and leave you a lot better off with significantly higher living standards.

So this had me thinking. Maybe it’s wiser to scale up stock allocations once your NW creeps up?

I did this myself. A few years back at age 34 I received an unexpected windfall that was equal to my NW at the time. I threw it all in the market and went 100%.
The bolded is the key. A 55 year old may only have 10 more years of good health and high functioning to enjoy. Good chance they only live another 20 years, although the mean would be more like 35. If they continue their living standard as if they had not received the windfall for an extended period, there's a high chance they will die before realizing any benefit from your strategy or die shortly after you've allowed them to increase their spending.

I'd say your 50-50 AA for a 55YO is too conservative anyways. If I was 55 and trying to maximize my lifetime spending, I'd probably still be 80-20. If I got a windfall that doubled my NW, I'd still be 80-20. By age 65 or 70 I'd be 60-40. But the windfall has changed nothing in the AA.

There are complex models on how to maximize lifetime spending... they are the basis for the glidepaths you see in target date retirement funds. You're trying to outsmart these models with back of the envelope calculations, but it won't work. Your principal mistakes are that 1) a 55 may not live that much longer, and even their mean life expectancy may be barely long enough to see stocks outperform bonds in a major ber market and 2) a small bond allocation may act as balast and allow them to rebalance into stocks at market lows and actually enhance returns. Thus a more typical allocation for a 55 YO would be 80-20, no matter their NW.

At 34 you should have been 90%+ stocks anyways with or without a windfall.
quantAndHold
Posts: 6431
Joined: Thu Sep 17, 2015 10:39 pm

Re: Is it actually rational to have a higher stock allocation as you age and become richer?

Post by quantAndHold »

Yes, I think that’s perfectly reasonable. It’s about need, ability, and willingness to take risk.

If you’re at 2x+ what you need to retire, then yes, you now have the ability to take more risk, because a crash, while unfortunate, isn’t going to make your retirement “fail.” As far as need, it seems reasonable that at that point, you’re investing the amount beyond 1x for your legacy, which is a longer timeline. To preserve assets on a long timeline, you would have the need to take more risk with that part of the portfolio.

I would also say, though, that at 34, your retirement portfolio should be at 90%+ stock anyway, and getting a windfall wouldn’t change that. But a 65 year old with a 50/50 portfolio who has exactly enough for retirement and gets a windfall that doubles their net worth, could probably go to 60/40, figuring that the “retirement” half of the portfolio stays at 50/50, and the “legacy” half of the portfolio is a perpetual 70/30.
Yes, I’m really that pedantic.
Thesaints
Posts: 4316
Joined: Tue Jun 20, 2017 12:25 am

Re: Is it actually rational to have a higher stock allocation as you age and become richer?

Post by Thesaints »

spanky123 wrote: Wed Aug 11, 2021 9:38 pm My preference is "when you have won the game, why keep on playing?".
When you have won the conference, why go for the national title ?
User avatar
climber2020
Posts: 2001
Joined: Sun Mar 25, 2012 8:06 pm

Re: Is it actually rational to have a higher stock allocation as you age and become richer?

Post by climber2020 »

TJat wrote: Wed Aug 11, 2021 6:44 pm I think it makes sense. I like the idea of moving towards a more conservative AA some +/- years before and after retirement to avoid sequence of returns risk and then gradually scale equities back up. With that strategy, you increase risk/returns once SORR diminishes (not disappears) and your retirement horizon is shorter.
I like this concept, but how often does it actually work?

There could be a scenario where the best stock market returns of one's investing life occur during those few years when the person has the most conservative AA (missing a significant amount of gains in the process), followed by a decade of lousy years when the stock percentage goes back up.
User avatar
nisiprius
Advisory Board
Posts: 44800
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: Is it actually rational to have a higher stock allocation as you age and become richer?

Post by nisiprius »

Thesaints wrote: Thu Aug 12, 2021 12:10 am
spanky123 wrote: Wed Aug 11, 2021 9:38 pm My preference is "when you have won the game, why keep on playing?".
When you have won the conference, why go for the national title?
Why share an Olympic gold medal when you have the option of competing again in a tie-breaker round?
You never know what is enough unless you know what is more than enough.
--William Blake, "Proverbs of Hell"
Last edited by nisiprius on Thu Aug 12, 2021 6:37 am, edited 1 time in total.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
SCb&b
Posts: 100
Joined: Thu Jan 18, 2018 5:45 pm

Re: Is it actually rational to have a higher stock allocation as you age and become richer?

Post by SCb&b »

It seems to me that once you have 10 years of expenses in bonds or safe assets it's silly to put more in. That would be my cutoff for increasing stock allocation as one ages.
smitcat
Posts: 8375
Joined: Mon Nov 07, 2016 10:51 am

Re: Is it actually rational to have a higher stock allocation as you age and become richer?

Post by smitcat »

SCb&b wrote: Thu Aug 12, 2021 6:29 am It seems to me that once you have 10 years of expenses in bonds or safe assets it's silly to put more in. That would be my cutoff for increasing stock allocation as one ages.
+1
secondopinion
Posts: 1459
Joined: Wed Dec 02, 2020 1:18 pm

Re: Is it actually rational to have a higher stock allocation as you age and become richer?

Post by secondopinion »

nisiprius wrote: Wed Aug 11, 2021 7:44 pm It's not a question of "rationality." It's a question of whether you have increasing relative risk aversion or decreasing relative risk aversion.

There is no objectively correct amount of risk aversion. It is an input to financial economics equations, not an output.

If you have decreasing relative risk aversion, then as you reach the point where you have more than enough wealth to take care of your needs and your important wants, you say "I can afford to gamble the rest of it, because it doesn't matter if I lose it."

If you have increasing relative risk aversion, then you say "When you've won the game, why keep on playing? I don't need to take risk at this point, and I prefer not to."

If you have constant relative risk aversion, then you say "As best I can judge, losing half my wealth suddenly now would hurt just about as badly as it would have years ago. So nothing has really changed, and I prefer to maintain a constant risk profile."

What to do with the extra money that you do not "need" is a personal choice.
Right; it is rational either way as long as this is about excess money. I am in the "decreasing relative risk aversion" group, but part of this is because I will never spend high excesses. As I continue to make more money, my spending is not increasing along with it (because I am happy with my life without spending much). Maybe some day I will know what to do with it (if I end up with it).

Sadly, so many people talk as if the market is a casino and investing is a game... I guess I take things seriously.
minimalistmarc
Posts: 1359
Joined: Fri Jul 24, 2015 4:38 pm

Re: Is it actually rational to have a higher stock allocation as you age and become richer?

Post by minimalistmarc »

9-5 Suited wrote: Wed Aug 11, 2021 8:51 pm There is definitely some truth to this concept and I intend to follow it to a degree. As the marginal utility of money declines with higher net worth, you face a paradox of have higher ability to take risk and lower need to take risk. Everyone gets to decide for themselves on which of those will prevail.

One quibble with the extreme proposition in the post though: it makes that common cardinal sin of implicitly assuming a lower limit of 50% for stock declines. Use 80% instead and that hypothetical looks a lot scarier. So I wouldn’t go to 100% stock because you MUST consider not just the probability of loss but the potential catastrophic nature of the loss.
80% is extremely improbable, although not impossible.
Broken Man 1999
Posts: 6685
Joined: Wed Apr 08, 2015 11:31 am
Location: West coast of Florida, near Champa Bay !

Re: Is it actually rational to have a higher stock allocation as you age and become richer?

Post by Broken Man 1999 »

I started at a 50% equities / 50% bonds AA when I took my pension lump-sum in August of 2015.

Last year, I changed to a 55% equity/45% bond AA. When I reach the end of another 5 years I will move to 60% equities / 40% bond AA, probably final AA.

We have a very well-funded retirement, and my primary reason is for legacy. All in all, even a 60% equity / 40% bond AA isn't that out of line.

When we do hit the 60/40 AA, we will have moved 10 years further along our retirement length, with 10 fewer years remaining.

Broken Man 1999
“If I cannot drink Bourbon and smoke cigars in Heaven then I shall not go." - Mark Twain
User avatar
ram
Posts: 1933
Joined: Tue Jan 01, 2008 10:47 pm
Location: Midwest

Re: Is it actually rational to have a higher stock allocation as you age and become richer?

Post by ram »

Yes.
(This does not mean that other asset allocations are irrational)
Ram
Firemenot
Posts: 741
Joined: Wed Apr 01, 2020 8:48 pm

Re: Is it actually rational to have a higher stock allocation as you age and become richer?

Post by Firemenot »

The wealthier I get the more comfortable I find my 100 percent stock allocation. A 50 percent fall doesn’t hurt so much as net worth goes up. Obviously the absolute dollar amount of a 50 percent fall is larger, but the remaining cushion is higher too.
bradpevans
Posts: 749
Joined: Sun Apr 08, 2018 1:09 pm

Re: Is it actually rational to have a higher stock allocation as you age and become richer?

Post by bradpevans »

Firemenot wrote: Thu Aug 12, 2021 7:43 pm The wealthier I get the more comfortable I find my 100 percent stock allocation. A 50 percent fall doesn’t hurt so much as net worth goes up. Obviously the absolute dollar amount of a 50 percent fall is larger, but the remaining cushion is higher too.
^^^^ same. 50%, theoretical or real, is easier to swallow when you are 4x, 8x, 10x etc
wrongfunds
Posts: 2977
Joined: Tue Dec 21, 2010 3:55 pm

Re: Is it actually rational to have a higher stock allocation as you age and become richer?

Post by wrongfunds »

HomerJ wrote: Wed Aug 11, 2021 6:27 pm Yes, once you have 2x+ what you need to retire, you can start to take more risks again, because a stock market crash won't really affect you any more.

I probably wouldn't, because if I already have 2x "enough", why would I feel the need to risk even more for a chance of making even more? (with a possible chance of losing a good chunk)

Once I have "enough", by definition, I no longer need "more".

But it's certainly a rational move for others, especially if they are trying to max out inheritances for their kids (but taking a chance where the kids get less instead)
Folks on this forum put lot of effort for growing, persevering and minimizing the assets which they don't even need! Some go to extra-ordinary efforts to achieve that goal. It makes perfect sense once you don't need your portfolio to live as your living expenses are covered by social security, pension, interest, dividend and rental income.

Do I need to take names? :-)
dkturner
Posts: 1659
Joined: Sun Feb 25, 2007 7:58 pm

Re: Is it actually rational to have a higher stock allocation as you age and become richer?

Post by dkturner »

grabiner wrote: Wed Aug 11, 2021 7:49 pm It depends on the intended use of the money.

Suppose that you retire with the intention of using your whole portfolio. But after ten years of a bull market, your standard of living has not changed, and your portfolio is now twice what you need to retire. It would be rational at that point to invest half the portfolio with an asset allocation appropriate for your own retirement, and the other half with an asset allocation appropriate for your heirs (which could be all stock if it is for the retirement of your still-working children and the college funds of your not-yet-born great-grandchildren).
We have been using this approach for several years and feel increasingly comfortable with it. Our retirement portfolio is currently 30/70 and “should” 😉 last us for the rest of our lives - barring a situation where both of us would require nursing home care for 5 or more years (we’re in our late 70s). Our non-retirement portfolio, which is slightly larger than our retirement portfolio, is currently 85/15. Combining the two portfolios gives us approximately a 60/40 allocation. It’s entirely possible that, if we hold our total equity exposure to 60%, our retirement portfolio may decline to a 100% fixed income allocation.

Would it be better to hold at least 25% equity in our retirement portfolio? As I recall, history suggests that a small allocation to equity is preferable to a 100% fixed income portfolio.
muffins14
Posts: 864
Joined: Wed Oct 26, 2016 4:14 am

Re: Is it actually rational to have a higher stock allocation as you age and become richer?

Post by muffins14 »

By “retirement” and “non-retirement” do you meant tax-deferred vs taxable accounts?

You really only have one portfolio, despite mental bucketing schemes, so it’s better to manage it as one combined portfolio.
dkturner
Posts: 1659
Joined: Sun Feb 25, 2007 7:58 pm

Re: Is it actually rational to have a higher stock allocation as you age and become richer?

Post by dkturner »

muffins14 wrote: Sat Aug 14, 2021 8:29 am By “retirement” and “non-retirement” do you meant tax-deferred vs taxable accounts?

You really only have one portfolio, despite mental bucketing schemes, so it’s better to manage it as one combined portfolio.
Legally, they are separate and distinct portfolios. Our retirement portfolio consists of his and her tax deferred Individual Retirement Accounts. Our non-retirement accounts consist of his and her fully taxable accounts. Both we and the Internal Internal Service clearly distinguish the retirement and non retirement accounts. We keep them separate because we live on our Social Security income and the cash flow (RMDs) from our retirement accounts. The non-retirement account income and principal are only utilized to the extent that Social Security income and RMD cash flow are insufficient for periodic extraordinary expenses, like car purchases and home remodeling/additions.
User avatar
grabiner
Advisory Board
Posts: 30601
Joined: Tue Feb 20, 2007 11:58 pm
Location: Columbia, MD

Re: Is it actually rational to have a higher stock allocation as you age and become richer?

Post by grabiner »

dkturner wrote: Sat Aug 14, 2021 7:43 am
grabiner wrote: Wed Aug 11, 2021 7:49 pm It depends on the intended use of the money.

Suppose that you retire with the intention of using your whole portfolio. But after ten years of a bull market, your standard of living has not changed, and your portfolio is now twice what you need to retire. It would be rational at that point to invest half the portfolio with an asset allocation appropriate for your own retirement, and the other half with an asset allocation appropriate for your heirs (which could be all stock if it is for the retirement of your still-working children and the college funds of your not-yet-born great-grandchildren).
We have been using this approach for several years and feel increasingly comfortable with it. Our retirement portfolio is currently 30/70 and “should” 😉 last us for the rest of our lives - barring a situation where both of us would require nursing home care for 5 or more years (we’re in our late 70s). Our non-retirement portfolio, which is slightly larger than our retirement portfolio, is currently 85/15. Combining the two portfolios gives us approximately a 60/40 allocation. It’s entirely possible that, if we hold our total equity exposure to 60%, our retirement portfolio may decline to a 100% fixed income allocation.

Would it be better to hold at least 25% equity in our retirement portfolio? As I recall, history suggests that a small allocation to equity is preferable to a 100% fixed income portfolio.
It doesn't matter what is in which account (except for tax purposes). Since you are retired, you can spend money from either your non-retirement account or your retirement account as appropriate, and then rebalance to the correct overall allocation. If you would like to maintain your stock allocation, but the money you want to spend is a stock dividend from the taxable account, you can move money from bond funds to stock funds in your IRA.

And if you are planning to leave a large amount to your heirs (or to charity), it's better to avoid selling stocks in your taxable account, as this will avoid the capital gain on any stocks you leave to your heirs. It would be reasonable to sell bonds from the taxable account, and let the taxable account become all-stock.
Wiki David Grabiner
User avatar
LilyFleur
Posts: 2146
Joined: Fri Mar 02, 2018 10:36 pm

Re: Is it actually rational to have a higher stock allocation as you age and become richer?

Post by LilyFleur »

spanky123 wrote: Wed Aug 11, 2021 9:38 pm
nisiprius wrote: Wed Aug 11, 2021 7:44 pm It's not a question of "rationality." It's a question of whether you have increasing relative risk aversion or decreasing relative risk aversion.

There is no objectively correct amount of risk aversion. It is an input to financial economics equations, not an output.

If you have decreasing relative risk aversion, then as you reach the point where you have more than enough wealth to take care of your needs and your important wants, you say "I can afford to gamble the rest of it, because it doesn't matter if I lose it."

If you have increasing relative risk aversion, then you say "When you've won the game, why keep on playing? I don't need to take risk at the point, and I prefer not to."

If you have constant relative risk aversion, then you say "As best I can judge, losing half my wealth suddenly now would hurt just about as badly as it would have years ago. So nothing has really changed, and I prefer to maintain a constant risk profile."

What to do with the extra money that you do not "need" is a personal choice.
My preference is "when you have won the game, why keep on playing?".
Unless you like playing. :mrgreen:
User avatar
LilyFleur
Posts: 2146
Joined: Fri Mar 02, 2018 10:36 pm

Re: Is it actually rational to have a higher stock allocation as you age and become richer?

Post by LilyFleur »

grabiner wrote: Sat Aug 14, 2021 2:48 pm
dkturner wrote: Sat Aug 14, 2021 7:43 am
grabiner wrote: Wed Aug 11, 2021 7:49 pm It depends on the intended use of the money.

Suppose that you retire with the intention of using your whole portfolio. But after ten years of a bull market, your standard of living has not changed, and your portfolio is now twice what you need to retire. It would be rational at that point to invest half the portfolio with an asset allocation appropriate for your own retirement, and the other half with an asset allocation appropriate for your heirs (which could be all stock if it is for the retirement of your still-working children and the college funds of your not-yet-born great-grandchildren).
We have been using this approach for several years and feel increasingly comfortable with it. Our retirement portfolio is currently 30/70 and “should” 😉 last us for the rest of our lives - barring a situation where both of us would require nursing home care for 5 or more years (we’re in our late 70s). Our non-retirement portfolio, which is slightly larger than our retirement portfolio, is currently 85/15. Combining the two portfolios gives us approximately a 60/40 allocation. It’s entirely possible that, if we hold our total equity exposure to 60%, our retirement portfolio may decline to a 100% fixed income allocation.

Would it be better to hold at least 25% equity in our retirement portfolio? As I recall, history suggests that a small allocation to equity is preferable to a 100% fixed income portfolio.
It doesn't matter what is in which account (except for tax purposes). Since you are retired, you can spend money from either your non-retirement account or your retirement account as appropriate, and then rebalance to the correct overall allocation. If you would like to maintain your stock allocation, but the money you want to spend is a stock dividend from the taxable account, you can move money from bond funds to stock funds in your IRA.

And if you are planning to leave a large amount to your heirs (or to charity), it's better to avoid selling stocks in your taxable account, as this will avoid the capital gain on any stocks you leave to your heirs. It would be reasonable to sell bonds from the taxable account, and let the taxable account become all-stock.
Under current tax law. The stretch IRA went away (many Bogleheads who were using it for legacy planning were very disappointed), and this could, too.
Northern Flicker
Posts: 8558
Joined: Fri Apr 10, 2015 12:29 am

Re: Is it actually rational to have a higher stock allocation as you age and become richer?

Post by Northern Flicker »

teuton33 wrote: Wed Aug 11, 2021 6:11 pm Here me out.

Suppose you are retired at age 55 with a NW=X and you determined that a 50/50 allocation met your risk tolerance. A 50% drop in stocks leaves you with 75% of your assets. You we’re all set for a long retirement!

Now what if unexpectedly you received a windfall equal to X making your NW=2X. If you changed your AA to 100% stocks a 50% drop leaves you with X which is more than .75X assuming the old AA and no inheritance.

You might make the argument that your living standards would immediately scale to the doubled NW and therefore the original 50/50 risk tolerance would apply. But what if you left your living standards at 0.5X?

Initially you won’t reap the full benefits of higher living standards of the new NW but if you can hang in there for a long period of time, that other half of stock will grow and grow and leave you a lot better off with significantly higher living standards.

So this had me thinking. Maybe it’s wiser to scale up stock allocations once your NW creeps up?

I did this myself. A few years back at age 34 I received an unexpected windfall that was equal to my NW at the time. I threw it all in the market and went 100%.
You should compare 75% stocks with 2X assets, to 50% stocks with X assets because in both cases you have X/2 in bonds.
My postings are my opinion, and never should be construed as a recommendation to buy, sell, or hold any particular investment.
Post Reply