Article: Why not 100% equities

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exodusing
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Article: Why not 100% equities

Post by exodusing »

Cliff Asness has an interesting article arguing against 100% equities. Especially given the volume of posts expressing enthusiasm for similar portfolios, it seems worth reading.

https://www.aqr.com/Insights/Perspectiv ... 0-Equities
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David Jay
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Re: Article: Why not 100% equities

Post by David Jay »

Two words: “Behavioral Finance”.

There is a whole field of study that looks at the human interaction with money. Hersh Shefrin was right in the middle of everything when behavioral finance was young. His quote in my signature line directly applies to 100% equity portfolios for the vast majority of individual investors. A portfolio that is mathematically superior - typically due to higher volatility - is unlikely to be appropriate for typical human behavior.
It's not an engineering problem - Hersh Shefrin | To get the "risk premium", you really do have to take the risk - nisiprius
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Re: Article: Why not 100% equities

Post by Sandtrap »

David Jay wrote: Mon Jun 24, 2024 7:44 am Two words: “Behavioral Finance”.

There is a whole field of study that looks at the human interaction with money. Hersh Shefrin was right in the middle of everything when behavioral finance was young. His quote in my signature line directly applies to 100% equity portfolios for the vast majority of individual investors. A portfolio that is mathematically superior - typically due to higher volatility - is unlikely to be appropriate for typical human behavior.
+1
You beat me to it. :D

While many focus on projecting and managing finances with spreadsheets, the forum "wiki", "Investing behavior pitfalls" brings attention to the always present "elephant in the room" that can and does cause irreversible damage to many a retirement portfolio.
Investing Behavior Pitfalls
https://www.bogleheads.org/wiki/Behavioral_pitfalls

One excellent real life example: (given with best intention but highly interpretive for context).

In March of 2020, the market fell by over 30 percent in 30 days, with no indication that it would stop that rapid fall, or recover if it did.
For many that profess "high risk tolerance" with "100 percent equities" in allocation, or high allocations in general, what did they actually do when that happened in March and months later?


j :D
*Edited for misinterpretations, cognitive bias, perspectives, et al.
(insert standard dis laimer for fact checks, opinionizations and perspectives: Everyone is different in everything.)
Last edited by Sandtrap on Mon Jun 24, 2024 11:53 am, edited 1 time in total.
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Re: Article: Why not 100% equities

Post by r.walker »

For many, having a portfolio diversified beyond equities makes a lot of sense. However, for those who live well below their means, 100% equities can work. Understood that many have behavioral responses which can compound risk for such a portfolio. Over several decades of investing, I've understood that volatility and risk are related, but not identical. I've always viewed corrections/bear markets as opportunities to buy more shares at bargain prices. I admittedly maintained a small cash buffer throughout, now less that 1% of my portfolio.

Once pensions and SS kick in and basic expenses are covered, portfolio volatility should be of little concern.
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Re: Article: Why not 100% equities

Post by Sandtrap »

r.walker wrote: Mon Jun 24, 2024 8:35 am For many, having a portfolio diversified beyond equities makes a lot of sense. However, for those who live well below their means, 100% equities can work. Understood that many have behavioral responses which can compound risk for such a portfolio. Over several decades of investing, I've understood that volatility and risk are related, but not equivalent. I've always viewed bear market corrections as an opportunity to buy more shares at bargain prices. I admittedly maintained a small cash buffer throughout, now less that 1% of my portfolio.

Once pensions and SS kick in and basic expenses are covered, portfolio volatility should be of little concern.
Yes
Well said
Good points

For those retiring or assured of retiring with employee pensions, SS, annuities, and other income streams covering retirement expenses (much like a reliable monthly paycheck in the accumulation years), portfolio allocation and "percent equities" can be relatively moot concerns.

But, for those without employee pensions and similar income streams, or if those monthly paycheck "like" amounts are minimal therefore greater portfolio reliance, concerns have a far different perspective.

For example:
How much of one's monthly expenses in retirement is covered by an investment portfolio of index funds, etc.?
How much reliance on this?
vs
How much of one's monthly expenses in retirement is covered by a pension, annuity, SS, etc, income stream combined?
How much reliance on this?

There are many where the later dwarfs the former, confident discussion of portfolio concerns, etc, can be interesting, socially, etc.
While there are many where the former is all that exists and discussion of retirement finance can be a great source of stress and "behavioral concerns".

This is why annuities continue to be popular topics and concerns.

This the importance of the forum wiki, "Investing Behavior Pitfalls"
j :D
Last edited by Sandtrap on Mon Jun 24, 2024 9:17 am, edited 2 times in total.
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Re: Article: Why not 100% equities

Post by TomatoTomahto »

My 28 year old son makes a good income. My advice to him a few years ago, not that he needed any advice from me, was that while his human capital so heavily outweighed his financial capital, to be 100% equities.
I get the FI part but not the RE part of FIRE.
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Re: Article: Why not 100% equities

Post by gavinsiu »

I agree with others it's all behavioral. There are a number of ways this can end badly. You say you can tough it out, but then find out that you are not so risk tolerance after all, and go to cash frequently to escape downmarket, give you less than bond returns.

We are also bad at sticking to plan, the equity premium can take a while to be realized, sometimes you may not see one in 10 years. Someone could stick with it for 10 years and then finally giving up and missed out on the rally in the next decade.
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Re: Article: Why not 100% equities

Post by KlangFool »

r.walker wrote: Mon Jun 24, 2024 8:35 am For many, having a portfolio diversified beyond equities makes a lot of sense. However, for those who live well below their means, 100% equities can work. Understood that many have behavioral responses which can compound risk for such a portfolio. Over several decades of investing, I've understood that volatility and risk are related, but not identical. I've always viewed corrections/bear markets as opportunities to buy more shares at bargain prices. I admittedly maintained a small cash buffer throughout, now less that 1% of my portfolio.

Once pensions and SS kick in and basic expenses are covered, portfolio volatility should be of little concern.
r.walker,

But, until the pension is vested and the person reaches 62 years old, it is too early to count the chicken. The person has to survive the coming recession first.

I watched a documentary on homeless people. In this case, the 50+ years person is living under a bridge hoping to reach 62 years old to withdraw his social security.

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Re: Article: Why not 100% equities

Post by smitcat »

KlangFool wrote: Mon Jun 24, 2024 9:15 am
r.walker wrote: Mon Jun 24, 2024 8:35 am For many, having a portfolio diversified beyond equities makes a lot of sense. However, for those who live well below their means, 100% equities can work. Understood that many have behavioral responses which can compound risk for such a portfolio. Over several decades of investing, I've understood that volatility and risk are related, but not identical. I've always viewed corrections/bear markets as opportunities to buy more shares at bargain prices. I admittedly maintained a small cash buffer throughout, now less that 1% of my portfolio.

Once pensions and SS kick in and basic expenses are covered, portfolio volatility should be of little concern.
r.walker,

But, until the pension is vested and the person reaches 62 years old, it is too early to count the chicken. The person has to survive the coming recession first.

I watched a documentary on homeless people. In this case, the 50+ years person is living under a bridge hoping to reach 62 years old to withdraw his social security.

KlangFool
Pensions can be vested in as little as 5 years - they can grow after that but owners are already vested.
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Re: Article: Why not 100% equities

Post by exodusing »

David Jay wrote: Mon Jun 24, 2024 7:44 am Two words: “Behavioral Finance”.

There is a whole field of study that looks at the human interaction with money. Hersh Shefrin was right in the middle of everything when behavioral finance was young. His quote in my signature line directly applies to 100% equity portfolios for the vast majority of individual investors. A portfolio that is mathematically superior - typically due to higher volatility - is unlikely to be appropriate for typical human behavior.
This ignores the problem of losing one's job and needing to sell equities for food shelter, etc. Especially since there's a reasonable correlation between economic conditions that result in job loses and equity declines.

It also totally ignores the article.
Last edited by exodusing on Mon Jun 24, 2024 9:23 am, edited 1 time in total.
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Re: Article: Why not 100% equities

Post by abc132 »

Very few people have the understanding of risk to hold 100% equities.

Things like portfolio size and amount of future contributions determine the safety of holding 100% stocks.

When people take a portfolio with no risk and say "why take the risk of stocks" they demonstrate the fundamental misunderstanding that they mistakenly believe stocks are simply risky. Stocks are only risky to the extent they can hurt your financial goals. The other things in the portfolio and the size of the portfolio matter. Your risk from stocks is not what is being graphed when people say stocks are risky.

With the lack of interest in understanding risks few people will have the understanding to hold a large amount of equities. The behavioral risk comes from the misunderstanding of stock risk. If you knew what stocks did for a portfolio you would be supportive of stock heavy allocations without telling everyone they will regret their stock choices in the next downturn.

Those of us with understanding don't regret our choices because of the outcome. That's reserved for people making behavioral decisions.
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Re: Article: Why not 100% equities

Post by notinuse »

Don't these articles always show up when the stock market is setting record highs?
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Re: Article: Why not 100% equities

Post by abc132 »

notinuse wrote: Mon Jun 24, 2024 9:24 am Don't these articles always show up when the stock market is setting record highs?
Articles saying people don't have the behavioral fortitude to stay 100% equities?

This would seem to be the correct time for such articles.

The article is wrong where it talks about risk-adjusted return without considering portfolio size or new contributions. These define the portfolio risk much more than returns vs volatility. Buffett at 90/10 is very safe for a good reason but 100/0 is also safe for the new investor for a very good reason - future contributions. Other's volatility risk materializing actually helps you while young. Things that help you are not things to fear.
Last edited by abc132 on Mon Jun 24, 2024 9:39 am, edited 1 time in total.
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Re: Article: Why not 100% equities

Post by rogue_economist »

There are some circumstances where 100% equities is the right choice, and many where it is the wrong choice. The issue is more in deciding what situation someone is in, and often the answer is the latter even when the former sounds tempting.
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Re: Article: Why not 100% equities

Post by nisiprius »

notinuse wrote: Mon Jun 24, 2024 9:24 am Don't these articles always show up when the stock market is setting record highs?
Wikipedia: "Minsky moment"
The more general concept of a "Minsky cycle" consists of a repetitive chain of Minsky moments: a period of stability encourages risk taking, which leads to a period of instability when risks are realized as losses, which quickly exhausts participants into risk-averse trading (de-leveraging), restoring stability and setting up the next cycle.
There hasn't been enough instability from 2011 to 2024 to create a feeling of insecurity. There is now a lot of money in the market from investors who were not of "investing age" in 2008-2009, and there's collective amnesia about what stock market risk really feels like. In a way the 2020 Covid crash probably made things worse, because although it was the shortest and least painful deep decline in stock market history, it probably misled a lot of young investors into thinking their risk tolerance is higher than it really is.

For sure, we are in a period right now where stock market risk is perceived as low. Some would say that happens to be the correct perception; some would say the perception of high risk in 2010 is the correct perception; but regardless, it's perceived as low now.
Last edited by nisiprius on Mon Jun 24, 2024 9:52 am, edited 3 times in total.
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Re: Article: Why not 100% equities

Post by MarkRoulo »

exodusing wrote: Mon Jun 24, 2024 6:46 am Cliff Asness has an interesting article arguing against 100% equities. Especially given the volume of posts expressing enthusiasm for similar portfolios, it seems worth reading.

https://www.aqr.com/Insights/Perspectiv ... 0-Equities
I also think Bogleheads threads such as:

I can't believe I am thinking this [Panic and Survival 2008-09]

and:

"Maximum Tolerable Loss" -- Not just a fear factor

Illustrate the challenges many face with a 100% equities position.
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Re: Article: Why not 100% equities

Post by Claudia Whitten »

exodusing wrote: Mon Jun 24, 2024 6:46 am Cliff Asness has an interesting article arguing against 100% equities. Especially given the volume of posts expressing enthusiasm for similar portfolios, it seems worth reading.

https://www.aqr.com/Insights/Perspectiv ... 0-Equities
I particularly like the conclusion, especially "extrapolating the winning country over a period of valuation increases is dangerous":

"The bottom line is diversification works, theory works (eventually), owning one asset is suboptimal, extrapolating the winning country over a period of valuation increases is dangerous, finance 101 is actually helpful – and we’ll likely have to do this again after the next bull market."
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Re: Article: Why not 100% equities

Post by rockstar »

I think, it’s easy to be 100% equities in tax deferred such as 401k. Mine has trading restrictions. It also has limited bond options. Stable income is about the only bond like perk with no loss of principal. So from a behavioral standpoint, I can be 100% equities.

However, I’d argue for an emergency fund in taxable. And call this your bond portfolio until you have built up sufficient expense space there. Given that a lot of people don’t have enough for an emergency, this should be pushed more than bonds for bonds sake.
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Re: Article: Why not 100% equities

Post by Morse Code »

exodusing wrote: Mon Jun 24, 2024 9:22 am
David Jay wrote: Mon Jun 24, 2024 7:44 am Two words: “Behavioral Finance”.

There is a whole field of study that looks at the human interaction with money. Hersh Shefrin was right in the middle of everything when behavioral finance was young. His quote in my signature line directly applies to 100% equity portfolios for the vast majority of individual investors. A portfolio that is mathematically superior - typically due to higher volatility - is unlikely to be appropriate for typical human behavior.
This ignores the problem of losing one's job and needing to sell equities for food shelter, etc. Especially since there's a reasonable correlation between economic conditions that result in job loses and equity declines.

It also totally ignores the article.
Right. The second part of the article actually argues behavioral concerns should be ignored because they cause sub-optimal portfolios.
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Re: Article: Why not 100% equities

Post by JackoC »

r.walker wrote: Mon Jun 24, 2024 8:35 am For many, having a portfolio diversified beyond equities makes a lot of sense. However, for those who live well below their means, 100% equities can work. Understood that many have behavioral responses which can compound risk for such a portfolio. Over several decades of investing, I've understood that volatility and risk are related, but not identical. I've always viewed corrections/bear markets as opportunities to buy more shares at bargain prices. I admittedly maintained a small cash buffer throughout, now less that 1% of my portfolio.

Once pensions and SS kick in and basic expenses are covered, portfolio volatility should be of little concern.
I don't disagree with the last exactly, it's just that a person from Mars might assume '100% equities' actually means that. Whereas the often understood definition '100% of a specified limited part of the source of future wealth/cash flow' varies a lot by wealth level. For people of modest means '100% equities' not counting SS might converge toward immateriality. For a well off person intending to maintain a well off lifestyle, '100% equities' could be close to, you know, 100% equities. :happy In case 1 it doesn't really matter. In case 2, close to reality for me, 100% equities is way too much risk. And I'm skeptical it's appropriate for anybody who is going to count a lot on their own savings unless they just started out. But what's inappropriate for me is up to me, what's inappropriate for others up to them.

Another vague term is 'behavioral finance'. There's an implication in that term, to me, of irrationality. IOW 100% equities would be best analytically, but people might react irrationally to 'turbulence'. That's a fundamentally flawed analogy IMO. I don't believe stock risk is just 'turbulence' on a modern airliner which unsettles many people (including me) but has almost no chance of bringing down the plane. It's turbulence in the Fokker Trimotor in 1931 with Knute Rockne where the (wooden, weakened by moisture) wings might come off the plane. :happy All the past graphs and 'learned' arguments how eg nothing worse than the Great Depression could possibly happen to the stock market aren't worth all that much IMO. It's not irrational to refuse to put yourself completely at the mercy of other people's optimism dressed up as 'the analytical answer'. Where '100% equities' actually means something close to that, again often it doesn't, which is another confusing part.
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Re: Article: Why not 100% equities

Post by BrooklynInvest »

I have the fortitude to be 100% equities. I just don't have the money.

Throughout my working life I had a much higher than zero percent likelihood I would need to tap my investments to stay afloat. Now they're about 40X expenses (after rental income and without factoring in SS in 10 years) but there were long stretches where drawing down during a bear market would have been problematic.
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Re: Article: Why not 100% equities

Post by firebirdparts »

Sandtrap wrote: Mon Jun 24, 2024 7:56 am
One excellent real life example:
In March of 2020, the market fell by over 30 percent in 30 days, with no indication that it would stop that rapid fall, or recover if it did.
For many that profess "high risk tolerance" with "100 percent equities" in allocation, or high allocations in general, what did they actually do when that happened in March and months later?

j :D
I think what you are saying here is "Behold, my imagination proves the inferior people are inferior". I have no idea why you, or anybody, would post such a thing.

But as for what 100% equities people do, they have to stand pat. If you're 100% equities, you can't buy anything during a downturn. You don't have anything that's not already invested. You can buy on payday. That's the answer to your "question".

In the case of 2020, there was about a month of warning and I don't think anybody was unaware. I that case a person with 100% equities gets a free shot at timing the market. Timing the market is not usually that easy, so I don't suppose we'll ever see that againe.
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Re: Article: Why not 100% equities

Post by Sandtrap »

firebirdparts wrote: Mon Jun 24, 2024 11:43 am
Sandtrap wrote: Mon Jun 24, 2024 7:56 am
One excellent real life example:
In March of 2020, the market fell by over 30 percent in 30 days, with no indication that it would stop that rapid fall, or recover if it did.
For many that profess "high risk tolerance" with "100 percent equities" in allocation, or high allocations in general, what did they actually do when that happened in March and months later?

j :D
I think what you are saying here is "Behold, my imagination proves the inferior people are inferior". I have no idea why you, or anybody, would post such a thing.

But as for what 100% equities people do, they have to stand pat. If you're 100% equities, you can't buy anything during a downturn. You don't have anything that's not already invested. You can buy on payday. That's the answer to your "question".

In the case of 2020, there was about a month of warning and I don't think anybody was unaware. I that case a person with 100% equities gets a free shot at timing the market. Timing the market is not usually that easy, so I don't suppose we'll ever see that againe.
Good points
well said

apologies for misunderstanding due to cognitive bias, etc.
I have corrected my post.
j
dis laimer: insert standard dislaimer.
Last edited by Sandtrap on Mon Jun 24, 2024 11:54 am, edited 1 time in total.
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Re: Article: Why not 100% equities

Post by gavinsiu »

I think the average SS for men is $2,057 a month and for woman is $1,634 a month, which end up being $24,684 and $19,608 a year. Most people don't have pension, so living on SS is possible but could be close to proverty level. Most people who make little also tend to have aggressive portfolio, probably because they feel unsafe.

I think 100% would be OK if my expenses are covered by some steady income. When the market crashed back in 2008, my job wasn't in danger and I didn't need the money, I was years from retirement. I think I would be nervous if I was retiring in 2008.
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Re: Article: Why not 100% equities

Post by carminered2019 »

Easy to be 100% equities when you are young and starting with little money.
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Re: Article: Why not 100% equities

Post by InvMoney »

A 100% equity portfolio for a retiree who depends on that portfolio for income is a high risk proposition.

By nearly every financial measure, stocks are expensive today. Some say the current stock valuation situation is comparable to that of the late 1990's. That bubble was followed by two major stock bear markets in the first decade of the 21st Century. It took until 2011 for the S&P 500 to be permanently valued above it's December 31,1999 closing price.

If a person retired on January 1, 2000 with a $1,000,000 portfolio and began taking $40,000 a year with subsequent annual inflation adjustments for income, their portfolio balance as of the end of April 2024 would be as follows if their portfolio was 100% invested in one of the Vanguard funds indicated:

$346,027 - S&P 500 Index (VFINX)
$1,084,890 - Balanced Index (VBINX)
$2,766,616 - Wellington (VWELX)

No one knows whether history will repeat itself. But if is does, there will once again be a lot of tears shed on this website by those favoring stock heavy portfolios.
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Re: Article: Why not 100% equities

Post by rockstar »

InvMoney wrote: Mon Jun 24, 2024 2:08 pm A 100% equity portfolio for a retiree who depends on that portfolio for income is a high risk proposition.

By nearly every financial measure, stocks are expensive today. Some say the current stock valuation situation is comparable to that of the late 1990's. That bubble was followed by two major stock bear markets in the first decade of the 21st Century. It took until 2011 for the S&P 500 to be permanently valued above it's December 31,1999 closing price.

If a person retired on January 1, 2000 with a $1,000,000 portfolio and began taking $40,000 a year with subsequent annual inflation adjustments for income, their portfolio balance as of the end of April 2024 would be as follows if their portfolio was 100% invested in one of the Vanguard funds indicated:

$346,027 - S&P 500 Index (VFINX)
$1,084,890 - Balanced Index (VBINX)
$2,766,616 - Wellington (VWELX)

No one knows whether history will repeat itself. But if is does, there will once again be a lot of tears shed on this website by those favoring stock heavy portfolios.
You also had twenty years of decreasing bonds rates during that period as well. The ten year treasury bond was over 6% at your starting point. It’s barely over 4% today.
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Re: Article: Why not 100% equities

Post by seajay »

InvMoney wrote: Mon Jun 24, 2024 2:08 pm A 100% equity portfolio for a retiree who depends on that portfolio for income is a high risk proposition.

By nearly every financial measure, stocks are expensive today. Some say the current stock valuation situation is comparable to that of the late 1990's. That bubble was followed by two major stock bear markets in the first decade of the 21st Century. It took until 2011 for the S&P 500 to be permanently valued above it's December 31,1999 closing price.

If a person retired on January 1, 2000 with a $1,000,000 portfolio and began taking $40,000 a year with subsequent annual inflation adjustments for income, their portfolio balance as of the end of April 2024 would be as follows if their portfolio was 100% invested in one of the Vanguard funds indicated:

$346,027 - S&P 500 Index (VFINX)
$1,084,890 - Balanced Index (VBINX)
$2,766,616 - Wellington (VWELX)

No one knows whether history will repeat itself. But if is does, there will once again be a lot of tears shed on this website by those favoring stock heavy portfolios.
Being both landlord and tenant (owning your own home) liability matches rent risk

Image

Combined with stocks and gold (or bonds) and the combined land/stock/gold portfolio value is inclined to be less volatile than 100% stocks. Lowering volatility uplifts the CAGR (geometric)

Image

Rebalancing house value is impractical however you can substitute stocks as a part proxy (more so if REIT type stocks).

Some might prefer to own one home, rent another, hold some gold. Another might prefer to own a home, hold stocks and gold (or bonds). 100% stocks with no other income and having to find/pay rent is by comparison a higher risk venture.

We own our own home, prefer stocks over that of the bother of renting, prefer gold over bonds (we also have pensions - that we consider to be like a bond fund ladder that precisely expires the day you die).

Someone with $1M wealth, $40K/year spending requirement, living in a $333K home that otherwise might cost $14K/year (4% rent), along with $20K/year pension income and $666K invested in stock/gold (or bonds) might be drawing < 1% SWR from that $666K portfolio ($14K imputed rent benefit, $20K pension, $6K from their $666K liquid wealth portfolio = $40K).
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Re: Article: Why not 100% equities

Post by tj »

GoCurryCracker wrote about this a decade ago:

https://www.gocurrycracker.com/path-100-equities
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Re: Article: Why not 100% equities

Post by WhitePuma »

I’m so glad that bonds and MM funds are now offering decent yields, and that TINA isn’t rampant. It makes me feel less bad about holding 30% bonds even if stocks continue to soar in the short-term.
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Re: Article: Why not 100% equities

Post by JBTX »

Why not 100% NASDAQ?
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Re: Article: Why not 100% equities

Post by smitcat »

abc132 wrote: Mon Jun 24, 2024 9:32 am
notinuse wrote: Mon Jun 24, 2024 9:24 am Don't these articles always show up when the stock market is setting record highs?
Articles saying people don't have the behavioral fortitude to stay 100% equities?

This would seem to be the correct time for such articles.

The article is wrong where it talks about risk-adjusted return without considering portfolio size or new contributions. These define the portfolio risk much more than returns vs volatility. Buffett at 90/10 is very safe for a good reason but 100/0 is also safe for the new investor for a very good reason - future contributions. Other's volatility risk materializing actually helps you while young. Things that help you are not things to fear.
Your past detailed posts with supporting math on this subject have been excellent. When the portfolio size is large enough the difference betwen risk and volatility becomes more apparent. I learned a lot from your past posts on this - thank you.
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Re: Article: Why not 100% equities

Post by seajay »

abc132 wrote: Mon Jun 24, 2024 9:32 am
notinuse wrote: Mon Jun 24, 2024 9:24 am Don't these articles always show up when the stock market is setting record highs?
Articles saying people don't have the behavioral fortitude to stay 100% equities?

This would seem to be the correct time for such articles.

The article is wrong where it talks about risk-adjusted return without considering portfolio size or new contributions. These define the portfolio risk much more than returns vs volatility. Buffett at 90/10 is very safe for a good reason but 100/0 is also safe for the new investor for a very good reason - future contributions. Other's volatility risk materializing actually helps you while young. Things that help you are not things to fear.
Historically Buffett's 90/10 was safer than 100% stock. For instance assume stocks pay 3% dividends and that's enough to live on, the remainder just left as-is, compared to 90/10 that yields 2.7% of the 3% and you draw a 0.3% SWR. The worst case historic 30 year outcomes (residual) were better for the 90/10, as was the median case outcome.

Much of investing is averaging, most tend to average in over many years, average out over many years, that helps smooth things out. SWR measures reflect averaging out, but disregards having averaged in, uses a fixed base start of drawdown date amount rather than reflecting how well or poorly it may have been to get to that value. However what works better for averaging out might also be considered as having worked better for averaging in, i.e. less variance, a better worst case.
Northern Flicker
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Re: Article: Why not 100% equities

Post by Northern Flicker »

exodusing wrote: Mon Jun 24, 2024 6:46 am Cliff Asness has an interesting article arguing against 100% equities. Especially given the volume of posts expressing enthusiasm for similar portfolios, it seems worth reading.

https://www.aqr.com/Insights/Perspectiv ... 0-Equities
Cliff Asness perhaps is commenting on recent work of Scott Cederburg there. That was discussed here:

viewtopic.php?t=419403
adave
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Re: Article: Why not 100% equities

Post by adave »

Asness is terrible and he is selling Alt high fee funds.

I say keep a cash cushion that ur comfortable with and the rest all in equities. It helps if you have a stable job.
abc132
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Re: Article: Why not 100% equities

Post by abc132 »

seajay wrote: Mon Jun 24, 2024 5:07 pm
abc132 wrote: Mon Jun 24, 2024 9:32 am
notinuse wrote: Mon Jun 24, 2024 9:24 am Don't these articles always show up when the stock market is setting record highs?
Articles saying people don't have the behavioral fortitude to stay 100% equities?

This would seem to be the correct time for such articles.

The article is wrong where it talks about risk-adjusted return without considering portfolio size or new contributions. These define the portfolio risk much more than returns vs volatility. Buffett at 90/10 is very safe for a good reason but 100/0 is also safe for the new investor for a very good reason - future contributions. Other's volatility risk materializing actually helps you while young. Things that help you are not things to fear.
Historically Buffett's 90/10 was safer than 100% stock. For instance assume stocks pay 3% dividends and that's enough to live on, the remainder just left as-is, compared to 90/10 that yields 2.7% of the 3% and you draw a 0.3% SWR. The worst case historic 30 year outcomes (residual) were better for the 90/10, as was the median case outcome.

Much of investing is averaging, most tend to average in over many years, average out over many years, that helps smooth things out. SWR measures reflect averaging out, but disregards having averaged in, uses a fixed base start of drawdown date amount rather than reflecting how well or poorly it may have been to get to that value. However what works better for averaging out might also be considered as having worked better for averaging in, i.e. less variance, a better worst case.
What happens at either of these AA's historically is that you blow way past your number in those pre-retirement sequences where you find the poor SWRs. Low SWR has meant a big run up and it is pretty trivial to decide to de-risk. I personally went 100/0 with a step move to 80/20 eight years before my expected retirement - based on great returns.

For a 50 year retirement and 20 years until social security with half my expenses covered by social security each of these has a 5% chance of failure:
100/0 26.2x expenses
90/10 25.4x expense

If we accept 5% failure the 100/0 portfolio only needs to be 3% bigger than the 90/10 portfolio.
If we reduce to 1% failure the 100/0 portfolio needs to be 7% bigger.
If we reduce to 0.1% failure the 100/0 portfolio needs to be 12% bigger.
If we reduce to 0.01% failure the 100/0 portfolio needs to be 17% bigger.

What you see is that the outsized returns from being 100/0 make up for the risk of the lower SWR for any failure rate someone at either AA might accept. It's not that stocks are less risky today its that we have bigger portfolios and that risk matters less. It is also that we can afford to de-risk without sacrificing great future earning potential. Those of us that were aggressive and evaluate risk appropriately have already won the game - and we don't need to stop playing.

I am a strong advocate for reaching those bigger portfolios with aggressive stock allocation and then some level of de-risking. 10-20% bonds is enough on a risk improvement basis and really all that makes sense if your risk tolerance is not changing dramatically. Someone with consistent risk tolerance would go from 100/0 to between 90/10 and 80/20, retire early, and have more than 25x expenses. If you get to 25x expense with 30 years to go and are ready to retire I recommend 70/30 AA. You need more bonds if you have the smaller portfolio.

A 30% bigger portfolio is 10x safer. If 10x safer is not enough you can fiddle with AA for marginal improvements in safety. It doesn't do much as our examples above show.

Achieving returns provides more safety than controlling volatility. This is why you stay aggressive until you get close to achieving your goals and then de-risk. If you try to manage volatility you increase risk. If you don't understand risk you are likely to make behavioral mistakes, calling stock risky, and having a less secure retirement sequence because of your choices. You certainly took the excess risk with too low of an AA even if you made it to a fully funded retirement. Once you get a big enough portfolio you have the luxury to do whatever you want. The least risk way to get there is with aggressive stock AA in accumulation and an understanding of risks that allows you to maintain that AA without behavioral mistakes.
ClassII
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Re: Article: Why not 100% equities

Post by ClassII »

Buffett’s 90/10 portfolio is for his wife to live on. I’m guessing her 10% bonds alone pump out 8-digits in interest a year. At that rate who cares if the stock market takes a plunge?
abc132
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Re: Article: Why not 100% equities

Post by abc132 »

smitcat wrote: Mon Jun 24, 2024 4:49 pm
abc132 wrote: Mon Jun 24, 2024 9:32 am
notinuse wrote: Mon Jun 24, 2024 9:24 am Don't these articles always show up when the stock market is setting record highs?
Articles saying people don't have the behavioral fortitude to stay 100% equities?

This would seem to be the correct time for such articles.

The article is wrong where it talks about risk-adjusted return without considering portfolio size or new contributions. These define the portfolio risk much more than returns vs volatility. Buffett at 90/10 is very safe for a good reason but 100/0 is also safe for the new investor for a very good reason - future contributions. Other's volatility risk materializing actually helps you while young. Things that help you are not things to fear.
Your past detailed posts with supporting math on this subject have been excellent. When the portfolio size is large enough the difference between risk and volatility becomes more apparent. I learned a lot from your past posts on this - thank you.
Thanks!

My belief is that understanding stock risk reduces behavioral mistakes.
abc132
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Re: Article: Why not 100% equities

Post by abc132 »

ClassII wrote: Tue Jun 25, 2024 12:18 am Buffett’s 90/10 portfolio is for his wife to live on. I’m guessing her 10% bonds alone pump out 8-digits in interest a year. At that rate who cares if the stock market takes a plunge?
You get the concept that portfolio size provides safety.

How about my 40x 80/20 portfolio as compared to a 30x 60/40? Which do you think is safer?

My portfolio is "only 33% bigger" but is now 6x less likely to fail than the more conservative 60/40 AA.

40x 80/20 0.2% failure (50 year retirement, 20 years until Soc Sec, Soc Sec provides 50% of income)
30x 60/40 1.3% failure (50 years retirement, 20 years until Soc Sec, Soc Sec provides 50% of income)

I took less risk than someone investing more conservatively and I have nearly 2x the average lifetime spending.
greedygus
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Re: Article: Why not 100% equities

Post by greedygus »

nisiprius wrote: Mon Jun 24, 2024 9:48 amThere hasn't been enough instability from 2011 to 2024 to create a feeling of insecurity. There is now a lot of money in the market from investors who were not of "investing age" in 2008-2009, and there's collective amnesia about what stock market risk really feels like. In a way the 2020 Covid crash probably made things worse, because although it was the shortest and least painful deep decline in stock market history, it probably misled a lot of young investors into thinking their risk tolerance is higher than it really is.
What if the causation runs in the other direction to some large extent? Maybe the modern covid crash was short and unpainful because of modern investors' different view & behavior on equities, where stock market volatility is not the kind of 'risk' we're really worried about. If anyone really had an inclination toward a poor behavioral response, march 2020 could have definitely been full panic-sale inducing. But instead it was just a blip, so isn't that some evidence that in aggregate, people may be less panicky? I love Minsky's point there, but crashing 50% in an uncertain global pandemic wasn't exactly the picture of "stability". To younger investors, stuff like crypto & gamestop get-rich-quick bets have been just a drastic contrast with passive index investing, which is considered the slow & steady path to guaranteed long-run gains.

It could be a missing piece of intuition and tested behavior for younger people who lived through the GFC & great recession but weren't investing during it. But again it can also work the other way: 2008 is recent evidence that even in one of the worst situations since the great depression, the people who made out best were those who stayed invested or even preferably continued to invest while stocks were down. Rather than amnesia, new investors get a free clear-eyed dispassionate retrospective look at what just took place, reinforcing what behavior is preferable. (Of course, there are real circumstantial risks, like risk of job loss during recession, or SOR risk when pulling the trigger on early retirement. But stuff like 'risk-adjusted returns', when actually just talking about measures of volatility, never seemed too compelling to me.)

I also think the behavioral angle is largely memetic, rather than purely an inherent universal psychology. As a millennial with 100% stocks, personally I feel lucky that I got into investing from various FIRE communities when the common meme was 'vtsax and chill'. If instead I had first come through the bogleheads community, there are so many members who repeat a mantra about needing bonds because 'most people can't stomach 100% equities and will make emotional mistakes', I may have just assumed that was true and followed suit. To me it now often sounds like a rationalization when I hear very smart members here declare that they hold a lot of bonds because they don't have the fortitude for too much index fund volatility and would *probably* succumb to panic selling or terrible anxiety. If people stopped repeating that, perhaps fewer onlookers would be worried about stock market fluctuations in the first place (it's pretty easy to not even look at the market very often, if you trust in the long term).
hudson
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Re: Article: Why not 100% equities

Post by hudson »

I'd take the sleep test before deciding on my asset allocation.

by GaryA505 » Tue May 23, 2023 1:33 pm Someone once said, "if you feel the need to sell equities when the stock market drops, your percentage of equities is too high".
viewtopic.php?p=7280736#p7280736



Bill Bernstein said:
"snip...young investors should be heavily into stocks, and retirees, and near-retirees, should aim for an LMP (liability matching portfolio...think fixed income), and beyond that, an RP (Risk Portfolio...think stocks)."
viewtopic.php?p=6458533#p6458533
dcabler
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Re: Article: Why not 100% equities

Post by dcabler »

TomatoTomahto wrote: Mon Jun 24, 2024 8:52 am My 28 year old son makes a good income. My advice to him a few years ago, not that he needed any advice from me, was that while his human capital so heavily outweighed his financial capital, to be 100% equities.
I had the same conversation with my 22 year old daughter when she graduated university last year and started working.

Cheers
alluringreality
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Re: Article: Why not 100% equities

Post by alluringreality »

greedygus wrote: Tue Jun 25, 2024 4:31 am Maybe the modern covid crash was short and unpainful because of modern investors' different view & behavior on equities, where stock market volatility is not the kind of 'risk' we're really worried about. If anyone really had an inclination toward a poor behavioral response, march 2020 could have definitely been full panic-sale inducing. But instead it was just a blip, so isn't that some evidence that in aggregate, people may be less panicky?
Goldman Sachs in the moment classified 2020 into their shortest event-driven category, what they term a one-off ‘shock’. They placed 2022 into their middle cyclical category, basically a rise in interest rates. Within their framework, a portion of investors have not experienced what they classify as a structural bear market, or bubble, their longest average historical time to recovery. Personally I don't take 2020 as social evidence for people near me being less panicked by price declines.
https://www.gsam.com/content/gsam/us/en ... bears.html
https://www.goldmansachs.com/intelligen ... ntials.pdf
https://www.goldmansachs.com/intelligen ... report.pdf
45% US Indexes, 25% Ex-US Indexes, 30% Fixed Income - Buy & Hold
JackoC
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Re: Article: Why not 100% equities

Post by JackoC »

gavinsiu wrote: Mon Jun 24, 2024 11:53 am I think 100% would be OK if my expenses are covered by some steady income.
In which case it wouldn't really be '100% equities' in any real economic sense I'd say, just in a stylized definition 'not counting this, that and the other thing'. But those things are highly relevant for some people (modest spenders with owned homes, just living on SS may be near the base case) and much less for others (highly disappointed having to come down to SS only lifestyle though OTOH others do it, it's obviously possible). But this is why I find '100% equities?' discussions bordering on meaningless. This is even besides differences in life stage.

Also I'm not saying 'behavioral risk' doesn't exist, just that stock risk, that the wings come off the plane, is real even if you have a totally cast iron stomach to 'turbulence'. The future is just not a guaranteed repeat of the past. Real 100% equities is foolhardy IMO unless quite young person with a quite secure job or a very high wealth level *they can stomach losing most of* (not common among wealthy people in reality IMO; Buffett isn't indifferent to being ruined, he's just convinced it won't happen: I'm not Buffett, in any way :happy ). '100% equities' that's really 50% equities as I'd tally it, I'd naturally view differently.
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Re: Article: Why not 100% equities

Post by gavinsiu »

JackoC wrote: Tue Jun 25, 2024 9:47 am In which case it wouldn't really be '100% equities' in any real economic sense I'd say, just in a stylized definition 'not counting this, that and the other thing'. But those things are highly relevant for some people (modest spenders with owned homes, just living on SS may be near the base case) and much less for others (highly disappointed having to come down to SS only lifestyle though OTOH others do it, it's obviously possible). But this is why I find '100% equities?' discussions bordering on meaningless. This is even besides differences in life stage.

Also I'm not saying 'behavioral risk' doesn't exist, just that stock risk, that the wings come off the plane, is real even if you have a totally cast iron stomach to 'turbulence'. The future is just not a guaranteed repeat of the past. Real 100% equities is foolhardy IMO unless quite young person with a quite secure job or a very high wealth level *they can stomach losing most of* (not common among wealthy people in reality IMO; Buffett isn't indifferent to being ruined, he's just convinced it won't happen: I'm not Buffett, in any way :happy ). '100% equities' that's really 50% equities as I'd tally it, I'd naturally view differently.
That's because Buffet has so much money that it would take a more massive event to bankrupt him. Let's say he loses 99% of his assxet, he would still be ok. When I see people say invest like Buffet, they should consider that they are not Buffet.
JackoC
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Re: Article: Why not 100% equities

Post by JackoC »

gavinsiu wrote: Tue Jun 25, 2024 10:12 am
JackoC wrote: Tue Jun 25, 2024 9:47 am In which case it wouldn't really be '100% equities' in any real economic sense I'd say, just in a stylized definition 'not counting this, that and the other thing'. But those things are highly relevant for some people (modest spenders with owned homes, just living on SS may be near the base case) and much less for others (highly disappointed having to come down to SS only lifestyle though OTOH others do it, it's obviously possible). But this is why I find '100% equities?' discussions bordering on meaningless. This is even besides differences in life stage.

Also I'm not saying 'behavioral risk' doesn't exist, just that stock risk, that the wings come off the plane, is real even if you have a totally cast iron stomach to 'turbulence'. The future is just not a guaranteed repeat of the past. Real 100% equities is foolhardy IMO unless quite young person with a quite secure job or a very high wealth level *they can stomach losing most of* (not common among wealthy people in reality IMO; Buffett isn't indifferent to being ruined, he's just convinced it won't happen: I'm not Buffett, in any way :happy ). '100% equities' that's really 50% equities as I'd tally it, I'd naturally view differently.
That's because Buffet has so much money that it would take a more massive event to bankrupt him. Let's say he loses 99% of his assxet, he would still be ok. When I see people say invest like Buffet, they should consider that they are not Buffet.
Agreed on the numbers, but I believe the key is he does not even entertain that possibility. I also agree that once we realize (99% of us should) we're not like him, we should put aside his views on investing as largely irrelevant. Except as they coincide with things we already know.
bh1
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Re: Article: Why not 100% equities

Post by bh1 »

I disagree that human behaviour is the sole, or even the major, motivator to avoid 100% equities. Many investors have high intestinal fortitude but hold bonds. Splitting a portfolio into a risky and riskless asset with rebalancing has an extremely large impact on volatility, at the cost of lower gain. Each investor has an optimal point (AA) on the volatility/gain curve, and there is no reason to assume that there is anything special about 100% equities. Of course, knowing one's optimal AA is the real issue. I vaguely recall that ~120% equities gives the maximum gain under backtesting, meaning balancing the increased gain from borrowing with the chance of going bust.
student
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Re: Article: Why not 100% equities

Post by student »

gavinsiu wrote: Mon Jun 24, 2024 9:07 am I agree with others it's all behavioral. There are a number of ways this can end badly. You say you can tough it out, but then find out that you are not so risk tolerance after all, and go to cash frequently to escape downmarket, give you less than bond returns.

We are also bad at sticking to plan, the equity premium can take a while to be realized, sometimes you may not see one in 10 years. Someone could stick with it for 10 years and then finally giving up and missed out on the rally in the next decade.
Yes. Good point. For those in Japan invested in Nikkei Index in 1990 waited for a long time.
CuriousGeorgeTx
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Re: Article: Why not 100% equities

Post by CuriousGeorgeTx »

Sandtrap wrote: Mon Jun 24, 2024 7:56 am One excellent real life example: (given with best intention but highly interpretive for context).

In March of 2020, the market fell by over 30 percent in 30 days, with no indication that it would stop that rapid fall, or recover if it did.
For many that profess "high risk tolerance" with "100 percent equities" in allocation, or high allocations in general, what did they actually do when that happened in March and months later?
When crises hit is when you find out what your real risk tolerance is. We designed our retirement with a big buffer (moat) to protect against volatility. During accumulation years, I had always bought more with what idle cash I had when the markets tanked. In retirement, I am more likely to do large Roth conversions (as I did in the referenced episode) when the market drops. That works for us because I have a significant pension (with no COLA) and we have a 7 year bond/CD ladder for Residual Living Expenses. Everything else is in VT. It works out to 85/15, but that is an outcome, not an input. The ladder has gotten smaller as Soc Sec begins. Once a year we decide based on market conditions whether to extend the ladder or use the maturing bonds for RLE. So as the market has risen, we have taken money off the table by selling equities and buying bonds (lately mostly TIPS). If the market drops significantly and stays there for 7 years, then we would have to consider whether to trim expenses or sell some equities. But trimming expenses means flying coach to Europe instead of business class.

This almost sounds cocky as I proof read it. I realize that the sequence of returns gods have smiled upon us. I have friends who retired in 2000 and watched their portfolio move sideways for 10 years. I have friends who worked for Enron or bought Stanford International Bank CDs. But our portfolio has more than doubled in the 8 years since I retired, changing our retirement from comfortable to very comfortable. As Deming said, the future is unknown and unknowable. I would not recommend that someone who does not have assured income streams in retirement be as aggressive as we have been.
Leesbro63
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Re: Article: Why not 100% equities

Post by Leesbro63 »

bh1 wrote: Tue Jun 25, 2024 10:34 am I disagree that human behaviour is the sole, or even the major, motivator to avoid 100% equities. Many investors have high intestinal fortitude but hold bonds. Splitting a portfolio into a risky and riskless asset with rebalancing has an extremely large impact on volatility, at the cost of lower gain. Each investor has an optimal point (AA) on the volatility/gain curve, and there is no reason to assume that there is anything special about 100% equities. Of course, knowing one's optimal AA is the real issue. I vaguely recall that ~120% equities gives the maximum gain under backtesting, meaning balancing the increased gain from borrowing with the chance of going bust.
The problem is that bonds are not really riskless at all. Only in the very short run. And TIPS don't work for everyone (such as high income taxable portfolio investors).
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