2024 Overconfidence - Let’s have a look at asset allocation

[TrustTheMarket]

I am just finishing reading a book called “The Great Depression: A Diary” by Benjamin Roth. It is a book of diary entries in real time during this tumultuous time period.

It is extremely eye-opening. And after reading it, I believe many of us are too overconfident these days in our asset allocation.

During the Great Depression, stocks lost nearly 90% of their value. But that wasn’t the eye-opening part. Rather, it was reading about the difficulty in finding work and making ends meet, real estate was impossible to sell, banks were going under, nobody knew where the bottom was, and “nobody had any money.”

More recently, look at the Great Recession from 2007-2009. I believe many have forgotten what those days were like in real time.

Furthermore, I believe everyone should try to predict what their situation would be in the event of a prolonged major economic downturn. In my case, I do not have an impressive college degree, and my income is extremely dependent on the status of the economy. The aggressive recommendations from Vanguard, for example, such as 90% in stocks for one’s working years, do not seem to fit me or others like me. Income levels would be hard to replace during a prolonged economic crash and I believe that I would behave better knowing that my retirement funds were not completely devastated. And in the worst case, these funds may need to be partially accessed.

“Age In Bonds,” as Jack Bogle once tossed around as a good rule of thumb for asset allocation, seems to make a lot of sense for many reasons. One could go more aggressive if they choose, but for anyone who does not have a good feeling after doing a mental exercise like this to evaluate how things could look for you in the worst of times, give “Age In Bonds” a shot. It seems to have strong balance.

Of course, as you get older, adjustments can be made. But overall, I think Bogle had an interesting take on where to start.

I’d be curious if anyone agrees with me that the general recommendations do not always reflect the interests of people who’s earnings would be devastated by an economic crash. The general recommendations out there seem to assume that in your working years, you will always find a way to earn.

[TipsQuestions]

Sure, if your human capital is stock-like, and worrying about GD II keeps you up at night, owning at least some bonds is a logical choice. You'll probably wind up with less money, but on the small chance of a prolonged economic nightmare you'll come out ahead. Keep in mind a global stock portfolio didn't drop 90% during the GD - the US was especially hard hit. Personally, I never owned many bonds while working, since I paid down my HCOL mortgage (negative bond) instead, and when I got close to retirement (last few years) yields were so low that I decided to roll the dice on stocks. Now, retired this year, I have a 60/40 port.

[theorist]

I read the same book a few months ago. Its directional effect on me was the same as the one it had on you.

The book makes a strong case that we should imagine what we do in a truly long term bear market with high unemployment and civil unrest, but where financial assets remain potentially valuable (not like what happened in Russia & China in parts of the twentieth century). The author repeatedly talks explicitly about how much better off people who had serious amounts of their wealth in bonds would be, compared to very wealthy people who were highly concentrated in stocks.

There are a subset of bogleheads who believe in building a liability matching portfolio of safe assets as they accumulate sufficient wealth. This seems like one sane response to worries about vaguely similar scenarios.

[TrustTheMarket]

I read the same book a few months ago. Its directional effect on me was the same as the one it had on you.

The book makes a strong case that we should imagine what we do in a truly long term bear market with high unemployment and civil unrest, but where financial assets remain potentially valuable (not like what happened in Russia & China in parts of the twentieth century). The author repeatedly talks explicitly about how much better off people who had serious amounts of their wealth in bonds would be, compared to very wealthy people who were highly concentrated in stocks.

There are a subset of bogleheads who believe in building a liability matching portfolio of safe assets as they accumulate sufficient wealth. This seems like one sane response to worries about vaguely similar scenarios.

Yes, I am with you. How can I learn more about a liability matching portfolio? I haven’t heard of that.

For now, I have a large emergency fund for about 2 years of expenses (held in treasuries) and then our retirement accounts are all “age in bonds.”

[sycamore]

...
Yes, I am with you. How can I learn more about a liability matching portfolio? I haven’t heard of that.

Read some of the various discussion threads on the subject.

To find them, use this forum's search feature. Or use Google directly to search this forum.

Example: https://www.google.com/search?q=Liabili ... eheads.org. Clucking that link will bring up a list of search results. Start clicking on them, and read, read, read

Here's a good one: viewtopic.php?t=106544

[Tamalak]

I am a little concerned that recent downturns have been "spoiling" us - 2020 and 2022 were both pretty strong corrections but they were brief and followed by nice rallies, so getting through them gives me the impression that I have a high risk tolerance. For the market to go nowhere year after grinding year for a decade like the 70s, it's hard to imagine how I'd react.

[Sandtrap]

I am just finishing reading a book called “The Great Depression: A Diary” by Benjamin Roth. It is a book of diary entries in real time during this tumultuous time period.

It is extremely eye-opening. And after reading it, I believe many of us are too overconfident these days in our asset allocation.

During the Great Depression, stocks lost nearly 90% of their value. But that wasn’t the eye-opening part. Rather, it was reading about the difficulty in finding work and making ends meet, real estate was impossible to sell, banks were going under, nobody knew where the bottom was, and “nobody had any money.”

More recently, look at the Great Recession from 2007-2009. I believe many have forgotten what those days were like in real time.

Furthermore, I believe everyone should try to predict what their situation would be in the event of a prolonged major economic downturn. In my case, I do not have an impressive college degree, and my income is extremely dependent on the status of the economy. The aggressive recommendations from Vanguard, for example, such as 90% in stocks for one’s working years, do not seem to fit me or others like me. Income levels would be hard to replace during a prolonged economic crash and I believe that I would behave better knowing that my retirement funds were not completely devastated. And in the worst case, these funds may need to be partially accessed.

“Age In Bonds,” as Jack Bogle once tossed around as a good rule of thumb for asset allocation, seems to make a lot of sense for many reasons. One could go more aggressive if they choose, but for anyone who does not have a good feeling after doing a mental exercise like this to evaluate how things could look for you in the worst of times, give “Age In Bonds” a shot. It seems to have strong balance.

Of course, as you get older, adjustments can be made. But overall, I think Bogle had an interesting take on where to start.

I’d be curious if anyone agrees with me that the general recommendations do not always reflect the interests of people who’s earnings would be devastated by an economic crash. The general recommendations out there seem to assume that in your working years, you will always find a way to earn.

general recommendations do not always reflect the interests of people who’s earnings would be devastated by an economic crash.

Define:
0
What aspects of AA specific to you are you concerned with?
Yield, downturns, risk control, etc??
1
general recommendations...by who and what?
2
Is there any differentiation between "people" who would or would not be effected by an economic crash/downturn? Who?
3
Read: "Ages of the Investor: Life Cycle Investing" by W. Bernstein
amazon.(paperback not kindle)
https://www.amazon.com/Ages-Investor-Cr ... 181&sr=8-1
4
Consider this for comprehensive input in the context of "your financials and long term financial strategy" specific to you.
Portfolio Review Request
https://www.bogleheads.org/forum/viewt ... =1&t=6212

[theorist]

I read the same book a few months ago. Its directional effect on me was the same as the one it had on you.

The book makes a strong case that we should imagine what we do in a truly long term bear market with high unemployment and civil unrest, but where financial assets remain potentially valuable (not like what happened in Russia & China in parts of the twentieth century). The author repeatedly talks explicitly about how much better off people who had serious amounts of their wealth in bonds would be, compared to very wealthy people who were highly concentrated in stocks.

There are a subset of bogleheads who believe in building a liability matching portfolio of safe assets as they accumulate sufficient wealth. This seems like one sane response to worries about vaguely similar scenarios.

Yes, I am with you. How can I learn more about a liability matching portfolio? I haven’t heard of that.

For now, I have a large emergency fund for about 2 years of expenses (held in treasuries) and then our retirement accounts are all “age in bonds.”

I think the notion under that name has been discussed in interviews and books by William Bernstein (who is certainly well respected on bogleheads). Zvi Bodie is another name associated with similar ideas. You can find it discussed in various bogleheads threads by searching the term on the site. (And oops, I see “sycamore” beat me to posting this and even included various helpful links!)

The basic concept is simple. Instead of relying on some projection of stock market stability or growth to support part of your retirement assets, one should invest in sufficient safe assets to cover estimated expenses for e.g. a period of 25 years. So for instance, one could design a TIPS ladder to pay out $100k per year, if one’s estimated expenses are an (inflation adjusted) 100k. Then one has removed any worries about market fluctuations and is also protected from unexpected inflation. Variants of the idea could also involve nominal bonds and/or annuities, and of course fold in any expected social security or pension payments.

This sounds very conservative given modern ideas about investing that are often discussed on sites like bogleheads. I thought it was a little nutty myself until reading the book you mentioned. The kind of scenario outlined in the book certainly makes liability matching seem like a very reasonable idea, if you have the assets to do it!

[Nowizard]

The comments reflect risk tolerances that are different for different people and during different investing phases. Arguably, the period of the worst Covid days and the volatility of the market, status of the economy that is interpreted differently by many, etc. adds an ambient environment that is, again, arguably more anxiety or concerns over the future. The Fear/Greed model theory shows the current environment as driven by greed but revealed fear just less than a month ago. The whipsaw does get attention of many and leads to questions regarding defining market timing versus longer term investment approaches based on risk tolerance.

[ScubaHogg]

I’d be curious if anyone agrees with me that the general recommendations do not always reflect the interests of people who’s earnings would be devastated by an economic crash. The general recommendations out there seem to assume that in your working years, you will always find a way to earn.

No, I think this is a strawman. Lifecycle finance doesn’t require you “always” have a job. It takes a reasonable rational view on the likelihood that you will generally find a way to have income and adjusts your investment portfolio accordingly with a practical goal of lowering your lifetime risk. And it doesn’t prohibit you from adjusting your allocation based on risk tolerance or prevent you from having an emergency fund

This book does a nice job explaining the concept of diversifying across assets as well as across time

https://www.amazon.com/Lifecycle-Invest ... B08XN9G4KL

All that being said, if there was a major depression and you couldn’t find work for ten years you’d obviously have to make some adjustments. But then again I can’t imagine what asset allocation you could have today where that wouldn’t be the case

[nisiprius]

...Sure, if your human capital is stock-like...

In my opinion that's a red herring. Nobody's human capital is bond-like.

And not all, but the majority of people who know the phrase "asset allocation," and are consciously engaged in setting it, are all people with good steady jobs, probably with 401(k) plans.

I don't believe you can fine-tune based on your occupation because the necessary statistics aren't available--what's the standard deviation of the career salary of a senior software engineer in Madison, Wisconsin? And would be meaningless if they were because you are a sample size of one and your idiosyncratic risk overwhelms anything systematic.

[nisiprius]

My big take-home from the The Great Depression: A Diary was Roth's frustration at being surrounded by what he knew to be bargains in both stocks and real estate, but not having any money to buy them. He was constantly lamenting the toll the depression was taking on "professional men" (he was a lawyer). He wasn't starving, but he wasn't salting away "$15 a month in good common stocks" the way John J. Raskob had told people to do in 1929.

It really illustrates the fallacy of simulations of how "good" the depression would have been for anyone with the gumption to just keep up steadily purchasing stocks.

[Sandtrap]

The comments reflect risk tolerances that are different for different people and during different investing phases. Arguably, the period of the worst Covid days and the volatility of the market, status of the economy that is interpreted differently by many, etc. adds an ambient environment that is, again, arguably more anxiety or concerns over the future. The Fear/Greed model theory shows the current environment as driven by greed but revealed fear just less than a month ago. The whipsaw does get attention of many and leads to questions regarding defining market timing versus longer term investment approaches based on risk tolerance.

+1
Excellent points.

(for those unfamiliar)
Fear/Greed Model Theory article:
https://www.cnn.com/markets/fear-and-greed

Fear Greed Index article:
https://www.investopedia.com/terms/f/fe ... %20values.

Spectrum of Intrinsic Cognitive Overload varies per person's market/economic/financial concerns and immediate tangible effects on daily life.
Thus..."ignore the noise", "remain rational..vs irrational", "respond vs react".
j

[rockstar]

I don’t invest based on feelings. And it’s too easy to become cynical and go way too conservative. If you’re buying more bonds, then you can look at the YTM and decide if that still accomplishes your goals after taxes. At today’s rates, bonds at best keep up with the national inflation rate, which can be very different from your state inflation rate and personal inflation rate.

If I had to guess, I’d expect more money to flow into equities as bonds become less attractive over the next couple of years. This could create another Greenspan like bubble, but we’ll only know in hindsight.

[CraigTester]

My big take-home from the The Great Depression: A Diary was Roth's frustration at being surrounded by what he knew to be bargains in both stocks and real estate, but not having any money to buy them. He was constantly lamenting the toll the depression was taking on "professional men" (he was a lawyer). He wasn't starving, but he wasn't salting away "$15 a month in good common stocks" the way John J. Raskob had told people to do in 1929.

It really illustrates the fallacy of simulations of how "good" the depression would have been for anyone with the gumption to just keep up steadily purchasing stocks.

I vividly remember looking for quarters in the couch cushions around 2009….

Also got a hard lesson in the lack of liquidity in zero coupon munis at that time.

Perhaps a good argument for one-way balancing… which some might suggest that Buffett is currently doing as he hordes t-bills.

[windaar]

“Age In Bonds,” as Jack Bogle once tossed around as a good rule of thumb for asset allocation, seems to make a lot of sense for many reasons.

Age based allocations, whatever the % in bonds, provide a lifetime glidepath timilar to a TDF. We see so many posts here from high-equity holders who want to move to a more conservative AA later in life, but they ask "how to do this?" "When to do this?" When you adjust AA with age you can have a lifetime plan.

[ApeAttack]

My big take-home from the The Great Depression: A Diary was Roth's frustration at being surrounded by what he knew to be bargains in both stocks and real estate, but not having any money to buy them. He was constantly lamenting the toll the depression was taking on "professional men" (he was a lawyer). He wasn't starving, but he wasn't salting away "$15 a month in good common stocks" the way John J. Raskob had told people to do in 1929.

It really illustrates the fallacy of simulations of how "good" the depression would have been for anyone with the gumption to just keep up steadily purchasing stocks.

In addition to this, another big take away for me was the uncertainty in what would come next. The local economy would seem to improve a bit, then collapse again (lawyers seemed to have a difficult time throughout). At the time, no one knew when the economy would fully recover.

If another Great Depression occurred today, we would have no idea how long we would need to hold out before it ends. After 5 years of greatly diminished amd intermittent income, and a rollercoaster​ stock market, how many of us on this forum who are still working would be in a position to take advantage of low stock prices? Some could, but I'd imagine many would find it quite a difficult time.

[nisiprius]

The stock market decline that began in 1929 ended with recovery in 1936, one of the best years in stock market history. But a many people are unaware that the stock market crashed again in 1937 and didn't recover until 1945. Only three months separated the two declines.The 1937 decline was about -50%, thus fully comparable to 2000-2002 and 2008-2009. It only escapes notice because 1929 was so much worse, and accompanied by so much social frenzy (in the weeks leading up to October 29th, people went to Wall Street and jammed the just to be there and sense the presence of a financial miracle.

[ScubaHogg]

...Sure, if your human capital is stock-like...

In my opinion that's a red herring. Nobody's human capital is bond-like.

You have to apply some discounted probability to your human capital to function in life. Consciously (which I advocate) or unconsciously

If you don’t the logical conclusions lead you to some weird places.

And “bond like” isn’t “exactly the same thing as a bond”

[Lawyered_]

In my opinion the 100% VTI and chill segment of Bogleheads is completely asinine and disregards huge risks associated with that type of portfolio. Single country risk. 100% stock risk. The list is massive. Someone who is 70% VT; 20% treasuries and 10% managed futures or gold takes on far far less risk. This time is not different. USA could crater for 20 years. At the very least, there will be another great recession or a depression at some point. Those who disregard that fact do so at their own peril.

[ekid]

What! No bonds defaulted in the Great Depression?

(I don't remember)

[RetiredAL]

I hate to use this term, but things will be different this time. I use it for 2 reasons.

1. The banking/loan system cannot collapse as it did in 1929-1930.
2. The widespread use of margin to high % of assets is now limited to much lower percentages.

Thus, IMO, the snowballing effect that occurred largely caused by those 2 items, is not likely to propagate into such widespread and large drop today. That does not mean that a drop will nor occur, just not to the same degree.

[arcticpineapplecorp.]

More recently, look at the Great Recession from 2007-2009. I believe many have forgotten what those days were like in real time.

I think people want to forget about tough times because it's a trauma. While most people tend to gravitate to the negative rather than the positive, most don't want to wallow on such bad times (like losing a job and not being able to get another one for a year or longer) especially if they've eventually recovered. Selective attention I'd call it.

Furthermore, I believe everyone should try to predict what their situation would be in the event of a prolonged major economic downturn. In my case, I do not have an impressive college degree, and my income is extremely dependent on the status of the economy. The aggressive recommendations from Vanguard, for example, such as 90% in stocks for one’s working years, do not seem to fit me or others like me. Income levels would be hard to replace during a prolonged economic crash and I believe that I would behave better knowing that my retirement funds were not completely devastated. And in the worst case, these funds may need to be partially accessed.

“Age In Bonds,” as Jack Bogle once tossed around as a good rule of thumb for asset allocation, seems to make a lot of sense for many reasons. One could go more aggressive if they choose, but for anyone who does not have a good feeling after doing a mental exercise like this to evaluate how things could look for you in the worst of times, give “Age In Bonds” a shot. It seems to have strong balance.

Of course, as you get older, adjustments can be made. But overall, I think Bogle had an interesting take on where to start.

these are all age based approaches, which really are irrelevant if you think about it. AA is individual. There's more variation within groups than between groups. examples:

Should all 30 year olds be 100% in stocks?

well, no. Some like Mark Zuckerberg won the game and can stop playing (i.e., he doesn't have the NEED to take risk at 30. He has the ability and maybe the willingness, but not the need).

I've known some 30 year olds that don't have the willingness to take the risk of 100% stocks. Doesn't matter that they have time on their side. If they're going to bail when the going gets tough, then that's the wrong allocation. The right allocation is the one you can stick with.

Some 30 year olds may be in the gig economy. If a recession rolls around, they could lose their job as demand dries up. Doesn't matter if they have a need to take risk (little to no investment capital) or the willingness. They may not have the same ABILITY to take risk as a 30 year old tenured professor, right?

So the amount of risk is based on your personal need, ability and willingness to take risk:

How much risk do you need to take: https://www.cbsnews.com/news/asset-allo ... -you-need/
How much risk do you have the ability to take: https://www.cbsnews.com/news/asset-allo ... -you-take/
How much risk do you have the willingness to take: https://www.cbsnews.com/news/asset-allo ... tolerance/
How to deal with conflicts between the need, ability and willingness to take risk: https://www.cbsnews.com/news/asset-allo ... ing-goals/

I’d be curious if anyone agrees with me that the general recommendations do not always reflect the interests of people who’s earnings would be devastated by an economic crash. The general recommendations out there seem to assume that in your working years, you will always find a way to earn.

I remember prior to 2008 the experts' advice for savings was have 3-6 months worth in case of job loss. Then after 2008, because it was evident some people were not going to find jobs for 1 year or longer, the advice changed to "have savings equal to 1 year or more". That was not helpful after the fact, was it? Again, general advice is too general. Does a brain surgeon need 1 year of savings? Not if there's a shortage of brain surgeons. High demand for labor, low supply of labor, s/he'll get remployed quickly (provided the reason for losing said job was something like hospital closure rather than incompetence). But a burger flipper? Well, when there are 14 million people out of work like in 2008-2009, there may be a lot of competition for your job as burger flipper because some people will do whatever they can to put food on table and keep roof over head. High supply of labor, low demand for labor, it will take longer to find said replacement job (and/or wage will fall due to high supply of labor relative to demand).

context matters. general rules are just that, general and may not apply to your SPECIFIC situation.

[delamer]

A major economic calamity in your working years is now backstopped by unemployment insurance.

A major economic calamity in your retirement years is now backstopped by Social Security.

Pensions and employment benefits were available to only a small portion of the population during the Great Depression. There was no safety net.

Financial pain will come to all when another crisis occurs. The degrees and types of pain will be different for a single 25 year-old, a married couple in their 40’s with 3 young kids, married empty-nesters in their 50’s, or a widowed 80 year old.

Each should have an allocation — and access to funds— that reflects their needs/concerns, whether that’s potential unemployment, inability to retire, etc.

The “unknown unknowns” of an extended crisis will mean that whatever portfolio you choose will probably be inadequate in some (or several) ways.

Don’t veer too far off the path of optimism though.

(I worry more about supply chain disruptions and my adult children’s prospects than our own.)

[beardsicles]

A major economic calamity in your working years is now backstopped by unemployment insurance.

A major economic calamity in your retirement years is now backstopped by Social Security.

Pensions and employment benefits were available to only a small portion of the population during the Great Depression. There was no safety net.

Financial pain will come to all when another crisis occurs. The degrees and types of pain will be different for a single 25 year-old, a married couple in their 40’s with 3 young kids, married empty-nesters in their 50’s, or a widowed 80 year old.

Each should have an allocation — and access to funds— that reflects their needs/concerns, whether that’s potential unemployment, inability to retire, etc.

The “unknown unknowns” of an extended crisis will mean that whatever portfolio you choose will probably be inadequate in some (or several) ways.

Don’t veer too far off the path of optimism though.

(I worry more about supply chain disruptions and my adult children’s prospects than our own.)

I've seen this too many times in my own family. I think it's quite plausible that in my lifetime, climate change will render many financial assets worthless. But I invest as if that won't happen, because I've what can happen if you veer off that path. And honestly, it's not even optimism for me, it's purely pragmatic. I don't have another choice.

My grandparents pulled a ton of money at the bottom of the market in 2008. They are living a materially worse life as a result of that choice.

My dad held trainloads of cash from ~2009 to 2022, too risk-averse to invest. My parents' retirement will be materially worse as a result of that choice. He missed out on something like 6% CAGR if he had just been conservatively invested during that period.

[yankees60]

I am just finishing reading a book called “The Great Depression: A Diary” by Benjamin Roth. It is a book of diary entries in real time during this tumultuous time period.

Just checked. Bought it six years ago tomorrow used but have never read it. After reading what you wrote it moves up on my priority list of books to read. Thanks.

[MBB_Boy]

I don't find it surprising that reading a book like this puts you in a mental state that wants to invest conservatively.

Go read a book written by a techno-optimist and do a similar mental exercise reflecting on all the good that can (and has already) happened. Bet you come away from that wanting to invest a different way as well

[abc132]

It is fascinating the degree to which conservative investors will
- try to justify a risk tolerance that has never produced better results
- use completely inappropriate comparisons (equal portfolio but entirely different risk preference through accumulation - for the worst possible stock decumulation sequences)
- try to justify their position by saying that some day aggressive investors will be sorry (we won't be - we made plans we are okay with regardless of the outcome)

I can be confident because my more aggressive AA got me to financial independence much faster than the conservative alternative. That has always been the case and there is a high probability we are much better off investing in stocks until we achieve financial independence. That is the only time that a heavy amount of fixed income reduces risk. Anything short term is covered by an appropriate emergency fund.

Why do you invest in a conservative plan that relies on working longer and staying healthy and employed?

Do you like taking more risk?

Why do I care about a double dip after 1929 if my plan still succeeded even in the low chance I lived to 95? I have social security and much better health care assurances today than I would have in 1929. Surely a portfolio that already succeeded without these things will be fine through that same event with these additional protections.

Are these real or imaginary problems we are trying to solve? Low savings rate, late start, unemployment - all of these things are better solved by higher expected returns. I typically hear about things that don't hurt an aggressive portfolio (like Japan 80's or US 2000 returns) or things that also bankrupt a conservative portfolio (stocks going to zero). If you need timing luck for the conservative portfolio to pay off (avoiding stock risk for many years of accumulation) it can be a worse bet.

You are taking the same risks and more as a conservative accumulator.

Can a conservative investor come up with a sensible comparison even where risks show up where their portfolio does better that is not reliant on timing luck with a low probability of working better? Even deep risks are better handled by achieving financial independence faster. You certainly can't guarantee anything but you improve your odds.

I need 35 years of expenses for my TIPS ladder and 10x expenses in stocks - per TIPS recommendations. Tell me how I get to 45x expenses before age 50 with a conservative portfolio that still works when stocks decline... You don't - the wise move is to take stock risk and secure your financial independence in the 99 percent of the time where your plan succeeds. That is better than timing luck of hoping you work long enough without stocks failing and then secure against stocks failing.

My plan worked in 1929. Is it overconfidence or is it taking an actual look at what would have happened?

[Dottie57]

I read the same book a few months ago. Its directional effect on me was the same as the one it had on you.

The book makes a strong case that we should imagine what we do in a truly long term bear market with high unemployment and civil unrest, but where financial assets remain potentially valuable (not like what happened in Russia & China in parts of the twentieth century). The author repeatedly talks explicitly about how much better off people who had serious amounts of their wealth in bonds would be, compared to very wealthy people who were highly concentrated in stocks.

There are a subset of bogleheads who believe in building a liability matching portfolio of safe assets as they accumulate sufficient wealth. This seems like one sane response to worries about vaguely similar scenarios.

Yes, I am with you. How can I learn more about a liability matching portfolio? I haven’t heard of that.

For now, I have a large emergency fund for about 2 years of expenses (held in treasuries) and then our retirement accounts are all “age in bonds.”

An example of liability matching is a tips ladder.

[dogagility]

I agree with abc123.

Guess the OP doesn't TrustTheMarket.

[UpperNwGuy]

And after reading it, I believe many of us are too overconfident these days in our asset allocation.

Can you be more specific? I've been reading this forum since 2017, and my impression is that most members tend to be conservative in their asset allocations. Why do you think many are overconfident?

I’d be curious if anyone agrees with me that the general recommendations do not always reflect the interests of people who’s earnings would be devastated by an economic crash. The general recommendations out there seem to assume that in your working years, you will always find a way to earn.

What general recommendations are you talking about? Most of the recommendations around here tend to be conservative. Are you talking about the 100% stock folk?

[TipsQuestions]

...Sure, if your human capital is stock-like...

In my opinion that's a red herring. Nobody's human capital is bond-like.

And not all, but the majority of people who know the phrase "asset allocation," and are consciously engaged in setting it, are all people with good steady jobs, probably with 401(k) plans.

I don't believe you can fine-tune based on your occupation because the necessary statistics aren't available--what's the standard deviation of the career salary of a senior software engineer in Madison, Wisconsin? And would be meaningless if they were because you are a sample size of one and your idiosyncratic risk overwhelms anything systematic.

You're probably right. I was thinking, for example, of a salesperson versus a radiologist, or (the classic example) a tenured college professor. But you can't fine tune things as you say, and there's so much future uncertainty no matter what career you choose.

[rkhusky]

A big bear market is one risk. A more common risk is injury or illness that requires you to start withdrawing from your portfolio earlier than expected. If that happens during even a moderate bear, you might end up in trouble.

[TrustTheMarket]

And after reading it, I believe many of us are too overconfident these days in our asset allocation.

Can you be more specific? I've been reading this forum since 2017, and my impression is that most members tend to be conservative in their asset allocations. Why do you think many are overconfident?

I’d be curious if anyone agrees with me that the general recommendations do not always reflect the interests of people who’s earnings would be devastated by an economic crash. The general recommendations out there seem to assume that in your working years, you will always find a way to earn.

What general recommendations are you talking about? Most of the recommendations around here tend to be conservative. Are you talking about the 100% stock folk?

I love this forum, don’t get me wrong! I have just found that many people have very high stock allocations. Perhaps they have the ability to do so. Also Vanguard’s Target Date funds utilize 90% stocks until age 40. After reading this book, a 90% stock allocation is something I believe most people could not handle in the worst of times. To see your life’s savings vanish before your eyes…that is something you cannot prepare for. Of course it should come back, but behavioral mistakes may happen. And I don’t think Vanguard should be using this high of a stock allocation.

Furthermore, I wanted to simply make the point that many people do not have jobs that can withstand an economic crisis. And for that reason, most portfolios should have a healthy amount of fixed income. Someone above mentioned that during 2008-2009, many experts changed their recommendations, advising people to hold 1+ year of an emergency fund. That advice came way too late. I wanted to make this post to ensure people read a book like this, or at least contemplate the other side, to help prepare themselves for when times are not so great. That’s all. And I’ve learned a lot from these responses, thanks everyone! The theme is that everyone’s situation is different. And we should all take a good look at what we need in safe keeping to weather a storm that could possibly hit in the future, like we’ve seen before. Let’s learn lessons from history.

[TrustTheMarket]

A couple of quotes from the book:

October 10th, 1931
“Again and again I am forced to the conclusion that in prosperous times a man must be cautious and preserve his capital and be careful not to over-expand his business or to go too deeply in debt relying on a continuation of good business to pay the debt.”

AUGUST 20, 1931
“This morning a client 65 years of age came into the office and we had a long talk about his personal affairs. He had been in the liquor business and in 1921 when Prohibition put an end to his activity he had accumulated about $200,000 in liquid cash. He is now broke except for some worthless real estate. He became a prey to high pressure salesmen of worthless stocks, tried one business after the other, speculated in real estate and in many ways tried to make more money quickly. We discussed 7 or 8 other men to whom the same thing happened. Not one was able to hold his money. They were good saloonkeepers but had not learned how to keep their money or to make it work for them. They knew absolutely nothing about sound investments and were not satisfied with a moderate return of 4% or 5%. I asked him what he would do again in the same circumstances. With tears in his eyes he said he would preserve and protect the principal at all hazards. He would invest safely for a small but certain return. On $8,000 a year, he could have lived well in Youngstown and he and his family would have had the peace of mind that financial security can bring. He was particularly rabid against his investments in real estate.”

[TrustTheMarket]

More recently, look at the Great Recession from 2007-2009. I believe many have forgotten what those days were like in real time.

I think people want to forget about tough times because it's a trauma. While most people tend to gravitate to the negative rather than the positive, most don't want to wallow on such bad times (like losing a job and not being able to get another one for a year or longer) especially if they've eventually recovered. Selective attention I'd call it.

Furthermore, I believe everyone should try to predict what their situation would be in the event of a prolonged major economic downturn. In my case, I do not have an impressive college degree, and my income is extremely dependent on the status of the economy. The aggressive recommendations from Vanguard, for example, such as 90% in stocks for one’s working years, do not seem to fit me or others like me. Income levels would be hard to replace during a prolonged economic crash and I believe that I would behave better knowing that my retirement funds were not completely devastated. And in the worst case, these funds may need to be partially accessed.

“Age In Bonds,” as Jack Bogle once tossed around as a good rule of thumb for asset allocation, seems to make a lot of sense for many reasons. One could go more aggressive if they choose, but for anyone who does not have a good feeling after doing a mental exercise like this to evaluate how things could look for you in the worst of times, give “Age In Bonds” a shot. It seems to have strong balance.

Of course, as you get older, adjustments can be made. But overall, I think Bogle had an interesting take on where to start.

these are all age based approaches, which really are irrelevant if you think about it. AA is individual. There's more variation within groups than between groups. examples:

Should all 30 year olds be 100% in stocks?

well, no. Some like Mark Zuckerberg won the game and can stop playing (i.e., he doesn't have the NEED to take risk at 30. He has the ability and maybe the willingness, but not the need).

I've known some 30 year olds that don't have the willingness to take the risk of 100% stocks. Doesn't matter that they have time on their side. If they're going to bail when the going gets tough, then that's the wrong allocation. The right allocation is the one you can stick with.

Some 30 year olds may be in the gig economy. If a recession rolls around, they could lose their job as demand dries up. Doesn't matter if they have a need to take risk (little to no investment capital) or the willingness. They may not have the same ABILITY to take risk as a 30 year old tenured professor, right?

So the amount of risk is based on your personal need, ability and willingness to take risk:

How much risk do you need to take: https://www.cbsnews.com/news/asset-allo ... -you-need/
How much risk do you have the ability to take: https://www.cbsnews.com/news/asset-allo ... -you-take/
How much risk do you have the willingness to take: https://www.cbsnews.com/news/asset-allo ... tolerance/
How to deal with conflicts between the need, ability and willingness to take risk: https://www.cbsnews.com/news/asset-allo ... ing-goals/

I’d be curious if anyone agrees with me that the general recommendations do not always reflect the interests of people who’s earnings would be devastated by an economic crash. The general recommendations out there seem to assume that in your working years, you will always find a way to earn.

I remember prior to 2008 the experts' advice for savings was have 3-6 months worth in case of job loss. Then after 2008, because it was evident some people were not going to find jobs for 1 year or longer, the advice changed to "have savings equal to 1 year or more". That was not helpful after the fact, was it? Again, general advice is too general. Does a brain surgeon need 1 year of savings? Not if there's a shortage of brain surgeons. High demand for labor, low supply of labor, s/he'll get remployed quickly (provided the reason for losing said job was something like hospital closure rather than incompetence). But a burger flipper? Well, when there are 14 million people out of work like in 2008-2009, there may be a lot of competition for your job as burger flipper because some people will do whatever they can to put food on table and keep roof over head. High supply of labor, low demand for labor, it will take longer to find said replacement job (and/or wage will fall due to high supply of labor relative to demand).

context matters. general rules are just that, general and may not apply to your SPECIFIC situation.

Fantastic post, thank you.

[retired@50]

Yes, I am with you. How can I learn more about a liability matching portfolio? I haven’t heard of that.

For now, I have a large emergency fund for about 2 years of expenses (held in treasuries) and then our retirement accounts are all “age in bonds.”

Read some of William Bernstein's books. It was he who coined the term as far as I know.
https://www.bogleheads.org/wiki/William_Bernstein

The Ages of the Investor & The Investor's Manifesto.

Regards,

[carminered2019]

100% stock AA or 30/70 AA, just take the emotion out of investing than everything will be ok. Even in retirement I will never be lower than 75% in stock and I was 100% in stock during my accumulation years.

[er999]

Other alternatives to age in bonds to derisking in case of another Great Depression;
1. Paid off mortgage
2. Government job with a pension.

Also if you are worried about another Great Depression take care to what type of bonds to hold. Probably not total bond but only us government bonds. Benjamin Roth does say that the us government bond holders made out all right. I thought it was interesting when he wrote people with properties were destroying the vacant buildings to avoid property tax so real estate investing wasn’t safe either.

Unlikely to have a Great Depression II as economists have learned the mistakes that made it worse but future downturns will happen. Bonds or other low risk asssets are worthwhile but you don’t want to be too cautious and miss out on gains. Age in bonds isn’t bad but perhaps too conservative for a lot of 40 year olds with secure jobs. While there are always exceptions you should have some idea whether your job is stock or bond like. Software engineers are stock like. Most doctors and postal employees are bond like.

[delamer]

And after reading it, I believe many of us are too overconfident these days in our asset allocation.

Can you be more specific? I've been reading this forum since 2017, and my impression is that most members tend to be conservative in their asset allocations. Why do you think many are overconfident?

I’d be curious if anyone agrees with me that the general recommendations do not always reflect the interests of people who’s earnings would be devastated by an economic crash. The general recommendations out there seem to assume that in your working years, you will always find a way to earn.

What general recommendations are you talking about? Most of the recommendations around here tend to be conservative. Are you talking about the 100% stock folk?

I love this forum, don’t get me wrong! I have just found that many people have very high stock allocations. Perhaps they have the ability to do so. Also Vanguard’s Target Date funds utilize 90% stocks until age 40. After reading this book, a 90% stock allocation is something I believe most people could not handle in the worst of times. To see your life’s savings vanish before your eyes…that is something you cannot prepare for. Of course it should come back, but behavioral mistakes may happen. And I don’t think Vanguard should be using this high of a stock allocation.

Furthermore, I wanted to simply make the point that many people do not have jobs that can withstand an economic crisis. And for that reason, most portfolios should have a healthy amount of fixed income. Someone above mentioned that during 2008-2009, many experts changed their recommendations, advising people to hold 1+ year of an emergency fund. That advice came way too late. I wanted to make this post to ensure people read a book like this, or at least contemplate the other side, to help prepare themselves for when times are not so great. That’s all. And I’ve learned a lot from these responses, thanks everyone! The theme is that everyone’s situation is different. And we should all take a good look at what we need in safe keeping to weather a storm that could possibly hit in the future, like we’ve seen before. Let’s learn lessons from history.

Not speaking for UpperNwGuy, but you just made a statement “I have just found that many people have very high stock allocations.” But you have offered no data or analysis to back up that assertion. And that’s where you lost me.

The article that you read convinced you that it is important for people to examine their asset allocations through the lense of “a worst case scenario,” particularly in terms of not having too a high a stock allocation.

Nothing wrong with making that recommendation. But it isn’t a logical conclusion to say that therefore “many people have very high stock allocations.” You don’t know that.

I’ve watched enough courtroom dramas to have heard “Objection: Assumes facts not in evidence.”

[HomerJ]

I'm one of the more conservative people here...

I think one should pick an allocation that you can hold even if the market drops 50%+ tomorrow and takes 5-10 years to recover.

Because it might.

For someone 20+ years from retirement, that could still be 90%-95% stocks with an emergency fund to help one get through a job loss.

For someone about to enter retirement, I would suggest something more conservative like 60/40 or 50/50 so you have 10 or so years worth of expenses in bonds/cash.

Once you've got an AA that you can hold through the next crash, you can stop worrying about the next crash. And that's nice.

Another option is to put aside a certain amount in "safer" assets, not a percentage thing, but an actual amount.

During 2008-2009, I rebalanced from bonds to stocks twice, but stopped once I got down to $200,000 in bonds\cash. That was my floor. It helped me "stay the course" and not panic knowing that I had $200,000 in "safe" money, enough to keep my family warm, fed, and dry for multiple years even if we lost our jobs.

(Also I joined Bogleheads just in time - see my join date, and they helped me "stay the course" as well)

I've been 50/50 for many years now, because I was always thinking retirement was just around the corner. Definitely has helped me sleep at night. None of the 20% drops in 2018, 2020, or 2022 (that easily could have become 50% crashes) bothered me at all, because I was already prepared for a crash.

[rockstar]

I have reduced this down to: how many years of expenses do I want in cash like investments? If things go south, that’s the money I’ll tap. Then, I can ignore the rest and let it ride. The downside for me is that I have this in short term TIPS in taxable and I Bonds.

[ge1]

I have a similar approach to Homer. I mentally apply a 50% haircut to my stock holdings and make sure I’m ok with that. It’s fairly simple for us though, we have a low need to take risk and our allocation to stocks therefore is low.

It’s clear that US stocks had a fantastic run since the GFC - some of it is due to very strong fundamentals (i.e., earnings growth), some of it is due to increase in valuations. In my personal opinion that leaves an investor in a tough spot right now as future returns may likely be lower if earnings growth hits a rough patch and/or valuations compress.

For a brief period last year, corporate bonds offered very attractive yields exceeding 6% but that has since corrected as well.

What do with that? I would overweigh value stocks (both large cap and small cap) within your stock allocation but otherwise keep your normal asset allocation between stocks and bonds. Just make sure recency bias doesn’t lead you to have too much in stocks.

[Chili Powder]

It is fascinating the degree to which conservative investors will
- try to justify a risk tolerance that has never produced better results
- use completely inappropriate comparisons (equal portfolio but entirely different risk preference through accumulation - for the worst possible stock decumulation sequences)
- try to justify their position by saying that some day aggressive investors will be sorry (we won't be - we made plans we are okay with regardless of the outcome)

It is bizarre. If anything, bondholders are the group of people that are being overconfident. In recent times, bonds haven't even kept up with inflation, but people call them the safe and risk free asset.

[abc132]

It is fascinating the degree to which conservative investors will
- try to justify a risk tolerance that has never produced better results
- use completely inappropriate comparisons (equal portfolio but entirely different risk preference through accumulation - for the worst possible stock decumulation sequences)
- try to justify their position by saying that some day aggressive investors will be sorry (we won't be - we made plans we are okay with regardless of the outcome)

It is bizarre. If anything, bondholders are the group of people that are being overconfident. In recent times, bonds haven't even kept up with inflation, but people call them the safe and risk free asset.

It is unproductive for them to focus on stock risk. The actionable strategy is to understand how stocks help and how bonds help. But they are too busy telling stock holders that they are going to regret their decision to have a bigger portfolio with better opportunity to de-risk.

Nine months into 2024 I already have 2.3 extra years of expenses in fixed income. I think my stock choices were pretty good and they have always worked better than what conservative investors are doing. It's going to take more than a 1929 sequence for my decisions not to pay off and I have many decades for expected growth to push the gap further.

[z3r0c00l]

Thanks for the recommendation, will get a copy of this book! I think my 70/30 AA is pretty conservative, and could live for about a decade on my bonds/cash alone if needed. (Longer if I move in with parents, or make other extreme moves.) But I sleep well at night knowing I have several back up careers if needed.

[rob]

As interesting historical stuff ok but it cannot happen today, so I don't see the point of trying to address it. The largest drops in my investing lifetime have had massive government intervention. The stock markets all have stalling triggers. It's just not relevant today.

[vriguy1]

I read the book many years ago, but I doubt the next decade-long crisis will play out the same way. Civil war/anarchy/governance breakdown in the US, Artificial intelligence "taking over", Climate calamities, and pandemics (bird flu etc.) are all, in my opinion, at least as likely as a replay of 1929-45. They may be worse, but I see no way to adequately prepare, as an individual, for those today, beyond being ready to flexible and adapt to change. I'm keeping 10-12 years expenses in VTIP and VAIPX, both TIPS bond funds, and going with total stock market funds and international stock index funds with the rest.

[stimulacra]

Has anyone done a specific optimized backtest for this period of time?

Say 1920 through 1941?

I'm curious what an asset allocation similar to the one below would have performed:

Stocks: 30%
Bonds: 40%
Real Estate: 15%
Precious Metals: 10%
Cash: 5%

[daleddm]

The message of the authors experience as I read it was that holding government bonds was or would have been the one safe holding, which definitely got my attention. It's not an exciting read - but comes across as very real.