Help?! My 70 year old father is 100% invested in equities

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Re: Help?! My 70 year old father is 100% invested in equities

Post by LadyGeek » Sun Sep 24, 2017 9:26 am

This thread is now in the Investing - Help with Personal Investments forum (portfolio help).
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Re: Help?! My 70 year old father is 100% invested in equities

Post by CurlyDave » Sun Sep 24, 2017 11:56 am

dbr wrote:
Sun Sep 24, 2017 8:36 am
...No one has ever said to ignore significant sources of income. That is a common misconception in this discussion. The problem originates in how one determines asset allocation. One of the many things wrong with a formula generating asset allocation from age only is that it does ignore income streams. This leads to illogical accounting such as creating bond holdings from income. There are better ways to decide on an asset allocation. The actual result for various investors may be that taking income streams into account should lead to holding less in stocks than otherwise or to holding more in stocks than otherwise, depending on what best suits the situation of the investor...
Well, since you don't like the logic of how I account for income streams, why don't you describe a practical method of how you suggest we should account for them.

My real point is that no matter how simplisticly we account for entitlements, any method is far better than not accounting for them at all, which is guaranteed to produce a very distorted AA. While saying: "I don't like the logic of how you do it" has some value, there is much greater value in suggesting: "This is how I think it should be done."

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Re: Help?! My 70 year old father is 100% invested in equities

Post by nedsaid » Sun Sep 24, 2017 12:13 pm

Messner8000 wrote:
Sat Sep 23, 2017 9:17 am
Thanks for all the responses. To be honest, I was expecting everyone to say that he needs to read book X or article Y, and I wasn't expecting folks to tell me to lay off him! But thinking about it, I think that is probably darn good advice. I raised the point, he wasn't too thrilled about it, and so I think upon further reflection I will just let it go, unless he happens to raise it with me again.

As always, good advice here. Thanks!
Well your dad has lived through the 1973-74, the 2000-02, and the 2008-09 bear markets; all of which saw drops of 50% or more. So he is aware of what bear markets can do. With dividend paying stocks, he has a decent shot at an income stream that will grow faster than inflation, bonds cannot do that except for TIPS which seem richly priced right now. There are people out there with 100% stock portfolios but I am not one of them. I have a lower tolerance for market volatility than I used to.

Sounds like he is a smart guy, is satisfied with how things are going, and would probably resent your interference.

One thing you could do would be to get performance numbers from his portfolio and compare them to a broad market index like US Total Stock Market or the S&P 500. My guess is that he is slightly underperforming because of the fee drag of the 1% annual advisor fee. The thing is, having the ability to call his advisor when the chips are down might make the fee worth it to him.
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Re: Help?! My 70 year old father is 100% invested in equities

Post by dbr » Sun Sep 24, 2017 12:15 pm

CurlyDave wrote:
Sun Sep 24, 2017 11:56 am

Well, since you don't like the logic of how I account for income streams, why don't you describe a practical method of how you suggest we should account for them.

My real point is that no matter how simplisticly we account for entitlements, any method is far better than not accounting for them at all, which is guaranteed to produce a very distorted AA. While saying: "I don't like the logic of how you do it" has some value, there is much greater value in suggesting: "This is how I think it should be done."
Sure. I strongly recommend the system presented by Larry Swedroe of need, ability, and willingness to take risk. I didn't go into it here because it has been posted so many times already by so many people.

Need: This is how much return you need to earn over your accumulation lifetime to meet your objectives in retirement. Looking at what spending you want to support you first take off the income streams you have to arrive at what income you will need to withdraw from investments. You can use a retirement investment model to look at the probabilities of being successful with various rates of saving, planned needs for withdrawal, and asset allocation. I think Larry uses a Monte Carlo model for his own clients. I don't think this problem can be done without some sort of probabilistic model because investment returns are variable and uncertain. Objectives can be broader than that of producing income in retirement. The objective might be to secure a level of wealth for a purpose or to pass on. In either case investment results and income sources combine, income as income and investment results as investment results.

Ability: This is a consideration of a person's tolerance for bad risk actually turning up. How to consider this is more judgemental than the need concept. One idea is the concept of personal capital, which says that a person who has an expectation of large future earnings can tolerate more investment risk because if things go downhill he can make up the difference if future earnings. This factor typically trends to taking less risk with more age. Income streams add to ability to take risk because the income is secure no matter what the investment outcome. This factor would trend to taking more risk the more income is available. But it may not be that simple. If the known income streams are not adequate to meet a strongly required need, then then the trend would be to less risk with investments. It could even be surrendering the investments in favor of an annuity would be wise. Ability takes a lot of thoughtful discussion among those affected by the issue.

Willingness: Willingness is the psychological ability to carry risk without doing something stupid. The paradigm example of doing something stupid is holding a high stock allocation then panicking and selling out during a market crash. But an investor could make other behavioral mistakes that would be withing the category of willingness. There could be foolish willingness to take too much risk when it is not justified.

A common dilemma with this scheme is when one finds oneself in the category of high ability but low need. The advice is the the trump card is need: take no more risk than necessary to meet objectives. Swedroe has pointed out that in this situation it is better to take less risk rather than more. A first reason for that is that the marginal utility of increasing wealth falls with wealth. There is not an incentive to take unneeded risk. A second reason is that most investors are prone to underestimate risk. Therefore one should not be so sure that one has as much ability as one thinks.

By the way, it takes a lot of work to type up all this. Also the content can't be implemented without work. It is as a lot more than just saying "Age in Bonds -- SS as a Bond"

I hope this helps.

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Re: Help?! My 70 year old father is 100% invested in equities

Post by JW-Retired » Sun Sep 24, 2017 12:31 pm

CurlyDave wrote:
Sun Sep 24, 2017 11:56 am
My real point is that no matter how simplistically we account for entitlements, any method is far better than not accounting for them at all, which is guaranteed to produce a very distorted AA. While saying: "I don't like the logic of how you do it" has some value, there is much greater value in suggesting: "This is how I think it should be done."
Curly,
I've also been frustrated that Bogleheads mostly shun formulaic AA methods..... like Bogle's age-in-bonds with your fixed income streams present value treated as pseudo bonds. It's so rigid here that very few of us will even tell you what the Bogle formula would recommend for them, let alone why it's no good in their case.

I'll admit my own AA picked out of the air is pretty close to Bogle's rule. But that may be luck.
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dbr
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Re: Help?! My 70 year old father is 100% invested in equities

Post by dbr » Sun Sep 24, 2017 1:47 pm

JW-Retired wrote:
Sun Sep 24, 2017 12:31 pm
CurlyDave wrote:
Sun Sep 24, 2017 11:56 am
My real point is that no matter how simplistically we account for entitlements, any method is far better than not accounting for them at all, which is guaranteed to produce a very distorted AA. While saying: "I don't like the logic of how you do it" has some value, there is much greater value in suggesting: "This is how I think it should be done."
Curly,
I've also been frustrated that Bogleheads mostly shun formulaic AA methods..... like Bogle's age-in-bonds with your fixed income streams present value treated as pseudo bonds. It's so rigid here that very few of us will even tell you what the Bogle formula would recommend for them, let alone why it's no good in their case.

I'll admit my own AA picked out of the air is pretty close to Bogle's rule. But that may be luck.
JW
If I were to hold the asset allocation I have chosen while counting income streams as bonds, I would not have enough actual investment money to make the required stock allocation. If I were to follow an age in bonds rule I would have to invest my actual assets considerably more in stocks than I have chosen. I have chosen to take less risk in actual investment assets than Bogle's rule would dictate. In general I think the ironic observation about the age in bonds with income as bonds is that the result can be to hold fairly risky allocations to stocks in the invested assets and prevent the alternative choice of deciding to take less risk with investments because one has income streams. The larger the income available the more risk one is told to take in investing. More than that the question is never asked how well one's income needs are covered by one's income assets. That would have seemed to me to be a pretty important question.

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Re: Help?! My 70 year old father is 100% invested in equities

Post by Bfwolf » Sun Sep 24, 2017 2:16 pm

A few thoughts:

1) I don't like the idea of "capitalizing" pensions/SS as bonds. Instead, simply subtract those amounts off the required annual spending during retirement. If you'll have $40,000 a year in today's $s in pensions/SS, and your spending requirements in retirement will be $100,000/year in today's $s, then you will need a portfolio and asset allocation in retirement that allows for $60,000 a year in spending in today's $s. At a 4% withdrawal rate, that would be a starting point in retirement of $1,500,000 in today's $s. In the OP's father's case, the critical info is that AFTER the pension/SS, he is still withdrawing 3% per year while also paying an advisor 1%, which amounts to 4%. Is 100% stocks appropriate for a 70 years withdrawing 4% a year? I'd say it's less than ideal. It's creating higher risk that the OP's father runs out of money...I think it's silly to suggest potential behavior problems have no chance of existing during a serious market downtown now that OP's father is retired and is reliant on his portfolio for survival. The good news about the pensions/SS is that the OP's father wouldn't end up destitute in such a situation. But it would still suck.

2) The OP would not be getting the same advice if this post hadn't been made during a long bull market. OP is right to be concerned.

3) The question here is whether the risk is high enough and your chance of changing your father's opinion is high enough to be worth doing anything. I don't know the answer to that. You might just end up pissing your father off. I like the suggestion of getting him to read the Bogleheads Guide to Investment and/or the Bogleheads Guide to Retirement Planning. They're both great books. He may or may not be open to them. How you frame up the suggestion would seem key here: how can you get him to WANT to read the book, and not have you shoving it down his throat?

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Re: Help?! My 70 year old father is 100% invested in equities

Post by dbr » Sun Sep 24, 2017 2:28 pm

Bfwolf wrote:
Sun Sep 24, 2017 2:16 pm
A few thoughts:

1) I don't like the idea of "capitalizing" pensions/SS as bonds. Instead, simply subtract those amounts off the required annual spending during retirement. If you'll have $40,000 a year in today's $s in pensions/SS, and your spending requirements in retirement will be $100,000/year in today's $s, then you will need a portfolio and asset allocation in retirement that allows for $60,000 a year in spending in today's $s. At a 4% withdrawal rate, that would be a starting point in retirement of $1,500,000 in today's $s. In the OP's father's case, the critical info is that AFTER the pension/SS, he is still withdrawing 3% per year while also paying an advisor 1%, which amounts to 4%.

Yep. I agree this is a good description of how to think about this.


Is 100% stocks appropriate for a 70 years withdrawing 4% a year? I'd say it's less than ideal. It's creating higher risk that the OP's father runs out of money...I think it's silly to suggest potential behavior problems have no chance of existing during a serious market downtown now that OP's father is retired and is reliant on his portfolio for survival. The good news about the pensions/SS is that the OP's father wouldn't end up destitute in such a situation. But it would still suck.

In general it is less than ideal without examination. What we know about withdrawing from portfolios at this withdrawal rate is that all stocks is a little riskier than perhaps 60/40, but it isn't by much. What is gained by holding all stocks in this case is increasing the likely wealth that would remain at death, perhaps by a lot. That is why the question is asked if a retiree is investing for himself or for his legacy. It makes a difference.

I also agree that it is not a good idea to assume no behavioral mistakes. Things look different from a different situation. That is why Willingness is part of the need/ability/willingness triad.



2) The OP would not be getting the same advice if this post hadn't been made during a long bull market. OP is right to be concerned.

The wailing and gnashing of teeth on this Forum and "Plan B" during the last downturn attest to that. But you had to be here ten years ago.

3) The question here is whether the risk is high enough and your chance of changing your father's opinion is high enough to be worth doing anything. I don't know the answer to that. You might just end up pissing your father off. I like the suggestion of getting him to read the Bogleheads Guide to Investment and/or the Bogleheads Guide to Retirement Planning. They're both great books. He may or may not be open to them. How you frame up the suggestion would seem key here: how can you get him to WANT to read the book, and not have you shoving it down his throat?

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Re: Help?! My 70 year old father is 100% invested in equities

Post by WanderingDoc » Sun Sep 24, 2017 3:53 pm

Bfwolf wrote:
Sun Sep 24, 2017 2:16 pm
A few thoughts:

1) I don't like the idea of "capitalizing" pensions/SS as bonds. Instead, simply subtract those amounts off the required annual spending during retirement. If you'll have $40,000 a year in today's $s in pensions/SS, and your spending requirements in retirement will be $100,000/year in today's $s, then you will need a portfolio and asset allocation in retirement that allows for $60,000 a year in spending in today's $s. At a 4% withdrawal rate, that would be a starting point in retirement of $1,500,000 in today's $s. In the OP's father's case, the critical info is that AFTER the pension/SS, he is still withdrawing 3% per year while also paying an advisor 1%, which amounts to 4%. Is 100% stocks appropriate for a 70 years withdrawing 4% a year? I'd say it's less than ideal. It's creating higher risk that the OP's father runs out of money...I think it's silly to suggest potential behavior problems have no chance of existing during a serious market downtown now that OP's father is retired and is reliant on his portfolio for survival. The good news about the pensions/SS is that the OP's father wouldn't end up destitute in such a situation. But it would still suck.

2) The OP would not be getting the same advice if this post hadn't been made during a long bull market. OP is right to be concerned.

3) The question here is whether the risk is high enough and your chance of changing your father's opinion is high enough to be worth doing anything. I don't know the answer to that. You might just end up pissing your father off. I like the suggestion of getting him to read the Bogleheads Guide to Investment and/or the Bogleheads Guide to Retirement Planning. They're both great books. He may or may not be open to them. How you frame up the suggestion would seem key here: how can you get him to WANT to read the book, and not have you shoving it down his throat?
Exactly. If the OP's father was in the exact same situation but the year was 2009, I guarantee that the same folks on this thread would be singing a different tune (to the tune of 40s/60b).
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Re: Help?! My 70 year old father is 100% invested in equities

Post by pkcrafter » Sun Sep 24, 2017 4:20 pm

Messner8000 wrote:
Sat Sep 23, 2017 8:08 pm
The bigger epiphany for me from this thread is the idea of counting SS, pensions and even emergency fund/cash reserves as part of your AA. That is blowing my mind. I'm about 85/15 stocks/bonds across all my accounts all-told, but my wife and I will both have government/public school pensions (respectively) when we retire, and I also have a 6 month rainy day fund in cash in a 1.2% money market account. So when I factor all that in, my stock/bond ratio is much more conservative than I thought. Very thought provoking as to whether I'm actually too conservative (never would have guessed!)
Please note that all Bogleheads do not think of income as part of asset allocation. Income may reduce your needed withdrawal rate, but income is not a large pool of non-stock assets.

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Re: Help?! My 70 year old father is 100% invested in equities

Post by dbr » Sun Sep 24, 2017 4:27 pm

Messner8000 wrote:
Sat Sep 23, 2017 8:08 pm

The bigger epiphany for me from this thread is the idea of counting SS, pensions and even emergency fund/cash reserves as part of your AA. That is blowing my mind. I'm about 85/15 stocks/bonds across all my accounts all-told, but my wife and I will both have government/public school pensions (respectively) when we retire, and I also have a 6 month rainy day fund in cash in a 1.2% money market account. So when I factor all that in, my stock/bond ratio is much more conservative than I thought. Very thought provoking as to whether I'm actually too conservative (never would have guessed!)
It is a very dangerous thing to arrive at a conclusion which may be correct by reasoning that is fallacious. The correct part is that it may indeed be that your allocation is more conservative than you thought, but the reason is absolutely not any way that income streams are bonds, even just for the purpose of figuring out asset allocations. It could also be that your allocation is more aggressive than you thought. (If you can't see how that could be, then you need to do more work.) But here is the question you should be asking: How do you determine your asset allocation? Does the answer to how you determine an asset allocation become different if you suddenly realize that having income streams when you retire should be taken into account? VERY IMPORTANT: I am not asking if you would arrive at a different asset allocation realizing what you should take into account. I am asking if HOW you arrive at an asset allocation would be different. To be more specific, how did you arrive at 85/15 in the first place?
Last edited by dbr on Sun Sep 24, 2017 4:34 pm, edited 1 time in total.

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Re: Help?! My 70 year old father is 100% invested in equities

Post by BuyAndHoldOn » Sun Sep 24, 2017 4:33 pm

TravelforFun wrote:
Sat Sep 23, 2017 6:46 am
I'd send the link to this forum to your dad and hopefully after he reads it for a while, he would adjust his AA and get rid of the advisor.

I do that all the time. People's interest - if they have any - will take care of the rest.

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Re: Help?! My 70 year old father is 100% invested in equities

Post by arcticpineapplecorp. » Sun Sep 24, 2017 5:42 pm

he may not change, but does he understand the impact of a 1% fee for the next 30 years of his life (may he live to be that long if not longer)? Until one has all available information, one is making a choice, but not an informed choice. So I hope you will share the following link with him if he is not familiar with it already, if for no other reason than to understand that he will be handing over 25% of his net worth to his advisor over the next 30 years. When you look at it that way, it really can change your perspective (provided you believe you could get the same return before costs).

https://vanguardblog.com/2011/10/28/sto ... f-returns/

Another way of thinking about this (from Charles Ellis):
Whatever the return he expects (or does) earn from his portfolio, you've got to factor in the cost. That's the percentage he's handing over each year.

Say you expect stocks to earn 8% per year over the next 30 years. By paying 1% per year what he's really doing is giving his advisor 12.5% of his total return EACH YEAR. How'd I come up with that? 1% divided by 8% = 12.5%.

As Jack Bogle (and Charles Ellls) would say, your father will have put up 100% of the capital, taken 100% of the risk, and only received 87.5% of the return each year. Why do that when you can get 99.5% of the return? How? By only paying 0.04% per year (total stock market admiral shares) he will give away just 0.04% cost divided by 8% return which is only 0.5% of his total return. Does he want to keep 99.5% of his returns or 87.5% of his returns each year? The choice is his, only his to make.
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Re: Help?! My 70 year old father is 100% invested in equities

Post by JW-Retired » Sun Sep 24, 2017 7:01 pm

JW-Retired wrote:
dbr wrote:
Sun Sep 24, 2017 1:47 pm
JW-Retired wrote:
Sun Sep 24, 2017 12:31 pm
I've also been frustrated that Bogleheads mostly shun formulaic AA methods..... like Bogle's age-in-bonds with your fixed income streams present value treated as pseudo bonds. It's so rigid here that very few of us will even tell you what the Bogle formula would recommend for them, let alone why it's no good in their case.

I'll admit my own AA picked out of the air is pretty close to Bogle's rule. But that may be luck.
JW
Thanks dbr, my color responses added.......JW
If I were to hold the asset allocation I have chosen while counting income streams as bonds, I would not have enough actual investment money to make the required stock allocation. ?? You can't choose AA going in, Bogle says let the rule choose it using your true chronological age.

If I were to follow an age in bonds rule I would have to invest my actual assets considerably more in stocks than I have chosen. Maybe sometimes, but definitely not always. I do have a significant pension and SS. The conventional AA I'm holding right now is 65/35. Bogle's rule would actually be more conservative. Counting in my income streams present value as bonds per Bogle, along with the same real assets, it all comes out to be Bogle AA=40/60. That is still stock heavy/bonds light for my 70+ age. Bogle's rule would recommend AA= 27/73, so less stocks then I have now.

I have chosen to take less risk in actual investment assets than Bogle's rule would dictate. Not in my case, it's the other way around.
I would be most happy to hear from other retired Bogleheads how Bogle's rule would compare with the AA you have now.
JW
Last edited by JW-Retired on Sun Sep 24, 2017 8:11 pm, edited 1 time in total.
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Re: Help?! My 70 year old father is 100% invested in equities

Post by Messner8000 » Sun Sep 24, 2017 7:27 pm

Well, I'm glad my question has triggered such a wide-ranging conversation! Two thoughts I'll flag:

(1) After so many comments about whether my dad would have the fortitude to stick with with his 100% AA in bad times, it occurred to me that I think I recall him saying a few years back that during the last downturn (2008) he had to sell some of his portfolio (as a precaution) because if he lost too much value it would impact his retirement. Knowing what I know, now I wouldn't be shocked if he thus took a pretty big loss selling when the market was down (and maybe now he is trying to catch back up?) I think I'm ultimately going to let this go unless he brings it up again. I just don't see suggesting he read Boggleheads Guide to Investing (a great book, obviously) ending well. Whenever I have raised his portfolio in the past with my mom in the room, when she says "should we be more conservative" he gets rather frustrated and doesn't want to talk about it. Best I think to just let sleeping dogs lie.

2) DLR - thanks for your thoughts about my AA. I wish I had a good answer for you about why I picked 80/20 AA. The truth is, I started getting into doing my own finances as a New Years resolution this year; I had just had my first child and it seemed like a good time to take control of things. In the last 9 months, I've read a half dozen or so of the books suggested here (Boggleheads Guide to Investing, Bogle on Mutual Funds, etc.), and many posts on this site, and that gave me the courage to leave my dad's financial adviser (who wasn't charging me anything, but still, my portfolio was a mess...lots of individual stocks he felt good about), and strike out on my own.

After reading posts here about avoiding "paralysis by analysis," I decided to just go for it and do a 3-fund portfolio, and (at the risk of people's heads exploding) my thinking was basically, "I have about $3XX,XXX or so in retirement savings, it'd suck to lose a ton of it, and the market seems really high right now (market timing, I know), so I'll sleep better at night with 80/20," and then when I can read more books I can always try to change my position if need be."

So that's my thinking, and to answer your question, yes, I know I need to read more because among other things, in response to your point, I don't know why my portfolio could be more risky than I think or less risky....

Again, thanks for all the great insights.

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Re: Help?! My 70 year old father is 100% invested in equities

Post by arcticpineapplecorp. » Sun Sep 24, 2017 7:41 pm

Messner8000 wrote:
Sun Sep 24, 2017 7:27 pm
Well, I'm glad my question has triggered such a wide-ranging conversation! Two thoughts I'll flag:

(1) After so many comments about whether my dad would have the fortitude to stick with with his 100% AA in bad times, it occurred to me that I think I recall him saying a few years back that during the last downturn (2008) he had to sell some of his portfolio (as a precaution) because if he lost too much value it would impact his retirement. Knowing what I know, now I wouldn't be shocked if he thus took a pretty big loss selling when the market was down (and maybe now he is trying to catch back up?)
Another one page visual you could show him or your mother who is also concerned about being too agressive is this:

https://personal.vanguard.com/us/insigh ... llocations

If he sold in 2008 because he was afraid of "losing too much" perhaps he and your mother could use the link above to determine what the "right" amount of "losses" might be and choose accordingly beforehand, not after the fact. You can see the worst year losses for each of the different allocations to stocks/bonds. That's the idea...picking an allocation that you can stick with through thick and thin because you've already anticipated what the worst one year loss might be and you choose an allocation that will let you live with that.
"Invest we must." -- Jack Bogle | “The purpose of investing is not to simply optimise returns and make yourself rich. The purpose is not to die poor.” -- William Bernstein

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Re: Help?! My 70 year old father is 100% invested in equities

Post by visualguy » Sun Sep 24, 2017 8:33 pm

The main fear I have with 100% stock isn't what happened in 2000 or 2008. I'm more concerned about a Japan-like scenario, prolonged economic stagnation with little growth (or none or negative) and reduced earnings, or some bad events with a radical and prolonged effect that may be hard to foresee now.

I don't think that having a significant bond allocation is the answer, though. It's basically dead money. I feel more comfortable with direct real estate ownership in economically strong areas as the complement to stock holdings, not bonds.

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Re: Help?! My 70 year old father is 100% invested in equities

Post by Prudence » Sun Sep 24, 2017 9:09 pm

I think your Dad is 100% correct. I especially agree with his conclusions about bonds. I am 70 and in a similar situation as he is. I can't tolerate risk the way he can but I wish I could. If he can sleep at night, and obviously he can, then 100% equities is the wisest allocation for him.

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Re: Help?! My 70 year old father is 100% invested in equities

Post by arcticpineapplecorp. » Sun Sep 24, 2017 9:17 pm

Prudence wrote:
Sun Sep 24, 2017 9:09 pm
I think your Dad is 100% correct. I especially agree with his conclusions about bonds. I am 70 and in a similar situation as he is. I can't tolerate risk the way he can but I wish I could. If he can sleep at night, and obviously he can, then 100% equities is the wisest allocation for him.
but he can't tolerate risk either because back in 2008 he had to "he had to sell some of his portfolio (as a precaution) because if he lost too much value it would impact his retirement". How does that square with his ability to take risk? You don't change your allocation in response to a crisis. You predetermine what allocation both meets your needs for growth, and only takes the amount of risk you can handle. You have to find a balance. I'm not sure his father has found that balance yet. If he held tight in 2008 and made no changes, then I'd agree with you that he can handle the risk he's taken. But alas, he did not do that in 2008 and may sell (thereby locking in losses) in the future.
"Invest we must." -- Jack Bogle | “The purpose of investing is not to simply optimise returns and make yourself rich. The purpose is not to die poor.” -- William Bernstein

Raabe34
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Re: Help?! My 70 year old father is 100% invested in equities

Post by Raabe34 » Sun Sep 24, 2017 11:43 pm

You're nuts. Honestly the advisor has probably paid for himself by keeping him aggressively invested in equities. This board would have decreased his returns in a more conservative bond allocation.

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Re: Help?! My 70 year old father is 100% invested in equities

Post by CurlyDave » Mon Sep 25, 2017 1:14 am

dbr wrote:
Sun Sep 24, 2017 12:15 pm

Sure. I strongly recommend the system presented by Larry Swedroe of need, ability, and willingness to take risk. I didn't go into it here because it has been posted so many times already by so many people.

Need: This is how much return you need to earn over your accumulation lifetime to meet your objectives in retirement. Looking at what spending you want to support you first take off the income streams you have to arrive at what income you will need to withdraw from investments. You can use a retirement investment model to look at the probabilities of being successful with various rates of saving, planned needs for withdrawal, and asset allocation. I think Larry uses a Monte Carlo model for his own clients. I don't think this problem can be done without some sort of probabilistic model because investment returns are variable and uncertain. Objectives can be broader than that of producing income in retirement. The objective might be to secure a level of wealth for a purpose or to pass on. In either case investment results and income sources combine, income as income and investment results as investment results.

Ability: This is a consideration of a person's tolerance for bad risk actually turning up. How to consider this is more judgemental than the need concept. One idea is the concept of personal capital, which says that a person who has an expectation of large future earnings can tolerate more investment risk because if things go downhill he can make up the difference if future earnings. This factor typically trends to taking less risk with more age. Income streams add to ability to take risk because the income is secure no matter what the investment outcome. This factor would trend to taking more risk the more income is available. But it may not be that simple. If the known income streams are not adequate to meet a strongly required need, then then the trend would be to less risk with investments. It could even be surrendering the investments in favor of an annuity would be wise. Ability takes a lot of thoughtful discussion among those affected by the issue.

Willingness: Willingness is the psychological ability to carry risk without doing something stupid. The paradigm example of doing something stupid is holding a high stock allocation then panicking and selling out during a market crash. But an investor could make other behavioral mistakes that would be withing the category of willingness. There could be foolish willingness to take too much risk when it is not justified.

A common dilemma with this scheme is when one finds oneself in the category of high ability but low need. The advice is the the trump card is need: take no more risk than necessary to meet objectives. Swedroe has pointed out that in this situation it is better to take less risk rather than more. A first reason for that is that the marginal utility of increasing wealth falls with wealth. There is not an incentive to take unneeded risk. A second reason is that most investors are prone to underestimate risk. Therefore one should not be so sure that one has as much ability as one thinks.

By the way, it takes a lot of work to type up all this. Also the content can't be implemented without work. It is as a lot more than just saying "Age in Bonds -- SS as a Bond"

I hope this helps.
It really does help, and I understand the appreciate the work you put into it.

One of the problems I have with it, is the underlying assumption that "...the marginal utility of increasing wealth falls with wealth." I learned this same thing in economics class way back when I was an undergraduate, 50+ years ago. But then the professor went on to point out that it sometimes wasn't true. After all, people buy lottery tickets. And back then there were a lot less lotteries than there are now.

Another observation which makes me question the assumption is the fact that Sheldon Adelson (CEO of Las Vegas Sands) has a net worth of about $35 billion, nearly 10 times the net worth of John Bogle which Wikipedia lists as about $4 billion. Sheldon is in the business of letting people give him small amounts of money in hopes of getting a very large amount back (even though they know this is unlikely going in) while John is in the business of giving people a very, very good chance of increasing their wealth at a modest, sustainable rate.

People gamble even when the odds are against them. There is something going on here which is outside the realm of standard utility theory.

* * * * * * * * * * * * * *
"Need: This is how much return you need to earn over your accumulation lifetime to meet your objectives in retirement."

Like most people on this board, I started my accumulation lifetime in my mid twenties. In my case, I started seriously accumulating in my early forties. I am 72 right now. I know people in their 20s. They are nothing but young kids. Would I let some your kid in his 20s tell me how much I needed to retire on? Not on your life. How about some acquaintance in his 40s? Would I let him tell me how much I needed in retirement? Again the answer is an emphatic NO!

Well then, why would I let my younger self at the age of 25, or even 40, tell me how much I need to retire on?

To me, the answer to "Need" is: "As much as I can legally get". And, I am willing to take some risks in order to increase my portfolio.

Plus, the pensions and SS represent a safety net. I knew they were there during the accumulation phase, so I invested aggressively, both in my AA and in my my choice of funds, and individual stocks. This paid off for me, and I think it will pay off most of the time for most people.

As academically nice as Swedroe's analysis is, for me, it doesn't answer the practical question of AA during either the accumulation or the distribution phase. I keep coming back to the nice rules of thumb, like age in bonds and quasi-bonds.

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Re: Help?! My 70 year old father is 100% invested in equities

Post by CurlyDave » Mon Sep 25, 2017 1:20 am

visualguy wrote:
Sun Sep 24, 2017 8:33 pm
The main fear I have with 100% stock isn't what happened in 2000 or 2008. I'm more concerned about a Japan-like scenario, prolonged economic stagnation with little growth (or none or negative) and reduced earnings, or some bad events with a radical and prolonged effect that may be hard to foresee now.

I don't think that having a significant bond allocation is the answer, though. It's basically dead money. I feel more comfortable with direct real estate ownership in economically strong areas as the complement to stock holdings, not bonds.
I agree with that and have a healthy share of real estate in my portfolio also. And, I put property managers in the same class as investment advisors. Do it yourself and pocket the commission he charges.

We do not even live in a particularly economically strong area, but brick and mortar rental real estate has been a nice part of our portfolio.

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Re: Help?! My 70 year old father is 100% invested in equities

Post by richardglm » Mon Sep 25, 2017 1:25 am

So many 70-year-olds live on social security only. To have SS+pension+stocks is doing something right, better than many.

I'd be more concerned that the 1% of AUM per year financial advisor is looking out more for ways to get their 1% fee than anything else.

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Re: Help?! My 70 year old father is 100% invested in equities

Post by msgt » Wed Sep 27, 2017 2:11 pm

As a soon to be retiree - 66, I too have a 'non-typical' AA of about 95/5 currently spitting out abut $70k/yr in dividends.

My almost 40yr old son thinks a 1.5% CD is a great "investment", my 35yr daughter has a 100% equity portfolio.

Guess who will be managing my money for my wife when I am gone.

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Re: Help?! My 70 year old father is 100% invested in equities

Post by rbaldini » Wed Sep 27, 2017 2:23 pm

Messner8000 wrote:
Sat Sep 23, 2017 6:04 am
From what I've read on this board and in books, a 100% AA for a 70-year old is crazy. I don't know a ton else, but my sense is that my dad relies on his investment portfolio for about 50% of his annual income (he also has a pension and Social Security) and utilizes a 3% withdrawal rate from the portfolio.
It's not necessarily crazy. If he has the capacity to take this risk (e.g., has a *lot* of money, so that even losing half of it still gives him plenty left?), and he doesn't pull out when the market tanks, he might be just fine. The age-based guidelines are useful, but just very rough guidelines.

EDIT: But maybe not, given what you say here: "I recall him saying a few years back that during the last downturn (2008) he had to sell some of his portfolio (as a precaution) because if he lost too much value it would impact his retirement"

You say he's smart, so he should be able to do the calculation for how much worse he would have been if he had been 100% stock in the recession. Or you could do this for him. It might be eye-opening.

Of course offering advice is tricky. But I tend to think that people are mature enough to at least listen to well-meant, unsolicited advice from a loved one (but don't push if they don't take it!) without getting their panties in a bunch. I guess others have had bad experiences with this, though. It depends on your dad's personality, and yours.

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Re: Help?! My 70 year old father is 100% invested in equities

Post by CnC » Wed Sep 27, 2017 3:04 pm

czeckers wrote:
Sat Sep 23, 2017 6:22 pm
Depending on the size of the portfolio, his withdrawal rate, and his life expectancy, 100% stocks might be entirely reasonable.
Exactly.

A 70+ year old with a portfolio in the millions who has his yearly expenses covered by dividends and probably has very little need to touch his principle may as well have a 100% equity portfolio.

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Re: Help?! My 70 year old father is 100% invested in equities

Post by itstoomuch » Wed Sep 27, 2017 3:13 pm

CnC wrote:
Wed Sep 27, 2017 3:04 pm
czeckers wrote:
Sat Sep 23, 2017 6:22 pm
Depending on the size of the portfolio, his withdrawal rate, and his life expectancy, 100% stocks might be entirely reasonable.
Exactly.

A 70+ year old with a portfolio in the millions who has his yearly expenses covered by dividends and probably has very little need to touch his principle may as well have a 100% equity portfolio.
BINGO.
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Re: Help?! My 70 year old father is 100% invested in equities

Post by flamesabers » Wed Sep 27, 2017 3:16 pm

CnC wrote:
Wed Sep 27, 2017 3:04 pm
czeckers wrote:
Sat Sep 23, 2017 6:22 pm
Depending on the size of the portfolio, his withdrawal rate, and his life expectancy, 100% stocks might be entirely reasonable.
Exactly.

A 70+ year old with a portfolio in the millions who has his yearly expenses covered by dividends and probably has very little need to touch his principle may as well have a 100% equity portfolio.
While I agree it's possible for one to cover his yearly expenses entirely by dividends, you run the risk that dividends might not be declared or be much smaller then anticipated. Also, what about the unexpected emergency that is a bit more then what his dividends can cover? Granted, if you have a portfolio that is in the millions you probably won't be hit as hard as someone who has to liquidate a much smaller 100% equity portfolio during a market downturn. However, it can still prove to be a costly experience.

If the 70 year-old has a sizable cash reserve, I don't think it's completely accurate to classify his portfolio as being 100% comprised of equities.

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Re: Help?! My 70 year old father is 100% invested in equities

Post by itstoomuch » Wed Sep 27, 2017 3:20 pm

OP:
The opposite of your mother is
viewtopic.php?p=3550175#p3550175

the difference is how they They view RIsk.

When One has enough, One can do anything One wants.
I would challenge you to examine why both scenarios are valid and the riskier path is a balanced portfolio. :confused
YMomsMV :moneybag . YMMV :?:
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Re: Help?! My 70 year old father is 100% invested in equities

Post by czeckers » Thu Oct 05, 2017 3:27 pm

A 70 year old male has an average life expectancy of 14 years -- less if he's a smoker of has some underlying health conditions such as diabetes, heart disease, etc. Even if he lives to be 100, that's only 30 years. He does not have to live off of dividends alone and can safely start dipping into the principal.
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