Portfolio Advice - Am I too aggressive?

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snodog
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Portfolio Advice - Am I too aggressive?

Post by snodog » Fri Dec 28, 2007 6:23 pm

I'm almost too embarrassed to post my measly portfolio on here with all you super savers. I wish we could've saved more but life dealt us a couple of curve balls, however, we have recently done well the last 2 years saving about 30% of our income. Hopefully that will continue, Lord willing.

Emergency fund- 8 months

Debt- 42k house loan at 6% fixed is all

Tax Filing Status: Married filing Jointly (no kids now or ever)

Tax Rate: ? 69k combined income, State of Residence - Penna.

Age: Me 38, wife 35

Desired Asset allocation: (100% stocks/0% bonds) right now

Intl allocation: 50% of stocks

Current portfolio - 62,500

401k with fidelity
Fidelity low priced stock(FLPSX) - 40,000
Fidelity Spartan U.S. Equity(FUSEX) - 5000

Roth IRA's with Vanguard
Total Int(VGTSX) - 17500

Other funds available at 401k with fidelity
DAVIS NY VENTURE Y
FID CAP APPRECIATION
FID EQUITY INCOME
FID OTC PORTFOLIO
MSIFT VALUE I
GS MIDCAP VALUE INST
RAINIER SM/MD CAP I
NB FASCIANO INVT
FID DIVERSIFIED INTL
MSI GLOBAL VAL EQ A
Freedom funds
FID INTERMED BOND
FIDELITY MIP II CL 3


1. I want to be aggressive and have the most possible growth. I'm not too worried about having enough in retirement because we will get $2500/ month in SS and we are currently living on that amount if you subtract our house payment. Plus we each will get 2 very small pensions. I feel I can handle more volatility since we dont have a huge amount saved and we are able to save 30% of our income. I am actually happy when the stock market does poorly because that means I am buying cheaper shares. Maybe I will not feel this way in the future when I get a higher balance, and then I can reallocate/buy some bonds for protection.

2. I wish there was a way to go all index funds, but I cant think of a way without getting rid of the small cap/value tilt. If the 401k offered spartan international that would solve it but sadly they dont.

3. I would like to add int. small cap at some point. I guess I'm waiting for vanguard to offer one as I would prefer to keep all my money with them.

4. I'm thinking of adding more emerging markets. I'm currently at about 14% and i'm thinking about going up to 20%. But I dont like the extra fees on VEIEX and the recent run up.

Thanks in advance

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Post by DaveTH » Fri Dec 28, 2007 6:39 pm

I want to be aggressive and have the most possible growth. I'm not too worried about having enough in retirement because we will get $2500/ month in SS and we are currently living on that amount if you subtract our house payment. Plus we each will get 2 very small pensions.
These seem to be inconsistent statements. Why take on the risk of an all equity portfolio if you do not need to? Are you sure that you will not panic during the next bear market if your portfolio loses 50% of its value? Personally I think a 100% allocation to equities is a little reckless.

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snodog
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Post by snodog » Fri Dec 28, 2007 7:48 pm

DaveTH wrote:
I want to be aggressive and have the most possible growth. I'm not too worried about having enough in retirement because we will get $2500/ month in SS and we are currently living on that amount if you subtract our house payment. Plus we each will get 2 very small pensions.
These seem to be inconsistent statements. Why take on the risk of an all equity portfolio if you do not need to? Are you sure that you will not panic during the next bear market if your portfolio loses 50% of its value? Personally I think a 100% allocation to equities is a little reckless.
I would like to retire ASAP

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Post by DaveTH » Fri Dec 28, 2007 8:02 pm

I would like to retire ASAP
Are you assuming that there is no downside risk and that stocks only go up? I know several people who got too aggressive with their portfolios and got killed during the bear market. They have since had to re-adjust their expectations and have had to delay their planned retirement by more than 5 years. Be careful.

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Post by snodog » Fri Dec 28, 2007 8:14 pm

Well I figure even in a best case scenario that I've got at least 15 more years to retirement, and I figure the chances that stocks will outperform bonds during a 15 year period are in my favor. As I get closer to retirement I will definitely add some bond exposure, but as for now I am very comfortable with no bonds. Although I will think about adding some if that is the consensus here.

And yes, I am very aware that there are downside risks of being 100% equities. By the way how much bond exposure are you talking about? 5, 10, 20%?

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Post by snodog » Fri Dec 28, 2007 9:21 pm

Also I wanted to add that our pensions total about 60k. Wouldnt that be considered a bond component?

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Post by White Coat Investor » Fri Dec 28, 2007 9:25 pm

snodog wrote:Well I figure even in a best case scenario that I've got at least 15 more years to retirement, and I figure the chances that stocks will outperform bonds during a 15 year period are in my favor. As I get closer to retirement I will definitely add some bond exposure, but as for now I am very comfortable with no bonds. Although I will think about adding some if that is the consensus here.

And yes, I am very aware that there are downside risks of being 100% equities. By the way how much bond exposure are you talking about? 5, 10, 20%?
Why stop at 100%? You could be 150% using margin. If you're comfortable with going 100% because it has a higher expected return, why not be 100% small value or emerging markets because they have an even higher expected return than stocks in general. What I'm trying to say is you're better off with an asset allocation that is less risky than you can handle than one that is more risky than you can handle. If you only have 15 years to go, I'd go at least 20% bonds and wouldn't feel badly at all being 40% bonds. Many experts don't expect stocks to do much better than bonds over the next few years due to higher valuations. Just look at the various Target Retirement funds this year....despite significant differences in stock:bond ratios, they all have a very similar return this year (7.84%-8.07%).

Asset allocation determines something like 90% of your returns...make sure you have it right for your need, ability, and willingness to take risk.
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Post by nisiprius » Fri Dec 28, 2007 10:52 pm

snodog wrote:Well I figure even in a best case scenario that I've got at least 15 more years to retirement, and I figure the chances that stocks will outperform bonds during a 15 year period are in my favor. As I get closer to retirement I will definitely add some bond exposure, but as for now I am very comfortable with no bonds. Although I will think about adding some if that is the consensus here.

And yes, I am very aware that there are downside risks of being 100% equities. By the way how much bond exposure are you talking about? 5, 10, 20%?
Burton Malkiel's A Random Walk Down Wall Street suggests, for "late thirties to early forties," 5% cash, 25% bonds, 10% real estate, 60% stocks.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

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agree

Post by SpaceCommander » Sat Dec 29, 2007 2:37 am

I wholeheartedly agree with DaveTH and EmergDoc. For someone who understands the risk, 100% equities isn't rational. For the most optimistic/agressive, I would recommend a maximum of 80% equities.

Willaim Bernstein's book "The Intelligent Asset Allocator" goes into detail about optimal asset allocations. A 100% equites portfolio cannot be expected to return a whole lot more than an 80% equities porfolio, but the risk is much higher (as measured by SD). So you end up taking a whole lot more risk, for very little more expected return. The rational investor will consider the considerable additional risk measured against the meager expected additional return and conclude that it's not worth it.

I also concur with the sentiment that 100% equities can put you on the fast track toward delayed retirement, panic selling, etc.

Recommendation: ease up on the rocket fuel (100% equities, 14-20% EM), don't worry about missing out on the exotic asset classes (EM, int small, etc.) If you can't get exposure to small/value in an efficient manner, then forget it. You'll do just fine with an 80/20 porfolio (or 60/40 for that manner). If you want action, you're in the wrong business.

Regards,

JC
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Post by at » Sat Dec 29, 2007 3:26 am

He's a small portfolio and a large emergency fund. Overall, his portfolio is not awfully risky as implied by his 100% stock AA.

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???

Post by SpaceCommander » Sat Dec 29, 2007 3:30 am

AT,

Do you normally consider one's emergency fund as a part of the overall asset allocation?

Is that wise?

JC
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Re: agree

Post by United » Sat Dec 29, 2007 3:37 am

Snodog, don't be embarrassed about your portfolio. It's great that you're saving and investing for your future with so many years left. You're certainly doing better than average.

100% equities is a reasonable allocation, especially considering the small size of the portfolio compared to the emergency fund.

SpaceCommander, it does make sense to include one's emergency fund as part of the overall asset allocation. The emergency fund is part of his liquid assets, even though it's used as a buffer to prevent going into debt or withdrawing from his portfolio.

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Re: ???

Post by at » Sat Dec 29, 2007 4:25 am

SpaceCommander wrote:Do you normally consider one's emergency fund as a part of the overall asset allocation?

Is that wise?
I think it doesn't matter.

For a large portfolio, one's emergency fund as a percentage of the whole portfolio is pretty small, so it doesn't matter.

For a small portfolio, the most effective way to expand the portfolio is via increased savings and not investment returns. So AA is not as important.

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Post by ramsfan » Sat Dec 29, 2007 6:45 am

snodog, you are getting some good advice in hear. Also, you should feel GREAT about a 30% savings rate!

Please let me give you a few things to think about also.

THE BEST thing you can do to speed your retirement is to increase your income. Lots of ways to do that (improve skills and marketability, migrate to higher paying job or career path, 2nd job or small business, etc...)

Regarding your investments:

First, I concur with a minimum 20% Fixed Income, rebalanced at least annually. You can take off a fair amount of risk, and only reduce your expected return slightly. You should read the books mentioned immediately, it will help you understand why this happens.

You should also be thinking of your mortgage as a negative bond in your allocation. In effect, you are about 200% equity, -100% Bonds in your allocation if you consider your mortgage as part of it. You are paying 6% interest to someone else. If I were you, I would take my 30% savings rate, and put half of it towards the mortgage, the other half towards your equities, until your mortgage is paid off, and then start building my FI (Bond) investments. It is like getting a guaranteed 6%...

Also, not to be silly, but I think you can consider other things in your life when you go to set your portfolio, or determine your risk profile.

For example, here are things that would cause me to be willing to take on more risk:

Huge amount of Emergency funds, say 3-5 years, in cash.
No Mortgage, and large Home equity.
Expected Social Security payments that expect to cover my lifestyle.
Lifestyle established (no expected major cash requirements).

Here are example that would lead me to be more conservative in my investments:

- small emergency reserve
- lots of debt (car loans, student loans, mortgage)
- Planned purchases like House, Expensive college, medical needs, etc...

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Post by openminded » Sat Dec 29, 2007 8:47 am

SnoDog:

I would not be so sure about that social security amount your banking on!

I would not bet the farm on it, let it just be icing on the cake!

Good Luck

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Post by Adrian Nenu » Sat Dec 29, 2007 9:05 am

A few questions:

- how much do you have now and how much will you need to accumulate at retirement?

- how much can you invest a year and what rate of return do you need to get you were you want to be at retirement?

- how much retirement income will your portfolio need to generate when you retire?

- if your portfolio lost 50% right before you plan to retire, how would that affect you?

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Post by mithrandir » Sat Dec 29, 2007 9:47 am

ramsfan wrote: You should also be thinking of your mortgage as a negative bond in your allocation. In effect, you are about 200% equity, -100% Bonds in your allocation if you consider your mortgage as part of it. You are paying 6% interest to someone else. If I were you, I would take my 30% savings rate, and put half of it towards the mortgage, the other half towards your equities, until your mortgage is paid off, and then start building my FI (Bond) investments. It is like getting a guaranteed 6%...
Mortgage interest is tax-deductible (if you itemize and qualify) so I remain unconvinced that paying off a 6% debt is really a priority for snodog. Additionally, the mortgage (assuming it is fixed) provides something of an inflation hedge.

I have a 5.5% 30-yr fixed mortgage and have never made additional principal payments nor do I plan to. I suppose I would feel different if my interest rate were higher or if I had an ARM.

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Post by openminded » Sat Dec 29, 2007 10:19 am

I might even say you have it exactly backwards.

Cover the basics with YOUR savings for retirement, and then let the govt' foot your travel bill.

I am sure not planning my retirement on these silly statements I get from the Social Security Administration. :roll:

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Post by mithrandir » Sat Dec 29, 2007 10:26 am

Also, I would argue that holding the mortgage debt offers a modest hedge against future tax increases.

Current income tax rates are set to expire in 2010 and if marginal income tax rates were to go up, at least my mortgage's tax-adjusted interest rate would effectively decline. Cold comfort but real nonetheless.

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comments

Post by pkcrafter » Sat Dec 29, 2007 11:17 am

FWIW, I concur with those suggesting you hold some bond - 20% minimum. Why? Because bonds are a major asset class diversifier. You will get some downside risk reduction without hardly any reduction in returns. It just makes sense.

snodog wrote:
Also I wanted to add that our pensions total about 60k. Wouldn't that be considered a bond component?

Yes, it could be viewed that way. But taking on excessive risk does not guarantee the expected returns. The pensions make up for a lot. You have been given some suggestions stated by experts. Here is one more from Paul Merriman: Never bear to much or to little risk

It's simply part of prudent investing.

at wrote: For a large portfolio, one's emergency fund as a percentage of the whole portfolio is pretty small, so it doesn't matter.

I think it does matter. An emergency fund for those in accumulation phase should not be included in retirement portfolio assets.

at: He's a small portfolio and a large emergency fund. Overall, his portfolio is not awfully risky as implied by his 100% stock AA.

Yes, small portfolio, but it wasn't easy for him to get this far. And I disagree that a 100% portfolio is not awfully risky. It is risky—and more risky than can be justified. Only my opinion, of course, but based on what the experts say.

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Re: comments

Post by at » Sun Dec 30, 2007 6:17 am

pkcrafter wrote:at wrote: For a large portfolio, one's emergency fund as a percentage of the whole portfolio is pretty small, so it doesn't matter.

I think it does matter. An emergency fund for those in accumulation phase should not be included in retirement portfolio assets.
Suppose, a person's emergency funds are 2% of his portfolio; does it matter if he has 40% fixed income or 40% fixed income plus emergency funds?
pkcrafter wrote: at: He's a small portfolio and a large emergency fund. Overall, his portfolio is not awfully risky as implied by his 100% stock AA.

Yes, small portfolio, but it wasn't easy for him to get this far. And I disagree that a 100% portfolio is not awfully risky. It is risky—and more risky than can be justified. Only my opinion, of course, but based on what the experts say.
What I mean is this. Suppose, he has the more orthodox 3 months instead of 8 months of emergency funds, his expenditure is half of his income and he places the extra 5 months in fixed income. Running through the numbers, that would mean his portfolio would be 20% bonds, just as EmergDoc has suggested.

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Post by LH » Sun Dec 30, 2007 6:38 am

at wrote:He's a small portfolio and a large emergency fund. Overall, his portfolio is not awfully risky as implied by his 100% stock AA.
I agree. He is only 38 too.

100 percent stock is not irrational per se. One could understand the risks and choose to be 100 percent at 38 years old and be making a rational decsion. Although I agree that statistically, if one is 100 percent, one is more likely not to understand the risk.

Bonds are good though, the more you understand risk, the more you will most likely have I posit.

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Post by Adrian Nenu » Sun Dec 30, 2007 6:55 am

The two key issues are:

- will your asset allocation provide the needed return which combined with your savings give you the best possible odds of reaching your financial goals?

- will your asset allocation be suitable for your risk tolerance? Consider my risk tolerance rule of thumb based on the '73-'74 bear market:

Maximum tolerable risk x 2 = Maximum equity allocation

The asset allocation typically ends up being a compromise between risk tolerance, ability to save and needed return.

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This is what I'm talking about...

Post by SpaceCommander » Sun Dec 30, 2007 1:35 pm

Image

When I said that a 100% stock portfolio isn't rational, this is the graphic I was referring to.

For a very small additional expected return, the 100% stock investor is taking on considerable additional risk. The graphic helps. When you look at it this way, why would anyone choose a 100% stock allocation?

Also, Larry Swedroe goes into detail in his book "Only Guide To A Winning Investment Strategy" outlining why additional volatility actually LOWERS risk (Chapter 6). I won't duplicate his argument here.

So with a 100% equities allocation, not only will one take on considerable additional risk (as measured by SD), but it's also likely that the all important annualized return of the portfolio will be lower than an 80/20 allocation.

Hope you find that helpful,

JC
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Post by White Coat Investor » Sun Dec 30, 2007 2:38 pm

I'd be willing to take on a lot more standard deviation for a higher guaranteed return. The risk isn't the higher standard deviation, it is the possibility that I WON'T get a higher return.

The two risks he is running by being 100% stocks are:
1) That he can't handle the volatility and he abandons his plan and
2) That bonds return more than stocks over a long period of time.

I agree that it doesn't matter if you have a bizarre asset allocation if the account is tiny. You could be 100% EM and it simply doesn't matter. I mentioned this in another thread but it bears repeating here:

When your account is small, your savings rate matters much more than your return/asset allocation. I have gone from a 4 figure account to a 6 figure account in 2 years but the earnings account for less than 10% of the total. Most of it is just brute savings. The OP with his excellent 30% savings rate will find in 2 or 3 years that his return just didn't matter much. 10 years from now that'll be a different story.

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Re: This is what I'm talking about...

Post by LH » Sun Dec 30, 2007 6:00 pm

SpaceCommander wrote:Image

When I said that a 100% stock portfolio isn't rational, this is the graphic I was referring to.

For a very small additional expected return, the 100% stock investor is taking on considerable additional risk. The graphic helps. When you look at it this way, why would anyone choose a 100% stock allocation?

Also, Larry Swedroe goes into detail in his book "Only Guide To A Winning Investment Strategy" outlining why additional volatility actually LOWERS risk (Chapter 6). I won't duplicate his argument here.

So with a 100% equities allocation, not only will one take on considerable additional risk (as measured by SD), but it's also likely that the all important annualized return of the portfolio will be lower than an 80/20 allocation.

Hope you find that helpful,

JC


That graph is maybe a bit misleading, becuase it just lumps two asset classes together. what about a comparion of that graph with a REIT vs Stock graph? Or anything else that is noncorrelated? Some of the benefit that occurs, is not unique to the bond asset class, its simply a matter of correlation benefit right? One does not have to use bonds to achieve that benefit....

Good graph to post, but I agree, cagr would be the right return to post. I still think 100 percent stock would beat a 80/20 split over the long term though. Why isnt the return in the graph annualized (cagr) to begin with?
Last edited by LH on Sun Dec 30, 2007 8:00 pm, edited 1 time in total.

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just an illustration

Post by SpaceCommander » Sun Dec 30, 2007 7:45 pm

You're right, it's just a chart. There's nothing misleading about it however.

You ask about alternative asset classes, etc. I hate to drop another shameless plug, but you need to read Bernstein and Swedroe for yourself. It's covered in the books...

Swedroe: "Only Guide To A Winning Investment Strategy"
Bernstein: "The Intelligent Asset Allocator"

I agree that if you're dealing with a "100% stock allocation" that is relatively peanuts, then it probably won't make a big difference. But, we should be focused on long term strategies and an asset allocation for the long haul. I submit that over the long term a 100% equities allocation doesn't make sense.

Will 100% stock beat an 80/20 portfolio long term? Maybe, maybe not. But this is true: the additional volatility does NOT enhance performance. To the contrary, it is detrimental to portfolio performance.

In addition, EmergDoc is absolutely right on when he says that a major risk factor of the 100% stock portfolio is that the investor will not be able to handle the volatility. That leads investors to do stupid things.

Remember the sage advice of Benjamin Graham: "The investor's chief problem and even his worst enemy - is likely to be himself."

For what it's worth. Have a gr8 2008,

JC
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Re: just an illustration

Post by LH » Sun Dec 30, 2007 8:10 pm

SpaceCommander wrote:You're right, it's just a chart. There's nothing misleading about it however.

You ask about alternative asset classes, etc. I hate to drop another shameless plug, but you need to read Bernstein and Swedroe for yourself. It's covered in the books...

Swedroe: "Only Guide To A Winning Investment Strategy"
Bernstein: "The Intelligent Asset Allocator"

I agree that if you're dealing with a "100% stock allocation" that is relatively peanuts, then it probably won't make a big difference. But, we should be focused on long term strategies and an asset allocation for the long haul. I submit that over the long term a 100% equities allocation doesn't make sense.

Will 100% stock beat an 80/20 portfolio long term? Maybe, maybe not. But this is true: the additional volatility does NOT enhance performance. To the contrary, it is detrimental to portfolio performance.

In addition, EmergDoc is absolutely right on when he says that a major risk factor of the 100% stock portfolio is that the investor will not be able to handle the volatility. That leads investors to do stupid things.

Remember the sage advice of Benjamin Graham: "The investor's chief problem and even his worst enemy - is likely to be himself."

For what it's worth. Have a gr8 2008,

JC
I have read those books. Perhaps I should in reply post the full list of books I have read, in a shameless plug, and state my argument is covered in them and you should read them, but that would be kinda nonsubstantive and vague, and perhaps completely wrong, like your assumption I have not read them?

I submit, a 100 percent stock allocation starting out can make sense. This person is not 60 years old, he is 38. No one is stating that one should be 100 percent stocks at retirement age, although, I can think of at least one situation where one should be.

Now there are lots of options to choose from here, but here is one of my favorites: Remember, "a bird in the hand, is worth two in the bush"

have a nice day : )

LH

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hostility?

Post by SpaceCommander » Sun Dec 30, 2007 8:19 pm

I guess I need to apologize if I came across as implying that you or anyone else on this thread were unread on the subject.

In no way did I intend to insinuate that anybody here doesn't understand the issues. For Pete's sake, what's with the hostility?

The reason I reference those books is because the issue at hand is DIRECTLY addressed in those chapters.

Just as the most defensive investor should include a little stock to LOWER risk, I propose that the most aggressive investor should add a little bonds to do the same.

But if anyone wants to go 100, 150, or 200% long equities, they can knock themselves out for all I care.

Regards,

JC
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Re: Portfolio Advice - Am I too aggressive?

Post by snodog » Sat Jan 13, 2018 7:50 pm

Sorry for bumping up an old thread but I thought I would update this 10 years later:

I am 48 and my wife is 45 and we have never made more than the $80,000 which we made last year.

I wish I would have listened to the wise advice I got from people telling me I needed more bonds. But I guess sometimes you have to learn the hard way. We went into 2008 with 100% equities and lost a bunch. Now I am 37% bonds.

2018 update:

We paid off our house and have $230,000 in equity. Our cars are also paid off and we are debt free.

We currently have $510,000 saved for retirement thanks in large part from the knowledge I gleaned from Bogleheads. So thank you all. :beer

We plan to keep on saving 30%.

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Re: Portfolio Advice - Am I too aggressive?

Post by JD2775 » Sat Jan 13, 2018 8:01 pm

snodog wrote:
Sat Jan 13, 2018 7:50 pm
Sorry for bumping up an old thread but I thought I would update this 10 years later:

I am 48 and my wife is 45 and we have never made more than the $80,000 which we made last year.

I wish I would have listened to the wise advice I got from people telling me I needed more bonds. But I guess sometimes you have to learn the hard way. We went into 2008 with 100% equities and lost a bunch. Now I am 37% bonds.

2018 update:

We paid off our house and have $230,000 in equity. Our cars are also paid off and we are debt free.

We currently have $510,000 saved for retirement in large part from the knowledge I gleaned from Bogleheads. So thank you all. :beer

We plan to keep on saving 30%.

Good for you man, that's awesome. I am 42 and hold 21% Bonds right now and as tempting as it is to lower that temporarily I am going to refrain and just ride it out until I feel I need to bump it UP, not DOWN. I am currently at 17% Bonds total in my 401k (contributing 21%) so I am almost at a rebalancing point actually

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