AA is much harder than I thought...

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
rudeboy
Posts: 10
Joined: Thu Oct 05, 2017 9:21 pm

AA is much harder than I thought...

Post by rudeboy » Sat Jan 13, 2018 3:07 pm

I'm 33 and have only been in the markets about a year. I'm doing my best to learn from the masters -- my first investing read was Common Sense and I just finished The Four Pillars.

Everything I have learned tells me that I should be buying bonds right now -- the 'trendiness' of 100% stocks (and their meteoric rise), the bleak projections for bonds, etc.. but yet, yesterday I logged into my 401k and bought 3k more of the Total Stock Index, bringing my allocation to 97/3.

It's alarming, because I do believe my portfolio should be at least 80/20, and this is how I'm acting when times are good. It makes me seriously wonder how I will handle a decline...

I've noticed that no one flat out announces 'I'm making a bad decision!' when they buy high/sell low. Rather, the investor psychology tricks one into believing one is making a good decision ( REITs are too complicated, I'll simplify by sliding them this into stocks... it's the Boglehead way!). I think that's what makes investing so tricky -- doing it right requires an extraordinary amount of honesty with oneself.

Anyway, just a stray observation about putting theory to practice.

The Wizard
Posts: 11214
Joined: Tue Mar 23, 2010 1:45 pm
Location: Reading, MA

Re: AA is much harder than I thought...

Post by The Wizard » Sat Jan 13, 2018 3:11 pm

Strive to get to 90/10 by the end of February...
Attempted new signature...

PFInterest
Posts: 665
Joined: Sun Jan 08, 2017 12:25 pm

Re: AA is much harder than I thought...

Post by PFInterest » Sat Jan 13, 2018 3:15 pm

AA is not hard.
the problem is knowing if its right.....

rebalance over 3/6/9/12 months. move on.

MotoTrojan
Posts: 947
Joined: Wed Feb 01, 2017 8:39 pm

Re: AA is much harder than I thought...

Post by MotoTrojan » Sat Jan 13, 2018 3:18 pm

All the threads/posts of people regretting being in cash for the last 1,3, or even 7 years is why I feel good investing every dollar I can, the moment I can.

But I’m also 26 years old and know if the market goes down I’ll just be excited to get a better deal than the day before.

I suggest you search for the market top invester article. He made out just fine :). I’m too much of a tinkerer to do anything else.

Having said that, at 33 and depending on your retirement timeline, 10-30% in bonds wouldn’t be unreasonable. If you can do the change in one step via tax-advantaged accounts, you should do it Tuesday AM. No reason to slowly transition unless there are tax implications.

User avatar
Tyler Aspect
Posts: 663
Joined: Mon Mar 20, 2017 10:27 pm
Location: California
Contact:

Re: AA is much harder than I thought...

Post by Tyler Aspect » Sat Jan 13, 2018 3:21 pm

Total bond market should be fairly well behaved; maybe a tiny bit of loss from time to time, but nothing to get excited about.
Past result does not predict future performance. Mentioned investments may lose money. Contents are presented "AS IS" and any implied suitability for a particular purpose are disclaimed.

racy
Posts: 172
Joined: Sun Mar 30, 2008 7:38 am
Location: Nebraska

Re: AA is much harder than I thought...

Post by racy » Sat Jan 13, 2018 3:24 pm

rudeboy wrote:
Sat Jan 13, 2018 3:07 pm
I'm 33 and have only been in the markets about a year. I'm doing my best to learn from the masters..... I do believe my portfolio should be at least 80/20, and this is how I'm acting when times are good. It makes me seriously wonder how I will handle a decline... Rather, the investor psychology tricks one into believing one is making a good decision...
Well, at least you're self-aware. That should help when you go through the next market decline. 8-)

TheHouse7
Posts: 257
Joined: Fri Jan 13, 2017 2:40 am

Re: AA is much harder than I thought...

Post by TheHouse7 » Sat Jan 13, 2018 3:26 pm

It is not.

I'm 30, with 80/20 25% stock international.

I keep thinking I need to buy more stock when I really mean save more. :)

Contributions matter so much more than AA it's not even funny.
"PSX will always go up 20%, why invest in anything else?!" -Father-in-law early retired.

livesoft
Posts: 58272
Joined: Thu Mar 01, 2007 8:00 pm

Re: AA is much harder than I thought...

Post by livesoft » Sat Jan 13, 2018 3:28 pm

I like these stray observations. It is always interesting to me to see behavioral finance/economics tricks and traps popping up routinely at bogleheads.org. I have just come to expect it.

Key phrases that signal these things are: "peace of mind", "piece of mind", "sleep well at night", "mental accounting", "dividend growth stocks", "gold", "buckets", and many others.

So you may enjoy reading two or more books on behavioral economics.
This signature message sponsored by sscritic: Learn to fish.

mega317
Posts: 1442
Joined: Tue Apr 19, 2016 10:55 am

Re: AA is much harder than I thought...

Post by mega317 » Sat Jan 13, 2018 3:36 pm

rudeboy wrote:
Sat Jan 13, 2018 3:07 pm
Everything I have learned tells me that I should be buying bonds right now -- the 'trendiness' of 100% stocks (and their meteoric rise), the bleak projections for bonds, etc..
Then you haven't learned anything valuable. You shouldn't base your allocation decisions on trendiness or projections.

Why did you buy total stock and increase to 97/3 if you want to be 80/20?

daveydoo
Posts: 1021
Joined: Sun May 15, 2016 1:53 am

Re: AA is much harder than I thought...

Post by daveydoo » Sat Jan 13, 2018 3:47 pm

rudeboy wrote:
Sat Jan 13, 2018 3:07 pm
... but yet, yesterday I logged into my 401k and bought 3k more of the Total Stock Index, bringing my allocation to 97/3.
It's harder because you're market-timing. A fixed and pre-defined asset allocation ensures that you are only market-timing away from the over-performing asset. (You just did the opposite. again.) It is the only way I know -- apart from dollar-cost averaging (i.e., investing same fixed dollar amount every month or every pay period) -- to ensure that you are buying more low-priced asset and selling more high-priced asset.

Another problem here is that the other side of the equation -- bonds -- is not super-attractive right now. Under more "normal" circumstances, I think it would be emotionally easier to re-balance into bonds. I've sacrificed some equity appreciation over the past year or two by re-balancing into bonds. I've lived through three "crashes" but i don't have that many more earning years ahead.

JBTX
Posts: 1919
Joined: Wed Jul 26, 2017 12:46 pm

Re: AA is much harder than I thought...

Post by JBTX » Sat Jan 13, 2018 3:53 pm

mega317 wrote:
Sat Jan 13, 2018 3:36 pm
rudeboy wrote:
Sat Jan 13, 2018 3:07 pm
Everything I have learned tells me that I should be buying bonds right now -- the 'trendiness' of 100% stocks (and their meteoric rise), the bleak projections for bonds, etc..
Then you haven't learned anything valuable. You shouldn't base your allocation decisions on trendiness or projections.

Why did you buy total stock and increase to 97/3 if you want to be 80/20?
There can be points in time when the markets keep going where to keep your allocation in line basically all of your new contribtions need to go into bonds. I can see how this seems unappealing when bond yields are so low.

User avatar
Watty
Posts: 12114
Joined: Wed Oct 10, 2007 3:55 pm

Re: AA is much harder than I thought...

Post by Watty » Sat Jan 13, 2018 4:23 pm

You might want to just consider putting the money into a target date 2050(?) fund if you don't have a clear reason not to.

dbr
Posts: 24760
Joined: Sun Mar 04, 2007 9:50 am

Re: AA is much harder than I thought...

Post by dbr » Sat Jan 13, 2018 4:47 pm

At least if you are 100/0 you can ignore all the threads on what bonds to buy, let along whether one should have CDs or I bonds. As an extra bonus you don't have to read the threads on rebalancing, target retirement funds, or which account to put what fund in (mostly). On the other hand you will have to be severely concerned how much you should tilt and whether or not to add REITs and Emerging Market.

staythecourse
Posts: 5169
Joined: Mon Jan 03, 2011 9:40 am

Re: AA is much harder than I thought...

Post by staythecourse » Sat Jan 13, 2018 5:00 pm

rudeboy wrote:
Sat Jan 13, 2018 3:07 pm

I've noticed that no one flat out announces 'I'm making a bad decision!' when they buy high/sell low. Rather, the investor psychology tricks one into believing one is making a good decision ( REITs are too complicated, I'll simplify by sliding them this into stocks... it's the Boglehead way!). I think that's what makes investing so tricky -- doing it right requires an extraordinary amount of honesty with oneself.
Astute observation. I have seen much market timing even from Bogleheads. The difference is it is not the common novice approach of, "Hey I think markets are going to crash so I will put my money in bonds instead". With bogleheads you see a lot of rationalization and intellectualizing (both common defense mechanisms) to justify the movement. You see a lot of, "Well it would be more simple if I just do x,y, or z" or "valuations are really pointing to doing x, y, or z" or "Hey this is why I am doing x, y, or z. Either way it is approached it is market timing.

My advice has always been that NEVER make an adjustment in one's AA towards what is the current returns. Meaning. for example, never increase equities when they are doing well. Never decrease an asset class because it is doing poorly at the moment.

Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle

WL2034
Posts: 452
Joined: Tue May 21, 2013 10:36 pm

Re: AA is much harder than I thought...

Post by WL2034 » Sun Jan 14, 2018 12:46 am

Watty wrote:
Sat Jan 13, 2018 4:23 pm
You might want to just consider putting the money into a target date 2050(?) fund if you don't have a clear reason not to.
I think this is a good idea for more of us than we'd like to admit. As I consider it more, if tax considerations weren't an issue I think I'd prefer to pay the extra 0.1% ER and put everything in a target date fund. No need to ever do the math or rebalance. I wonder how many of us will make behavioral mistakes more costly than 0.1% during the next bear market. After the market has just dropped 50%, will we wait an extra 3 or 6 months to rebalance into equities (just don't quite get around to it earlier than that)?

Because we have retirement accounts, taxable, TLH opportunities, I will keep the more complicated porfolio, but if it was only a retirement account I would really consider the target date.

User avatar
House Blend
Posts: 4270
Joined: Fri May 04, 2007 1:02 pm

Re: AA is much harder than I thought...

Post by House Blend » Sun Jan 14, 2018 8:47 am

rudeboy wrote:
Sat Jan 13, 2018 3:07 pm
I'm 33 and have only been in the markets about a year.
Accept that you won't have a real understanding of your risk tolerance until you've been through a market crash. Just about anyone who started investing after 2010 is in the same boat.

In the meantime, it's a good idea to have an allocation to bonds/fixed income so you can learn the routine of maintaining an AA before it actually matters.

Dottie57
Posts: 2544
Joined: Thu May 19, 2016 5:43 pm

Re: AA is much harder than I thought...

Post by Dottie57 » Sun Jan 14, 2018 10:15 am

House Blend wrote:
Sun Jan 14, 2018 8:47 am
rudeboy wrote:
Sat Jan 13, 2018 3:07 pm
I'm 33 and have only been in the markets about a year.
Accept that you won't have a real understanding of your risk tolerance until you've been through a market crash. Just about anyone who started investing after 2010 is in the same boat.

In the meantime, it's a good idea to have an allocation to bonds/fixed income so you can learn the routine of maintaining an AA before it actually matters.
+1

Also, as you accumulate more wealth you might change and be more conservative. Experience will tell.

Random Walker
Posts: 2225
Joined: Fri Feb 23, 2007 8:21 pm

Re: AA is much harder than I thought...

Post by Random Walker » Sun Jan 14, 2018 11:28 am

Hi Rudeboy,
You are off to a great start. I think you are developing some excellent contrarian instincts! That being said, here’s what I think. You are young, and with many years of human capital ahead of you, you can afford to take risk. Moreover, current high equity valuations imply lower future expected returns. So perhaps somewhat ironically, it can make sense for a young person to increase their equity allocation in the presence of lower future expected returns because they need to in order to meet goals. Given that you have many investing years ahead of you, I think a high equity allocation is a good idea. But I would not go 100% equities, and here’s why. I think you should have at least 10-20% bonds to develop the psychological discipline to stick to a plan, rebalance, tax loss harvest. The difference between 80% equities and 100% equities is surprisingly little. The 80% equity portfolio probably has > 95% of its risk on the equity side. The behavioral / psychological muscles you’ll develop from rebalancing (selling bonds to buy equities when equities are tanking) will serve you very well for decades to come I think.

Dave

User avatar
Scott S
Posts: 1391
Joined: Mon Nov 24, 2008 3:28 am
Location: SW CR IA US NA PE

Re: AA is much harder than I thought...

Post by Scott S » Sun Jan 14, 2018 1:33 pm

rudeboy wrote:
Sat Jan 13, 2018 3:07 pm
I'm 33 and have only been in the markets about a year. I'm doing my best to learn from the masters -- my first investing read was Common Sense and I just finished The Four Pillars.

Everything I have learned tells me that I should be buying bonds right now -- the 'trendiness' of 100% stocks (and their meteoric rise), the bleak projections for bonds, etc.. but yet, yesterday I logged into my 401k and bought 3k more of the Total Stock Index, bringing my allocation to 97/3.

It's alarming, because I do believe my portfolio should be at least 80/20, and this is how I'm acting when times are good. It makes me seriously wonder how I will handle a decline...

I've noticed that no one flat out announces 'I'm making a bad decision!' when they buy high/sell low. Rather, the investor psychology tricks one into believing one is making a good decision ( REITs are too complicated, I'll simplify by sliding them this into stocks... it's the Boglehead way!). I think that's what makes investing so tricky -- doing it right requires an extraordinary amount of honesty with oneself.

Anyway, just a stray observation about putting theory to practice.
One of my favorite sayings about investing goes something like this: "When you are well-diversified, you will always be unhappy with some part of your portfolio." ;)
My Plan: | (Age-10)% in bonds until I reach age 60, 50/50 thereafter. | Equity split: 50/50 US/Int'l, Bond split: 50/50 TBM/TIPS.

User avatar
wander
Posts: 2362
Joined: Sat Oct 04, 2008 9:10 am

Re: AA is much harder than I thought...

Post by wander » Sun Jan 14, 2018 1:52 pm

Easy, just buy a target retirement or Vanguard Life Strategy fund that has the AA you want and leave it alone.

rudeboy
Posts: 10
Joined: Thu Oct 05, 2017 9:21 pm

Re: AA is much harder than I thought...

Post by rudeboy » Sun Jan 14, 2018 2:36 pm

Thanks for all of the thoughts and insights. Yes, I am beginning to think a lifestrategy/target date fund may be right for me. I can always keep a total stock fund on the side that I can contribute to in the event of a major downturn.

User avatar
Exige
Posts: 300
Joined: Mon Apr 11, 2011 3:58 pm
Location: Littleton, CO

Re: AA is much harder than I thought...

Post by Exige » Mon Jan 15, 2018 12:52 pm

This is extremely true in the early accumulation phase as the OP, you and I are at. I was struggling with AA and went back and compared my 80/20 to a full 100% stocks and the difference I would have made over the last 10 years was so minimal my contributions were making up WAY more.

TheHouse7 wrote:
Sat Jan 13, 2018 3:26 pm
It is not.

I'm 30, with 80/20 25% stock international.

I keep thinking I need to buy more stock when I really mean save more. :)

Contributions matter so much more than AA it's not even funny.
‘I found the road to wealth when I decided that a part of all I earned was mine to keep. And so will you.'

retireearly
Posts: 67
Joined: Tue Mar 14, 2017 1:51 pm

Re: AA is much harder than I thought...

Post by retireearly » Mon Jan 15, 2018 2:16 pm

rudeboy wrote:
Sat Jan 13, 2018 3:07 pm
I'm 33 and have only been in the markets about a year. I'm doing my best to learn from the masters -- my first investing read was Common Sense and I just finished The Four Pillars.

Everything I have learned tells me that I should be buying bonds right now -- the 'trendiness' of 100% stocks (and their meteoric rise), the bleak projections for bonds, etc.. but yet, yesterday I logged into my 401k and bought 3k more of the Total Stock Index, bringing my allocation to 97/3.

It's alarming, because I do believe my portfolio should be at least 80/20, and this is how I'm acting when times are good. It makes me seriously wonder how I will handle a decline...

I've noticed that no one flat out announces 'I'm making a bad decision!' when they buy high/sell low. Rather, the investor psychology tricks one into believing one is making a good decision ( REITs are too complicated, I'll simplify by sliding them this into stocks... it's the Boglehead way!). I think that's what makes investing so tricky -- doing it right requires an extraordinary amount of honesty with oneself.

Anyway, just a stray observation about putting theory to practice.

It doesn't have to be hard but it's hard because you are struggling with risk/reward. I was 100% stock until 44 and then found my way here since I knew it was time for less risk.

What is your goal? At 33, if you truly don't need any of these funds until say 65, then you are fine at 100 stock% if you can handle the future correction/collapse and when it happens, smile and continue to buy in as you have been doing. However, if you feel that you cannot handle that, or need a % of those funds in the next 10-20 years, then you should have some in Fixed Income. I've read a lot into AA and think about it frequently and it's all about risk/reward, or risk tolerance.

That said, there is probably a range where most would agree and that is probably between 0-35% fixed income. As you get near each pole, know that you are either being real aggressive or real conservative. We're due for a good drop, 20, 30%, whatever, but nobody knows when, for how long, etc. At the other end, low bond yields and inflation are real risks, too. Some at 33 that has 50% bonds will surely come out way behind of someone with fewer bonds at the age of 70.
Age: 44, Married kids 8/12. Over the last six months, moved from 100% stock to 67/33. Desired AA 50/50 Us/INT, with tilt to US SCV, Int SCV and EM.

Greenie
Posts: 145
Joined: Thu Apr 30, 2009 9:43 pm

Re: AA is much harder than I thought...

Post by Greenie » Mon Jan 15, 2018 2:36 pm

House Blend wrote:
Sun Jan 14, 2018 8:47 am
rudeboy wrote:
Sat Jan 13, 2018 3:07 pm
I'm 33 and have only been in the markets about a year.
Accept that you won't have a real understanding of your risk tolerance until you've been through a market crash. Just about anyone who started investing after 2010 is in the same boat.

In the meantime, it's a good idea to have an allocation to bonds/fixed income so you can learn the routine of maintaining an AA before it actually matters.
Rudeboy, I was 100% equities until the crash of 2008. I thought I could endure much more pain from a crashing market then I was actually capable of. I saw my portfolio drop 50% and realized I would have to double my future returns to get back to even. I took this risk far to close to retirement and had many sleepless nights. The goods news was I didn't capitulate and sell everything but the emotional roll coaster wasn't worth it. I have learned what risk I can actually tolerate and having a serious stash of cash equivalents is a very good thing. Maybe you should consider CDs, MM, and just save more.

User avatar
ruralavalon
Posts: 12135
Joined: Sat Feb 02, 2008 10:29 am
Location: Illinois

Re: AA is much harder than I thought...

Post by ruralavalon » Mon Jan 15, 2018 2:52 pm

rudeboy wrote:
Sat Jan 13, 2018 3:07 pm
I'm 33 and have only been in the markets about a year. I'm doing my best to learn from the masters -- my first investing read was Common Sense and I just finished The Four Pillars.
Those were excellent choices for books to read.

rudeboy wrote:Everything I have learned tells me that I should be buying bonds right now -- the 'trendiness' of 100% stocks (and their meteoric rise), the bleak projections for bonds, etc.. but yet, yesterday I logged into my 401k and bought 3k more of the Total Stock Index, bringing my allocation to 97/3.

It's alarming, because I do believe my portfolio should be at least 80/20, and this is how I'm acting when times are good. It makes me seriously wonder how I will handle a decline...

I've noticed that no one flat out announces 'I'm making a bad decision!' when they buy high/sell low. Rather, the investor psychology tricks one into believing one is making a good decision ( REITs are too complicated, I'll simplify by sliding them this into stocks... it's the Boglehead way!). I think that's what makes investing so tricky -- doing it right requires an extraordinary amount of honesty with oneself.

Anyway, just a stray observation about putting theory to practice.
You know better, there is no reason to leave it 97/3, so you could just exchange funds to get your 80/20 asset allocation.

wander wrote:
Sun Jan 14, 2018 1:52 pm
Easy, just buy a target retirement or Vanguard Life Strategy fund that has the AA you want and leave it alone.
rudeboy wrote:
Sun Jan 14, 2018 2:36 pm
Thanks for all of the thoughts and insights. Yes, I am beginning to think a lifestrategy/target date fund may be right for me. I can always keep a total stock fund on the side that I can contribute to in the event of a major downturn.
That's a good idea, you could just switch everything to a target date fund with an 80/20 asset allocation or Vanguard LifeStrategy Growth Fund (VASGX). People who use a balanced fund do tend to leave it alone and not get seduced by trends.

. . . . .

Make sure you save and invest as much as is practical for you. When starting out that influences portfolio growth more than any other factor under your control.
Last edited by ruralavalon on Mon Jan 15, 2018 3:02 pm, edited 1 time in total.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

User avatar
pennstater2005
Posts: 2324
Joined: Wed Apr 11, 2012 8:50 pm

Re: AA is much harder than I thought...

Post by pennstater2005 » Mon Jan 15, 2018 2:58 pm

I didn’t trust myself so I went with a Lifestrategy Fund and set it to automatic. Mine happened to be 80/20. Otherwise I probably would screw things up.
“Life is short, Break the Rules, Forgive quickly, Kiss slowly, Love truly, Laugh uncontrollably, And never regret anything that made you smile" - Unknown

User avatar
midareff
Posts: 5183
Joined: Mon Nov 29, 2010 10:43 am
Location: Biscayne Bay, South Florida

Re: AA is much harder than I thought...

Post by midareff » Mon Jan 15, 2018 3:13 pm

Back in 1997 I could not understand the logic of owning any bonds and had a very tech heavy portfolio. The daily grind of watching $1.3M dwindle to $589K was .. well, without 4 letter words, horrid. It took more than a decade for me to recover. I'm now 45/55 with 18 years draw in bonds sans dividends and am 70. How hard or how easy you learn is up to you.

pkcrafter
Posts: 12256
Joined: Sun Mar 04, 2007 12:19 pm
Location: CA
Contact:

Re: AA is much harder than I thought...

Post by pkcrafter » Tue Jan 16, 2018 10:12 am

rudeboy:
Everything I have learned tells me that I should be buying bonds right now -- the 'trendiness' of 100% stocks (and their meteoric rise), the bleak projections for bonds, etc.. but yet, yesterday I logged into my 401k and bought 3k more of the Total Stock Index, bringing my allocation to 97/3.
Something wrong here. If your AA is 80/20, why would you buy stocks? Do you have a written investment policy statement that says your AA is 80/20? Do not use "the voices" to make investment decisions.
IPS

https://www.bogleheads.org/wiki/Investm ... _statement


Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.

Post Reply