how did you determine your risk tolerance?

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antiqueman
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Re: how did you determine your risk tolerance?

Post by antiqueman » Tue Feb 13, 2018 12:56 am

I notice that many responses to this question focus on how long you could live on your savings to help determine your AA.

I have a severe problem with buying equities. I have enough income-- a substantial part in tips- to last 20 years and never touch equities. I could buy more equities but do not ever think the time is right.


I only have 10% in equities. From an intellectual standpoint I KNOW I should have more equities and should have for the last 30years. I am 63. I have always been to conservative. with money and investing. I estimate that had I invested at a 40/60 AA over the past 10 years since the 2008 recession I would have made over a million dollars in equities had I bought and held them to now. In essence I left a million dollars on the table the past 10 years. Who knows what that amount is over my work life. Of course no-one knew the market would do what it has done the past 10 year

My point to the OP is that while I could obviously have taken, and can even now,take more risk, I have not done so. One of the reason is that I am just to conservative and do not want to lose money. M y AA was not based on what my true risk tolerance was over my work life.. I hope the you can find the right AA for yourself soon. And, if anyone has any suggestions for a 63 old , with over 20 years of living expenses, about how to increase their equity 10 or 15 more percent I welcome the suggestions. ( I probably need to increase equity for my child and grandchildren)

bling
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Re: how did you determine your risk tolerance?

Post by bling » Tue Feb 13, 2018 6:44 pm

antiqueman wrote:
Tue Feb 13, 2018 12:56 am
I notice that many responses to this question focus on how long you could live on your savings to help determine your AA.
i purposely described my portfolio as a multiplier of my expenses for a couple reasons:

1) even though we're on an online forum with aliases, i don't feel comfortable giving my actual numbers.
2) portfolio as a multiplier of expenses can be used by people of all income levels.
3) the actual question i had was in the thread title: how did you figure out your risk tolerance!!

in the end, this backfired as we spent 2 pages debating on whether i should have an emergency fund or not. a $500 unexpected expense for someone making $30k is very different from a person making $100k. at a lower income you might not have enough left over in your pay check to cover that $500, hence the potential need for an emergency fund. for someone with a high income, it makes no difference. add it to the credit card and pay it off the next statement. you save $500 less that month -- you're still cash positive.
antiqueman wrote:
Tue Feb 13, 2018 12:56 am
I only have 10% in equities. From an intellectual standpoint I KNOW I should have more equities and should have for the last 30years. I am 63. I have always been to conservative. with money and investing. I estimate that had I invested at a 40/60 AA over the past 10 years since the 2008 recession I would have made over a million dollars in equities had I bought and held them to now. In essence I left a million dollars on the table the past 10 years. Who knows what that amount is over my work life. Of course no-one knew the market would do what it has done the past 10 year

My point to the OP is that while I could obviously have taken, and can even now,take more risk, I have not done so. One of the reason is that I am just to conservative and do not want to lose money. M y AA was not based on what my true risk tolerance was over my work life.. I hope the you can find the right AA for yourself soon. And, if anyone has any suggestions for a 63 old , with over 20 years of living expenses, about how to increase their equity 10 or 15 more percent I welcome the suggestions. ( I probably need to increase equity for my child and grandchildren)
does your 20 years include social security or not? if it doesn't i'd say you've already won the game and don't need to take any more risk.

as for increasing your equity allocation, i would say just do it cold turkey and rebalance into 15% or 20% equities. or you can do it slowly by moving 0.5% into equities every month and ease yourself into it, and perhaps even defining a 10-20% equity rebalancing band as part of your IPS.

you can play around with portfoliovisualizer.com with various stock/bond allocations to get a sense of what's happened in the past. the difference between a 10% and 20% allocation is actually very small.

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nisiprius
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Re: how did you determine your risk tolerance?

Post by nisiprius » Tue Feb 13, 2018 6:56 pm

bling wrote:
Sun Feb 11, 2018 3:44 pm
...holding cash is losing money...
No, it isn't. Not unless by "cash" you actually mean literal, physical currency in storage--and by "money" you mean, not money (dollars) but inflation-adjusted purchasing power.

1) Short-term treasury bills generally have kept up with inflation and eked out a tiny real return.

2) Competitive bank accounts generally have done the same thing. Yes, you can, if you wish, put your money in a zero-interest business checking account, but competitive "money market deposit accounts" and even shorter-term CDs have also kept up with inflation.

3) Nobody refers to a loss of real value (purchasing power) as "losing money" except when they are attacking cash or TIPS. For example, $10,000 invested in the Vanguard Total International Stock Market Index Fund grew from $10,000 to $11,980.98 during the ten years 2008 through 2017. Ask people "did the fund lose money?" and I bet ten out of ten will say "no," even though some will add "it did lose real value, however."
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kaudrey
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Re: how did you determine your risk tolerance?

Post by kaudrey » Wed Feb 14, 2018 3:38 pm

bling - to get back to your original question: risk tolerance is easy to intellectually understand; but, as you've noted, hard to know the "feeling" once implemented.

Part of it is your ability to ignore noise and not panic with a 10%, 20%, 30% correction, which will be dependent on a lot of things - your inherent nature, job security, age, other future income sources. I am 75/25 right now, and I am 48. However, I am a fed, will have a federal pension (even if the proposed budget cuts it somewhat), am not in danger of losing my job, and have a partner who also has a good job and pension from a former employer to rely on in a few years. In 2007/8, I was 90/10. I've reduced that slowly over the last 10 years because 1) I'm older and 2) now plan to retire earlier than I thought; so I've adjusted accordingly.

70/30 is a very acceptable allocation - sounds like you won't panic and you have a lot of years to make it up; plus you seem to have a high income and can deal with a lot with just cash flows if needed. Stay the course, keep investing, and you'll be fine. You'll win the game; don't sweat a % here and there.

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Re: how did you determine your risk tolerance?

Post by Noobvestor » Sat Feb 24, 2018 2:01 am

knpstr wrote:
Sun Feb 11, 2018 9:57 pm
I realized that volatility isn't risk for me and that inflation is a major risk for me.
Since I'm very risk adverse, I am 100% equities.
I strongly suspect that if inflation is your biggest fear, mixing some TIPS in with your equities would help. In high-inflation environments, equities tend to do better than nominal bonds, but not amazingly well.
"In the absence of clarity, diversification is the only logical strategy" -= Larry Swedroe

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burt
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Re: how did you determine your risk tolerance?

Post by burt » Sat Feb 24, 2018 7:36 am

DrGoogle2017 wrote:
Sun Feb 11, 2018 12:50 am
Wait until you also get a lay off notice, stock market is down by a large percentage, it might take you years to find full employment, or maybe never. Your emergency fund is also gone and you have to pay COBRA or the like for health insurance.
+1
Don't forget to add an upside down mortgage and two kids in college.
Let's be optimistic and assume the marriage can survive the financial storm.

burt

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knpstr
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Re: how did you determine your risk tolerance?

Post by knpstr » Sat Feb 24, 2018 2:03 pm

Noobvestor wrote:
Sat Feb 24, 2018 2:01 am
knpstr wrote:
Sun Feb 11, 2018 9:57 pm
I realized that volatility isn't risk for me and that inflation is a major risk for me.
Since I'm very risk adverse, I am 100% equities.
I strongly suspect that if inflation is your biggest fear, mixing some TIPS in with your equities would help. In high-inflation environments, equities tend to do better than nominal bonds, but not amazingly well.
Thanks for the suggestion, but I'll pass on TIPS
Very little is needed to make a happy life; it is all within yourself, in your way of thinking. -Marcus Aurelius

bondsr4me
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Re: how did you determine your risk tolerance?

Post by bondsr4me » Sat Feb 24, 2018 2:06 pm

I lost some money trying to trade every day....that sure helped me figure it out pretty fast!

Don

bling
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Re: how did you determine your risk tolerance?

Post by bling » Sat Feb 24, 2018 2:19 pm

burt wrote:
Sat Feb 24, 2018 7:36 am
DrGoogle2017 wrote:
Sun Feb 11, 2018 12:50 am
Wait until you also get a lay off notice, stock market is down by a large percentage, it might take you years to find full employment, or maybe never. Your emergency fund is also gone and you have to pay COBRA or the like for health insurance.
+1
Don't forget to add an upside down mortgage and two kids in college.
Let's be optimistic and assume the marriage can survive the financial storm.

burt
if all of that happened and the only thing you ever "invested" in was cash in a savings account, you would still run out of money.

i don't understand how these doomsday scenarios to determine your risk tolerance are constructive at all.... the chances of you dying from a car accident or health disease are probably higher.

DrGoogle2017
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Re: how did you determine your risk tolerance?

Post by DrGoogle2017 » Sat Feb 24, 2018 4:26 pm

bling wrote:
Sat Feb 24, 2018 2:19 pm
burt wrote:
Sat Feb 24, 2018 7:36 am
DrGoogle2017 wrote:
Sun Feb 11, 2018 12:50 am
Wait until you also get a lay off notice, stock market is down by a large percentage, it might take you years to find full employment, or maybe never. Your emergency fund is also gone and you have to pay COBRA or the like for health insurance.
+1
Don't forget to add an upside down mortgage and two kids in college.
Let's be optimistic and assume the marriage can survive the financial storm.

burt
if all of that happened and the only thing you ever "invested" in was cash in a savings account, you would still run out of money.

i don't understand how these doomsday scenarios to determine your risk tolerance are constructive at all.... the chances of you dying from a car accident or health disease are probably higher.
Those are actual scenarios, not doomsday scenatios. But you don’t have to learn from people’s mistakes, go ahead and make your own mistakes. You know better than anybody than why bother asking?

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burt
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Re: how did you determine your risk tolerance?

Post by burt » Sat Feb 24, 2018 6:12 pm

bling wrote:
Sat Feb 24, 2018 2:19 pm
burt wrote:
Sat Feb 24, 2018 7:36 am
DrGoogle2017 wrote:
Sun Feb 11, 2018 12:50 am
Wait until you also get a lay off notice, stock market is down by a large percentage, it might take you years to find full employment, or maybe never. Your emergency fund is also gone and you have to pay COBRA or the like for health insurance.
+1
Don't forget to add an upside down mortgage and two kids in college.
Let's be optimistic and assume the marriage can survive the financial storm.

burt
if all of that happened and the only thing you ever "invested" in was cash in a savings account, you would still run out of money.

i don't understand how these doomsday scenarios to determine your risk tolerance are constructive at all.... the chances of you dying from a car accident or health disease are probably higher.
Not a scenario... real life.

edit..
Me thinks people have short memories. Did the 2008-2009 crash never happen? Try surviving that after losing your job and 30% of your lifetime savings.
Regarding cash.. in the Great Depression the only cash that mattered was those bills and coins buried in coffee cans in the backyard.
(people couldn't get funds from failing banks)

burt

Random Walker
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Re: how did you determine your risk tolerance?

Post by Random Walker » Sat Feb 24, 2018 8:16 pm

I assumed stocks could lose 50% in any given 1-2 year period. Assumed that if that happened, bonds might rise 5%. Chose combination stocks and bonds that make the loss only moderately painful. Also I strongly recommend looking at that loss not only in % terms, but also in absolute dollar amounts.

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Toons
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Re: how did you determine your risk tolerance?

Post by Toons » Sat Feb 24, 2018 8:17 pm

When I had trouble sleeping.
:mrgreen:
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privatefarmer
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Re: how did you determine your risk tolerance?

Post by privatefarmer » Sun Feb 25, 2018 1:13 am

DrGoogle2017 wrote:
Sun Feb 11, 2018 12:50 am
Wait until you also get a lay off notice, stock market is down by a large percentage, it might take you years to find full employment, or maybe never. Your emergency fund is also gone and you have to pay COBRA or the like for health insurance.
I understand this point of view. However, wouldn't you be better off in these "dooms day" scenarios if you had a much larger portfolio to start with? We all understand that stocks have gone up far more than they've gone down. Owning businesses, at the end of the day, is a profitable thing to do. So if you want to be best prepared for the hard times, wouldn't you want your portfolio to grow as much as possible leading up to those times? We can never know when those times are coming, it is fruitless to try and time the market, so a better strategy might be to just put your foot on the gas and hope for the most gain in your portfolio knowing that you'll possibly need the money to live off of someday.

Putting one foot on the gas (stocks) and one foot on the brakes (fixed income/cash) just doesn't make sense to me. It's one thing if you're retired and do not want much volatility, but if you're still accumulating it seems the best thing you can do to prepare for the hard times is to accumulate as much and as fast as possible while you can.

DrGoogle2017
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Re: how did you determine your risk tolerance?

Post by DrGoogle2017 » Sun Feb 25, 2018 1:18 am

privatefarmer wrote:
Sun Feb 25, 2018 1:13 am
DrGoogle2017 wrote:
Sun Feb 11, 2018 12:50 am
Wait until you also get a lay off notice, stock market is down by a large percentage, it might take you years to find full employment, or maybe never. Your emergency fund is also gone and you have to pay COBRA or the like for health insurance.
I understand this point of view. However, wouldn't you be better off in these "dooms day" scenarios if you had a much larger portfolio to start with? We all understand that stocks have gone up far more than they've gone down. Owning businesses, at the end of the day, is a profitable thing to do. So if you want to be best prepared for the hard times, wouldn't you want your portfolio to grow as much as possible leading up to those times? We can never know when those times are coming, it is fruitless to try and time the market, so a better strategy might be to just put your foot on the gas and hope for the most gain in your portfolio knowing that you'll possibly need the money to live off of someday.

Putting one foot on the gas (stocks) and one foot on the brakes (fixed income/cash) just doesn't make sense to me. It's one thing if you're retired and do not want much volatility, but if you're still accumulating it seems the best thing you can do to prepare for the hard times is to accumulate as much and as fast as possible while you can.
Yes, and we did. 100% in equities before 2000 crash. But when 90% of engineers in Silicon Valley were laid off, it was a position we were caught by surprise. The lucky part for us was we lived on one income and saved almost all of the other income. Over saving saved us, but we did sell some equities in down years too, that was my regret.

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privatefarmer
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Re: how did you determine your risk tolerance?

Post by privatefarmer » Sun Feb 25, 2018 1:25 am

BogleMelon wrote:
Sun Feb 11, 2018 3:51 pm
bling wrote:
Sun Feb 11, 2018 3:44 pm
KlangFool wrote:
Sun Feb 11, 2018 3:12 pm

3) If you are unemployed and the stock market drop by 50%, how long can you last with that $500?
1) i don't believe in emergency funds because holding cash is losing money


3) obviously not very long. but there are other things we have not discussed. we have not talked about unemployment benefits. nor selling the house, or taking out a HELOC. i could even last for 2-3 years with credit cards alone, then deplete my investments, followed by bankruptcy a couple years later :twisted:
OP:
Seriously? You prefer to go through this pain than to lose couple of percentages in inflation for holding $10K in a high yield saving account? You can even have your EF in Ibonds and not lose anything for inflation, and avoid that catastrophic scenario when something that happens too often these days is happening to you! :oops:
It's math vs emotions. I can understand both sides. If you can keep your emotions in check, we all know the math would tell us to be 100% stocks 100% of the time. Even if you have to sell some after a downturn, you're most likely still going to be ahead bc you had been 100% equities leading up to that downturn. you had a bigger pot to begin with.

What people need to be cognizant of is whether they are responsible for others (ie a wife and kids). Will their spouse be okay with the volatility or will he/she force you to sell low? Will taking additional risk possibly put the welfare of your children at stake? These are serious questions. But we all understand the math. Cash is a drag on your portfolio, so is anything that returns less than stocks. I am 100% equities however I have ran through many of the "worst case" scenarios and feel confident that I can stay the course.

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privatefarmer
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Re: how did you determine your risk tolerance?

Post by privatefarmer » Sun Feb 25, 2018 1:28 am

DrGoogle2017 wrote:
Sun Feb 25, 2018 1:18 am
privatefarmer wrote:
Sun Feb 25, 2018 1:13 am
DrGoogle2017 wrote:
Sun Feb 11, 2018 12:50 am
Wait until you also get a lay off notice, stock market is down by a large percentage, it might take you years to find full employment, or maybe never. Your emergency fund is also gone and you have to pay COBRA or the like for health insurance.
I understand this point of view. However, wouldn't you be better off in these "dooms day" scenarios if you had a much larger portfolio to start with? We all understand that stocks have gone up far more than they've gone down. Owning businesses, at the end of the day, is a profitable thing to do. So if you want to be best prepared for the hard times, wouldn't you want your portfolio to grow as much as possible leading up to those times? We can never know when those times are coming, it is fruitless to try and time the market, so a better strategy might be to just put your foot on the gas and hope for the most gain in your portfolio knowing that you'll possibly need the money to live off of someday.

Putting one foot on the gas (stocks) and one foot on the brakes (fixed income/cash) just doesn't make sense to me. It's one thing if you're retired and do not want much volatility, but if you're still accumulating it seems the best thing you can do to prepare for the hard times is to accumulate as much and as fast as possible while you can.
Yes, and we did. 100% in equities before 2000 crash. But when 90% of engineers in Silicon Valley were laid off, it was a position we were caught by surprise. The lucky part for us was we lived on one income and saved almost all of the other income. Over saving saved us, but we did sell some equities in down years too, that was my regret.
So the market has come up a long way since 2000. If you were 100% equities before then and 100% equities after, would you have more than recovered by now? Did you or did you become more conservative after the tech bubble? And being in tech during the tech bubble is about as bad as it gets. Anything is possible, however living through that in your situation I would think would be a pretty good test of your risk tolerance.

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privatefarmer
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Re: how did you determine your risk tolerance?

Post by privatefarmer » Sun Feb 25, 2018 1:38 am

KlangFool wrote:
Sun Feb 11, 2018 5:32 pm
bling wrote:
Sun Feb 11, 2018 5:16 pm
in case there was any doubt, my comment about HELOC and credit cards was a joke.

there are many comments about the ability to stay the course in a recession. i'm pretty confident in myself that i can do it, but of course we won't know for sure until the next crash.

nonetheless, you all cannot be serious about advocating for a 33 year old, who has 30+ working years ahead of him, to be 80% bonds and 20% cash.... just because i've never been through a crash.
bling,

That is a ridiculous statement.

Your portfolio = 65 months of expense.

Take 6 months to be cash aka emergency fund. 18 month as fixed income. The rest (41 months) could be stock.

If you do not count EF as part of your portfolio, it is 69/31. It is exactly what you have now except for the 6 months emergency fund. It is perfectly reasonable.

The unreasonable part of your current portfolio is the lack of emergency fund.

With $500 as your current emergency fund, you do not have the ability to take the risk. You will have to sell whenever you are unemployed or you are faced with a financial emergency,

KlangFool
yeah I'm not so sure. We all assume an EF must be in cash. But say your EF needs to be 6 months of expenses and you happen to have 12 months of expenses in your brokerage account. Why can't that be in stocks? Very very worst case scenario is that it drops in half and you have to tap it, you'd still have a 6 month EF. This also is an UNLIKELY scenario, not saying it cannot happen but it is unlikely to happen. And if it did happen at some point you likely would have built up wayyy more than 12 months of an EF leading up to that scenario since it would've been invested. If you're comfortable with the volatility and have a large enough cushion I think it is totally reasonable to have your EF invested in equities.

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privatefarmer
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Re: how did you determine your risk tolerance?

Post by privatefarmer » Sun Feb 25, 2018 1:44 am

KlangFool wrote:
Sun Feb 11, 2018 8:55 pm
bling wrote:
Sun Feb 11, 2018 8:41 pm
KlangFool wrote:
Sun Feb 11, 2018 8:27 pm
What makes you think that?
for me it comes down to risk/reward. since the beginning of 2008 until now, the S&P500 has almost tripled in value. because all of my funds were fully invested in the market, i already have 3 emergency funds instead of 1. as of right now the market would have to crash 67% for me to break even with a cash emergency fund.

using your portfolio as an example, right now you say you have 240 months of expenses as your portfolio size. assuming a 50/50 stock/bond split, your 120 months of stocks made 24 months of expenses (20% return) in 2017, more than double your emergency fund of 12 months.

that is why i say it doesn't matter after a certain point.
bling,

Which part do you not understand?

I have a choice

A) Keep one year of the emergency fund and get 0% return. In exchange, I do not face the danger of selling my portfolio at 50% or more losses for at least one year.

B) Do not keep one year of the emergency fund and have to sell at 50% or more losses.

(A) is a better deal for me.

You had never faced a recession and unemployed at the same time. You did not calculate the actual cost of not having an emergency fund. I was unemployed for more than 1 year a few times. And, a few of them in a recession. The emergency fund saved my portfolio from big losses a few times.

You ignore the risk of having to sell your portfolio at big losses without the emergency fund. Is that wise? Almost everyone that experienced a recession told you they had an emergency fund to help them sleep at night.

You only have $500 as the emergency fund. Bond and stock's value can be lower when you need to sell them. You could have losses.

KlangFool
what bling is getting at here is that even if you sold stocks at a 50% loss, if those stocks had tripled before the recession then you still ended up ahead. 50k ---> 150k, then down to 75k after the recession. That's still ahead of your cash EF. That's the math behind it. Emotionally it may be a totally different story and many (probably nearly all) will sleep better knowing they have a cash cushion even if mathematically its a drag on their total net worth.

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privatefarmer
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Re: how did you determine your risk tolerance?

Post by privatefarmer » Sun Feb 25, 2018 2:03 am

bling wrote:
Mon Feb 12, 2018 7:03 pm
thangngo wrote:
Mon Feb 12, 2018 3:49 pm
OP:
1) if you haven't already, grab Bogleheads Guide to Investing. It has a good chapter on Insurance. You insure to protect what you can't lose. As for investment, using asset allocation as a means to get insurance is a bad planning.
2) $500 of EF is ridiculously small. Any big item expenses (house, car repair, deductibles, property taxes, funeral, health care bills, etc.) would wipe it out in a second. Maybe you're not in a position to deal with those big item expenses yet. But make sure you plan for it. Don't put yourself in position that you'd kick yourself selling losing funds or winning funds just to cover those expenses.
i don't know why but it seems like because i don't have an emergency fund everyone assumes i'm a reckless person who doesn't understand risk.

1) i have life and disability insurance.
2) i don't have $500 for a EF, i have $0 for an EF. i say $500 in my checkings account because that's what i expect i need to spend in cash a month. everything else goes on the credit card (of which pay off every month), so i can fly for free.

of the expenses you mentioned, house, deductibles, property taxes, health care bills, are not expenses. they are known in advance, or capped because of health insurance.

for unexpected things like a car repair, house repair, etc., if i literally need cash and can't put it on the credit card, i'll sell. that has happened to me exactly once in my life. my portfolio fluctuates much more than that every day.

and to hopefully end the discussion that having a $0 emergency fund is a universally bad idea, here's some scenarios to back it up.

scenario 1: starting balance is $41,000. 70/30. monthly rebalancing. 2008-2009. you also have a $24,000 EF.

https://www.portfoliovisualizer.com/bac ... alBond1=30

you have $36,977.

scenario 2: starting balance is $65,000. 70/30. monthly rebalancing. $1,000 monthly withdrawal. 2008-2009.

https://www.portfoliovisualizer.com/bac ... alBond1=30

you have $31,837.

you have been unemployed for 2 whole years and the difference between having an emergency fund and not is a measly $5,000.

i'm not even going to go into the lost returns of cash vs being invested over time, or having to recoup your now $0 emergency fund after the recession and how that will affect future returns.

ok, so maybe a 24 month emergency fund is overkill, let's try just 2008 such that the recovery never happened.

scenario 3: starting balance $53,000. 70/30. monthly rebalancing. $12,000 EF. 2008.

https://www.portfoliovisualizer.com/bac ... alBond1=30

you have $39,194 left.

scenario 4: starting balance $65,000. 70/30. monthly rebalancing. $1,000 monthly withdrawal. 2008.

https://www.portfoliovisualizer.com/bac ... alBond1=30

you have $37,726. left.

----

if $1,468 or 2.2% is all i'm paying for not having an EF during 2008 i will gladly pay that to have an expected 8% return over my lifetime on that cash.
man, my only question is why are you not 100% equities? you have a solid grasp on the math and you're in your 30s correct?

the math is the math. the odds are in your favor if you bet on equities over cash/bonds. if you can check your emotions at the door during the next recession then there's no reason not to be 100% equities IMO

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Re: how did you determine your risk tolerance?

Post by DrGoogle2017 » Sun Feb 25, 2018 10:03 am

privatefarmer wrote:
Sun Feb 25, 2018 1:28 am
DrGoogle2017 wrote:
Sun Feb 25, 2018 1:18 am
privatefarmer wrote:
Sun Feb 25, 2018 1:13 am
DrGoogle2017 wrote:
Sun Feb 11, 2018 12:50 am
Wait until you also get a lay off notice, stock market is down by a large percentage, it might take you years to find full employment, or maybe never. Your emergency fund is also gone and you have to pay COBRA or the like for health insurance.
I understand this point of view. However, wouldn't you be better off in these "dooms day" scenarios if you had a much larger portfolio to start with? We all understand that stocks have gone up far more than they've gone down. Owning businesses, at the end of the day, is a profitable thing to do. So if you want to be best prepared for the hard times, wouldn't you want your portfolio to grow as much as possible leading up to those times? We can never know when those times are coming, it is fruitless to try and time the market, so a better strategy might be to just put your foot on the gas and hope for the most gain in your portfolio knowing that you'll possibly need the money to live off of someday.

Putting one foot on the gas (stocks) and one foot on the brakes (fixed income/cash) just doesn't make sense to me. It's one thing if you're retired and do not want much volatility, but if you're still accumulating it seems the best thing you can do to prepare for the hard times is to accumulate as much and as fast as possible while you can.
Yes, and we did. 100% in equities before 2000 crash. But when 90% of engineers in Silicon Valley were laid off, it was a position we were caught by surprise. The lucky part for us was we lived on one income and saved almost all of the other income. Over saving saved us, but we did sell some equities in down years too, that was my regret.
So the market has come up a long way since 2000. If you were 100% equities before then and 100% equities after, would you have more than recovered by now? Did you or did you become more conservative after the tech bubble? And being in tech during the tech bubble is about as bad as it gets. Anything is possible, however living through that in your situation I would think would be a pretty good test of your risk tolerance.
You made a lot of assumptions, one being 100% in equities after and recovered by now. Of course my nut has grown, that’s because I managed to get a job and got my husband a job through my connection. Things might not have turned out well otherwise. I have a friend who has not worked since 2001. He blew through his 401k account, so no money left to recover. What would you say about him? But he’s lucky, he did move back with his parents for a while.

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Sandtrap
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Re: how did you determine your risk tolerance?

Post by Sandtrap » Sun Feb 25, 2018 10:10 am

Toons wrote:
Sat Feb 24, 2018 8:17 pm
When I had trouble sleeping.
:mrgreen:
+1
DW calls it the "freaking out" factor.
Watch one's portfolio and various funds as they rise and dip and rise and fall fall fall. The allocation is "Goldilocks" just right. . . when you can go to sleep without worrying about it.
j :D

bling
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Re: how did you determine your risk tolerance?

Post by bling » Sun Feb 25, 2018 10:58 am

DrGoogle2017 wrote:
Sat Feb 24, 2018 4:26 pm
Those are actual scenarios, not doomsday scenatios. But you don’t have to learn from people’s mistakes, go ahead and make your own mistakes. You know better than anybody than why bother asking?
yes, i know that a lot of people during 2008 lived through exactly the scenario you described. what i'm getting at is that there's literally no precaution you could have done to avoid it. having an EF vs not having an EF. 100% bonds vs 100% stocks. it made no difference.

i don't think it's prudent to base your investment decisions on the 1% chance that everything that could go wrong, goes wrong.
privatefarmer wrote:
Sun Feb 25, 2018 2:03 am
man, my only question is why are you not 100% equities? you have a solid grasp on the math and you're in your 30s correct?
because i have a mortgage...and like all young families my house is my biggest "asset". nonetheless, search threads on "mortgage as a negative bond" and it suggests that i should be 100% bonds, so from that perspective i'm already way too aggressive to even have stocks at all. i obviously disagree, but it does make me think a little.

-----

i will note that this thread appears very lopsided because there are many more pro-EF posters than pro-non-EF posters.

here's a recent thread in the personal investments section and there are plenty of BHs that don't have EFs:
viewtopic.php?f=1&t=241960

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Re: how did you determine your risk tolerance?

Post by burt » Sun Feb 25, 2018 3:38 pm

When the consequences of failure far outweigh the benefits of success.
Occam's Razor ?

burt

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randomizer
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Re: how did you determine your risk tolerance?

Post by randomizer » Sun Feb 25, 2018 4:07 pm

In addition to all that stuff about need, willingness, ability etc I do two things.

One is read a load of books on markets and history, to see all the ways things went wrong in the past that nobody expected. This steels me, knowing that sooner or later the unprecedented will happen, and I shouldn’t build a plan that rests on the unexpected not happening.

The other is thought experiments where I imagine losing my job and house and the market crashing 50%, 90%. I calculate the actual numbers and ask myself how is that going to feel.

In the end, I am at 75:25 and committed to staying there pretty much forever.
75:25 AA / Expected retirement: 2097

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burt
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Re: how did you determine your risk tolerance?

Post by burt » Sun Feb 25, 2018 6:06 pm

I've came to the conclusion that reporting stock/bond/cash allocation is meaningless without knowing the circumstances.

- Young or Old
- Rich or poor (or somewhere inbetween)
- Fat pension or not
- 15X expenses saved or 50X expenses saved.
- Expecting a fat inheritance or a loan to pay funeral expenses.
- Healthy or sick.
- Stable job or not.

burt

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Re: how did you determine your risk tolerance?

Post by n00b590 » Sun Feb 25, 2018 11:20 pm

bling wrote:
Sun Feb 25, 2018 10:58 am
because i have a mortgage...and like all young families my house is my biggest "asset". nonetheless, search threads on "mortgage as a negative bond" and it suggests that i should be 100% bonds, so from that perspective i'm already way too aggressive to even have stocks at all. i obviously disagree, but it does make me think a little.
What? No, that's not right. Mortgage effectively being a negative bond means that you should have 0% in bonds - because it generally doesn't make sense e.g. to hold bonds paying 3% while you're borrowing at 4% on your mortgage.

ImUrHuckleberry
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Re: how did you determine your risk tolerance?

Post by ImUrHuckleberry » Sun Feb 25, 2018 11:28 pm

DrGoogle2017 wrote:
Sun Feb 25, 2018 10:03 am
privatefarmer wrote:
Sun Feb 25, 2018 1:28 am
DrGoogle2017 wrote:
Sun Feb 25, 2018 1:18 am
privatefarmer wrote:
Sun Feb 25, 2018 1:13 am
DrGoogle2017 wrote:
Sun Feb 11, 2018 12:50 am
Wait until you also get a lay off notice, stock market is down by a large percentage, it might take you years to find full employment, or maybe never. Your emergency fund is also gone and you have to pay COBRA or the like for health insurance.
I understand this point of view. However, wouldn't you be better off in these "dooms day" scenarios if you had a much larger portfolio to start with? We all understand that stocks have gone up far more than they've gone down. Owning businesses, at the end of the day, is a profitable thing to do. So if you want to be best prepared for the hard times, wouldn't you want your portfolio to grow as much as possible leading up to those times? We can never know when those times are coming, it is fruitless to try and time the market, so a better strategy might be to just put your foot on the gas and hope for the most gain in your portfolio knowing that you'll possibly need the money to live off of someday.

Putting one foot on the gas (stocks) and one foot on the brakes (fixed income/cash) just doesn't make sense to me. It's one thing if you're retired and do not want much volatility, but if you're still accumulating it seems the best thing you can do to prepare for the hard times is to accumulate as much and as fast as possible while you can.
Yes, and we did. 100% in equities before 2000 crash. But when 90% of engineers in Silicon Valley were laid off, it was a position we were caught by surprise. The lucky part for us was we lived on one income and saved almost all of the other income. Over saving saved us, but we did sell some equities in down years too, that was my regret.
So the market has come up a long way since 2000. If you were 100% equities before then and 100% equities after, would you have more than recovered by now? Did you or did you become more conservative after the tech bubble? And being in tech during the tech bubble is about as bad as it gets. Anything is possible, however living through that in your situation I would think would be a pretty good test of your risk tolerance.
You made a lot of assumptions, one being 100% in equities after and recovered by now. Of course my nut has grown, that’s because I managed to get a job and got my husband a job through my connection. Things might not have turned out well otherwise. I have a friend who has not worked since 2001. He blew through his 401k account, so no money left to recover. What would you say about him? But he’s lucky, he did move back with his parents for a while.
I don't understand how a cash emergency fund would have helped your friend.

DrGoogle2017
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Re: how did you determine your risk tolerance?

Post by DrGoogle2017 » Sun Feb 25, 2018 11:35 pm

ImUrHuckleberry wrote:
Sun Feb 25, 2018 11:28 pm
DrGoogle2017 wrote:
Sun Feb 25, 2018 10:03 am
privatefarmer wrote:
Sun Feb 25, 2018 1:28 am
DrGoogle2017 wrote:
Sun Feb 25, 2018 1:18 am
privatefarmer wrote:
Sun Feb 25, 2018 1:13 am


I understand this point of view. However, wouldn't you be better off in these "dooms day" scenarios if you had a much larger portfolio to start with? We all understand that stocks have gone up far more than they've gone down. Owning businesses, at the end of the day, is a profitable thing to do. So if you want to be best prepared for the hard times, wouldn't you want your portfolio to grow as much as possible leading up to those times? We can never know when those times are coming, it is fruitless to try and time the market, so a better strategy might be to just put your foot on the gas and hope for the most gain in your portfolio knowing that you'll possibly need the money to live off of someday.

Putting one foot on the gas (stocks) and one foot on the brakes (fixed income/cash) just doesn't make sense to me. It's one thing if you're retired and do not want much volatility, but if you're still accumulating it seems the best thing you can do to prepare for the hard times is to accumulate as much and as fast as possible while you can.
Yes, and we did. 100% in equities before 2000 crash. But when 90% of engineers in Silicon Valley were laid off, it was a position we were caught by surprise. The lucky part for us was we lived on one income and saved almost all of the other income. Over saving saved us, but we did sell some equities in down years too, that was my regret.
So the market has come up a long way since 2000. If you were 100% equities before then and 100% equities after, would you have more than recovered by now? Did you or did you become more conservative after the tech bubble? And being in tech during the tech bubble is about as bad as it gets. Anything is possible, however living through that in your situation I would think would be a pretty good test of your risk tolerance.
You made a lot of assumptions, one being 100% in equities after and recovered by now. Of course my nut has grown, that’s because I managed to get a job and got my husband a job through my connection. Things might not have turned out well otherwise. I have a friend who has not worked since 2001. He blew through his 401k account, so no money left to recover. What would you say about him? But he’s lucky, he did move back with his parents for a while.
I don't understand how a cash emergency fund would have helped your friend.
I didn’t say it would. But his 401k was in stocks and he had to liquidate the stocks slowly to live. How would you feel if your 401 is down 50% and you have to take out some money on top of that.

ImUrHuckleberry
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Re: how did you determine your risk tolerance?

Post by ImUrHuckleberry » Sun Feb 25, 2018 11:46 pm

DrGoogle2017 wrote:
Sun Feb 25, 2018 11:35 pm
I didn’t say it would. But his 401k was in stocks and he had to liquidate the stocks slowly to live. How would you feel if your 401 is down 50% and you have to take out some money on top of that.
If you're into your 401(k) it's a bad situation any way you look at it. But can we agree that in extreme situations like this it doesn't much matter where your emergency fund was invested? It's not like your friend could have protected themselves with a cash emergency fund containing 17 years of expenses.

I'm having a hard time understanding why people are bringing up extreme situations as examples for why a cash emergency fund is more prudent since in these types of cases you're pretty much just screwed.

txranger
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Re: how did you determine your risk tolerance?

Post by txranger » Mon Feb 26, 2018 6:33 am

When the Dow dropped 1000 points in one day and after the 10% correction, I was sleeping totally fine, I knew I m comfortable w my risk level. Keep 15-20% in cash. Cash s king partic now that bonds yield nothin and move in same direction as equities.

txranger
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Re: how did you determine your risk tolerance?

Post by txranger » Mon Feb 26, 2018 6:39 am

Re some of the posts above of having 0 EF, I d like to quote mr Mike Tyson — everyone has a plan until u get punched in the face. If u can survive a nasty bear market w out selling some equities ie as in back of 08-09, more power to u. I suggest u read some of the threads from
Back then if u didn’t live thru it. Else I suggest u keep some kash on a sideline, whatever would let u pull thru that bear market. And it’s coming!!! U can count on it.

DrGoogle2017
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Re: how did you determine your risk tolerance?

Post by DrGoogle2017 » Mon Feb 26, 2018 10:00 am

ImUrHuckleberry wrote:
Sun Feb 25, 2018 11:46 pm
DrGoogle2017 wrote:
Sun Feb 25, 2018 11:35 pm
I didn’t say it would. But his 401k was in stocks and he had to liquidate the stocks slowly to live. How would you feel if your 401 is down 50% and you have to take out some money on top of that.
If you're into your 401(k) it's a bad situation any way you look at it. But can we agree that in extreme situations like this it doesn't much matter where your emergency fund was invested? It's not like your friend could have protected themselves with a cash emergency fund containing 17 years of expenses.

I'm having a hard time understanding why people are bringing up extreme situations as examples for why a cash emergency fund is more prudent since in these types of cases you're pretty much just screwed.
I only made that comment again a poster who said, you would be alright if you were 100% in equities and the market has recovered since, to me not if you have to dip into your stash to live. My comment was not about emergency fund. You are the one that bought that up, I didn’t.

If I’m not mistaken, this thread is about risk tolerance, OP has zero or minimal EF. I guess usually EF was in cash. It depends on how deep the downturn and the industry you are in. If you are a doctor, you might not need that much EF, but if you are in the field that you will be laid off easily, you might think twice about.
But I like to caution people who keep saying it’s for a small percentage like 1% or extreme situation, in the dotcom bust, Silicon Valley lost 85k Jobs, almost 17%, not a small percentage.

https://www.bls.gov/opub/regional_repor ... h_tech.htm

I think it’s a lot worse for the Great Recession for many industries. Extreme case. I don’t think so. If anything, I think OP is in denial, probably due to his age, he admitted that this scenario did happen but for very small percentage of people. That small percentage of people in extreme case will be you some day. My husband and I never thought two engineers in a Silicon Valley would be unemployed ever, let alone for nearly 2 years. But like I said early and this will be my last post here, try to learn from other people, you don’t want to make all the mistakes yourself. Good luck with your AA.

txranger
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Re: how did you determine your risk tolerance?

Post by txranger » Mon Feb 26, 2018 11:11 am

Btw I am a doctor, I do worry about unemployment as just a few yrs back in my specialty the job market was dead. Crickets. My income went down by like 40% and still not recovered.

I think what allowed Warren buffet to stand tall during a market mayhem is, besides a brass set of balls, a huge, huge pile of cash. As much as he says he hates it, he certainly keeps a lot around.

It’s a highly personal decision. U need to have enuf cash in the bank to sleep well at night and to know u won’t sell equities when they drop 50%, which they will, sooner or later. Only now bonds may fall with them and gold can at best go sideways. Just my 2c for what it’s worth.

bling
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Re: how did you determine your risk tolerance?

Post by bling » Mon Feb 26, 2018 6:35 pm

n00b590 wrote:
Sun Feb 25, 2018 11:20 pm
bling wrote:
Sun Feb 25, 2018 10:58 am
because i have a mortgage...and like all young families my house is my biggest "asset". nonetheless, search threads on "mortgage as a negative bond" and it suggests that i should be 100% bonds, so from that perspective i'm already way too aggressive to even have stocks at all. i obviously disagree, but it does make me think a little.
What? No, that's not right. Mortgage effectively being a negative bond means that you should have 0% in bonds - because it generally doesn't make sense e.g. to hold bonds paying 3% while you're borrowing at 4% on your mortgage.
nah, it literally means mortgage = negative bond.

so if you had a $200k mortgage, your bond allocation is -$200k to start, and you would need to have $200k in bonds to zero it out before you even think about a stock/bond allocation.

ImUrHuckleberry
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Re: how did you determine your risk tolerance?

Post by ImUrHuckleberry » Mon Feb 26, 2018 6:47 pm

bling wrote:
Mon Feb 26, 2018 6:35 pm
n00b590 wrote:
Sun Feb 25, 2018 11:20 pm
bling wrote:
Sun Feb 25, 2018 10:58 am
because i have a mortgage...and like all young families my house is my biggest "asset". nonetheless, search threads on "mortgage as a negative bond" and it suggests that i should be 100% bonds, so from that perspective i'm already way too aggressive to even have stocks at all. i obviously disagree, but it does make me think a little.
What? No, that's not right. Mortgage effectively being a negative bond means that you should have 0% in bonds - because it generally doesn't make sense e.g. to hold bonds paying 3% while you're borrowing at 4% on your mortgage.
nah, it literally means mortgage = negative bond.

so if you had a $200k mortgage, your bond allocation is -$200k to start, and you would need to have $200k in bonds to zero it out before you even think about a stock/bond allocation.
Is home equity considered in this at all?

MnD
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Re: how did you determine your risk tolerance?

Post by MnD » Mon Feb 26, 2018 7:11 pm

1986-1990 I crept up from 50/50 (didn't know any better so just started with that) to 70/30.
From 1990 to date I keep anchoring right around 70/30 AA (range was 66/34 to 75/25) and I am now comfortable with that AA for life.
Increasing confidence that I will collect my pension and social security and exceeding "numbers" resulted in no urge to dial back risk.
Early on I had no idea how investing returns in stocks would go and I assumed my pension and social security weren't going to happen for me, so 70/30 had the same riskiness in my late 20's as it does today, 6 months from early retirement.

Emergency fund was building an all-stock taxable account equal to 125% of annual income pre-kids 1986-1990 and have always been comfortable with that. The earnings from that money tree have been incredibly useful for emergencies, needs and wants over the decades and despite never adding another dime to it since 1990, its bigger in real terms than it was back then. All these doomsday scenarios of spending your 401-K stocks to nothing while your finances go down the drain to justify a cash mountain emergency fund seem a bit contrived.

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Re: how did you determine your risk tolerance?

Post by n00b590 » Mon Feb 26, 2018 9:32 pm

bling wrote:
Mon Feb 26, 2018 6:35 pm
n00b590 wrote:
Sun Feb 25, 2018 11:20 pm
bling wrote:
Sun Feb 25, 2018 10:58 am
because i have a mortgage...and like all young families my house is my biggest "asset". nonetheless, search threads on "mortgage as a negative bond" and it suggests that i should be 100% bonds, so from that perspective i'm already way too aggressive to even have stocks at all. i obviously disagree, but it does make me think a little.
What? No, that's not right. Mortgage effectively being a negative bond means that you should have 0% in bonds - because it generally doesn't make sense e.g. to hold bonds paying 3% while you're borrowing at 4% on your mortgage.
nah, it literally means mortgage = negative bond.

so if you had a $200k mortgage, your bond allocation is -$200k to start, and you would need to have $200k in bonds to zero it out before you even think about a stock/bond allocation.
I understand what you're saying that it's a negative bond. I disagree with the implication that you should be 100% bonds to "zero it out". There's no rule that says you can't be something like 120% stocks and -20% bonds - It's perfectly fine if that matches your risk profile.

And as a previous poster noted, you're also failing to account for your home equity, which essentially works as a (positive) bond since it saves you $X per month you would otherwise have to pay in rent.

bling
Posts: 228
Joined: Sat Jan 21, 2012 12:49 pm

Re: how did you determine your risk tolerance?

Post by bling » Mon Feb 26, 2018 10:34 pm

n00b590 wrote:
Mon Feb 26, 2018 9:32 pm
bling wrote:
Mon Feb 26, 2018 6:35 pm
n00b590 wrote:
Sun Feb 25, 2018 11:20 pm
bling wrote:
Sun Feb 25, 2018 10:58 am
because i have a mortgage...and like all young families my house is my biggest "asset". nonetheless, search threads on "mortgage as a negative bond" and it suggests that i should be 100% bonds, so from that perspective i'm already way too aggressive to even have stocks at all. i obviously disagree, but it does make me think a little.
What? No, that's not right. Mortgage effectively being a negative bond means that you should have 0% in bonds - because it generally doesn't make sense e.g. to hold bonds paying 3% while you're borrowing at 4% on your mortgage.
nah, it literally means mortgage = negative bond.

so if you had a $200k mortgage, your bond allocation is -$200k to start, and you would need to have $200k in bonds to zero it out before you even think about a stock/bond allocation.
I understand what you're saying that it's a negative bond. I disagree with the implication that you should be 100% bonds to "zero it out". There's no rule that says you can't be something like 120% stocks and -20% bonds - It's perfectly fine if that matches your risk profile.

And as a previous poster noted, you're also failing to account for your home equity, which essentially works as a (positive) bond since it saves you $X per month you would otherwise have to pay in rent.
as i said earlier, i disagree with it, which is why i don't follow it. it also greatly complicates how you view your overall portfolio because it's not only equity, but also the house itself, which counts as real estate. e.g. should you have a tilt in REITs or not while you own a house?

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