Holding bonds vs 100% equities

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smitcat
Posts: 4193
Joined: Mon Nov 07, 2016 10:51 am

Re: Holding bonds vs 100% equities

Post by smitcat » Thu Nov 07, 2019 9:53 am

KlangFool wrote:
Thu Nov 07, 2019 9:39 am
smitcat wrote:
Thu Nov 07, 2019 9:24 am


"Which may or may not be helpful to a particular individual in a recession. A person cannot be 4% unemployed"
The math does not support an outlier situation where all income from a household is removed several times for over a year each.
If outlying situations are to be taken into consideration then 25X earnings and many other guidelines you state would also fail.
smitcat,

<<The math does not support an outlier situation where all income from a household is removed several times for over a year each.>>

There are two sides to the coin: income and expense. There could be unexpected expenses too.

<<If outlying situations are to be taken into consideration then 25X earnings and many other guidelines you state would also fail.>>

Now, you are going to the extreme. In order for 70/30 to beat 100/0, the financial emergency only needs to exceed the emergency fund and cause withdrawal in a recession. I do not need an outlaying situation.

100/0 only beat 70/30 with 20 years of no withdrawal.

KlangFool
"There are two sides to the coin: income and expense. There could be unexpected expenses too."
So your math would need to take into account several years of 100% unemployment fore a one year duration and unexpected expenses at the same time? As I said your example is an outlier and it is not supported by facts or math.

"Now, you are going to the extreme. In order for 70/30 to beat 100/0, the financial emergency only needs to exceed the emergency fund and cause withdrawal in a recession. I do not need an outlaying situation."
- I never needed an emergency fund
- If I worried about it then 6 months seemed prudent
- if you thins k it should be one year then do that

nigel_ht
Posts: 19
Joined: Tue Jan 01, 2019 10:14 am

Re: Holding bonds vs 100% equities

Post by nigel_ht » Thu Nov 07, 2019 9:59 am

smitcat wrote:
Thu Nov 07, 2019 9:24 am
KlangFool wrote:
Thu Nov 07, 2019 9:16 am
smitcat wrote:
Thu Nov 07, 2019 9:08 am
KlangFool wrote:
Thu Nov 07, 2019 8:36 am
SandysDad wrote:
Thu Nov 07, 2019 8:11 am


Ok. I would tweak my advice to include an emergency fund in cash or mm of 6-12 months expenses.

It’s all about risk tolerance and if someone is 10+ years from retirement and wants to take the risk for the minimal additional potential return, it’s up to them.
SandysDad,

Even with an emergency fund of 6 to 12 months, there is no guarantee that the person may not need to withdraw from the portfolio. I had been unemployed for more than 1 year a few times across 20+ years of working.

<<It’s all about risk tolerance and if someone is 10+ years from retirement and wants to take the risk for the minimal additional potential return, it’s up to them.>>

Historically, the minimal additional potential return is only possible with 20 or more years of no withdrawal. Long-run = 20+ years. 100/0 only win over 70/30 with 20+ years.

KlangFool
"I had been unemployed for more than 1 year a few times across 20+ years of working."
- that is not typical frequency or duration
- there is most often a spousal income to cover costs
- there are often many ways to earn some income part time
- there is often a way to work at some other job to stem costs
- there is often a way to move to find employment
smitcat,

You can be drowned in a lake with an average depth of 3 inches. This is a personal finance forum. We are not a statistic. A person cannot be 4% unemployed.

<<- that is not typical frequency or duration
- there is most often a spousal income to cover costs
- there are often many ways to earn some income part time
- there is often a way to work at some other job to stem costs
- there is often a way to move to find employment>>

Which may or may not be helpful to a particular individual in a recession. A person cannot be 4% unemployed.

KlangFool

"Which may or may not be helpful to a particular individual in a recession. A person cannot be 4% unemployed"
The math does not support an outlier situation where all income from a household is removed several times for over a year each.
If outlying situations are to be taken into consideration then 25X earnings and many other guidelines you state would also fail.
Lol. It’s not binary and outliers happen. You don’t want to be that outlier without having given some thought as to what you can do in that circumstance.

Nobody plans to be involuntarily out of work for more than a year but unless you are in a hot field it can happen.

But it’s usually not one thing that gets you. It’s when two things happen that most folks get in real trouble. Like a recession and you lose your job. After you just got married and bought a house. That’s now underwater.

That’s not a ridiculously unlikely scenario (*cough* 2008 *cough*) that folks should just ignore as an “outlier”.

To heck with “several times”. Once is enough to ruin your carefully laid plans and expectations for years and years.

nigel_ht
Posts: 19
Joined: Tue Jan 01, 2019 10:14 am

Re: Holding bonds vs 100% equities

Post by nigel_ht » Thu Nov 07, 2019 10:03 am

smitcat wrote:
Thu Nov 07, 2019 9:53 am

- I never needed an emergency fund
Never confuse being lucky (or at least not unlucky) with being good.

KlangFool
Posts: 14009
Joined: Sat Oct 11, 2008 12:35 pm

Re: Holding bonds vs 100% equities

Post by KlangFool » Thu Nov 07, 2019 10:03 am

smitcat wrote:
Thu Nov 07, 2019 9:53 am

"There are two sides to the coin: income and expense. There could be unexpected expenses too."
So your math would need to take into account several years of 100% unemployment fore a one year duration and unexpected expenses at the same time? As I said your example is an outlier and it is not supported by facts or math.

"Now, you are going to the extreme. In order for 70/30 to beat 100/0, the financial emergency only needs to exceed the emergency fund and cause withdrawal in a recession. I do not need an outlaying situation."
- I never needed an emergency fund
- If I worried about it then 6 months seemed prudent
- if you thins k it should be one year then do that

smitcat,

<< I never needed an emergency fund
- If I worried about it then 6 months seemed prudent
- if you thins k it should be one year then do that
>>

In summary, across your working life, you never have any financial emergency and/or unemployment that requires you to use your emergency fund and/or withdraw from your portfolio. You do not believe you are an outlying case.

I disagreed.

KlangFool

smitcat
Posts: 4193
Joined: Mon Nov 07, 2016 10:51 am

Re: Holding bonds vs 100% equities

Post by smitcat » Thu Nov 07, 2019 10:11 am

KlangFool wrote:
Thu Nov 07, 2019 10:03 am
smitcat wrote:
Thu Nov 07, 2019 9:53 am

"There are two sides to the coin: income and expense. There could be unexpected expenses too."
So your math would need to take into account several years of 100% unemployment fore a one year duration and unexpected expenses at the same time? As I said your example is an outlier and it is not supported by facts or math.

"Now, you are going to the extreme. In order for 70/30 to beat 100/0, the financial emergency only needs to exceed the emergency fund and cause withdrawal in a recession. I do not need an outlaying situation."
- I never needed an emergency fund
- If I worried about it then 6 months seemed prudent
- if you thins k it should be one year then do that

smitcat,

<< I never needed an emergency fund
- If I worried about it then 6 months seemed prudent
- if you thins k it should be one year then do that
>>

In summary, across your working life, you never have any financial emergency and/or unemployment that requires you to use your emergency fund and/or withdraw from your portfolio. You do not believe you are an outlying case.

I disagreed.

KlangFool
I was always able to get work - just not at the last level or profession, it was never that hard but it did not pay near the same amount.
We were never at 100/0 but often near that with maybe 95/5 when younger.
If we had ever needed it we would sell the stocks to cover expenses, certainly not a huge drawdown.

"You do not believe you are an outlying case."
I believe that this site is full of outliers looking for data and ideas on these posts - saying that this group should plan on 3X layoffs of 1 year each with unexpected expenses on top needs some background data and % attached , please supply sources.

smitcat
Posts: 4193
Joined: Mon Nov 07, 2016 10:51 am

Re: Holding bonds vs 100% equities

Post by smitcat » Thu Nov 07, 2019 10:12 am

KlangFool wrote:
Thu Nov 07, 2019 10:03 am
smitcat wrote:
Thu Nov 07, 2019 9:53 am

"There are two sides to the coin: income and expense. There could be unexpected expenses too."
So your math would need to take into account several years of 100% unemployment fore a one year duration and unexpected expenses at the same time? As I said your example is an outlier and it is not supported by facts or math.

"Now, you are going to the extreme. In order for 70/30 to beat 100/0, the financial emergency only needs to exceed the emergency fund and cause withdrawal in a recession. I do not need an outlaying situation."
- I never needed an emergency fund
- If I worried about it then 6 months seemed prudent
- if you thins k it should be one year then do that

smitcat,

<< I never needed an emergency fund
- If I worried about it then 6 months seemed prudent
- if you thins k it should be one year then do that
>>

In summary, across your working life, you never have any financial emergency and/or unemployment that requires you to use your emergency fund and/or withdraw from your portfolio. You do not believe you are an outlying case.

I disagreed.

KlangFool
I answered your question so please answer this one....
So your math would need to take into account several years of 100% unemployment for a one year duration and unexpected expenses at the same time?

Ferdinand2014
Posts: 767
Joined: Mon Dec 17, 2018 6:49 pm

Re: Holding bonds vs 100% equities

Post by Ferdinand2014 » Thu Nov 07, 2019 10:12 am

babystep wrote:
Tue Nov 05, 2019 8:27 pm
Why does Vanguard Target Retirement 2040 Fund have 83.3/16.7 instead of 70/30 ?

https://investor.vanguard.com/mutual-fu ... olio/vforx
Because it is on a glide path. It will become more conservative then a 70/30 into retirement. The result is the same.

“ Target-date funds follow a very simple rule of thumb that does not necessarily benefit an investor but may be comforting; it is harmful, however, if it entails higher fees. Target-date investing also offers no greater risk reduction compared with a constant-mix strategy.”

— The 3 Simple Rules of Investing: Why Everything You've Heard about Investing Is Wrong — and What to Do Instead by Michael Edesess, Kwok L. Tsui, et al.
“You only find out who is swimming naked when the tide goes out.“ — Warren Buffett

nigel_ht
Posts: 19
Joined: Tue Jan 01, 2019 10:14 am

Re: Holding bonds vs 100% equities

Post by nigel_ht » Thu Nov 07, 2019 10:17 am

smitcat wrote:
Thu Nov 07, 2019 9:48 am
nigel_ht wrote:
Thu Nov 07, 2019 9:36 am
smitcat wrote:
Thu Nov 07, 2019 9:08 am
KlangFool wrote:
Thu Nov 07, 2019 8:36 am
SandysDad wrote:
Thu Nov 07, 2019 8:11 am


Ok. I would tweak my advice to include an emergency fund in cash or mm of 6-12 months expenses.

It’s all about risk tolerance and if someone is 10+ years from retirement and wants to take the risk for the minimal additional potential return, it’s up to them.
SandysDad,

Even with an emergency fund of 6 to 12 months, there is no guarantee that the person may not need to withdraw from the portfolio. I had been unemployed for more than 1 year a few times across 20+ years of working.

<<It’s all about risk tolerance and if someone is 10+ years from retirement and wants to take the risk for the minimal additional potential return, it’s up to them.>>

Historically, the minimal additional potential return is only possible with 20 or more years of no withdrawal. Long-run = 20+ years. 100/0 only win over 70/30 with 20+ years.

KlangFool
"I had been unemployed for more than 1 year a few times across 20+ years of working."
- that is not typical frequency or duration
- there is most often a spousal income to cover costs
- there are often many ways to earn some income part time
- there is often a way to work at some other job to stem costs
- there is often a way to move to find employment
Risks are evaluated not just on probability but also on impact. A low probability high impact risk ends up yellow or red on a risk chart and some thought should be given to how to mitigate it.

How much thought is required depends on your safety net. Parents, spouse, etc are effective mitigating circumstances that you can say “this would be a red risk but because I can just go live with my parents until I get back on my feet it’s really green”. Not everyone can do that so that’s why allocations and financial plans aren’t one size fits all.

Saying everyone early career should be 100/0 is no more valid than saying everyone should be 70/30. As always, it depends.
"How much thought is required depends on your safety net. Parents, spouse, etc are effective mitigating circumstances that you can say “this would be a red risk but because I can just go live with my parents until I get back on my feet it’s really green”"
Never had any backstop or safety net. There was always a way to earn income but sometimes in jobs that were considered to be 'underemployed' positions. Other than perhaps the affect of taking a 'lower' level job they were always very helpful in removing any episodes of unemployment.
Try doing that after a car accident or major illness that limits your mobility and employability. We buy various insurances as a safety net when there aren’t other backstops.

Never had insurance? M’kay.

A more conservative asset allocation is just one potential tool of building a safety net for yourself and your family.

I’m in cardiac rehab and I thought I drew the short straw from having a heart attack at 54. There’s a 46 yo there.

He sure as heck didn’t plan to do that and statistically he’s a huge freaking outlier. Stuff happens in life.

KlangFool
Posts: 14009
Joined: Sat Oct 11, 2008 12:35 pm

Re: Holding bonds vs 100% equities

Post by KlangFool » Thu Nov 07, 2019 10:23 am

smitcat wrote:
Thu Nov 07, 2019 10:12 am
KlangFool wrote:
Thu Nov 07, 2019 10:03 am
smitcat wrote:
Thu Nov 07, 2019 9:53 am

"There are two sides to the coin: income and expense. There could be unexpected expenses too."
So your math would need to take into account several years of 100% unemployment fore a one year duration and unexpected expenses at the same time? As I said your example is an outlier and it is not supported by facts or math.

"Now, you are going to the extreme. In order for 70/30 to beat 100/0, the financial emergency only needs to exceed the emergency fund and cause withdrawal in a recession. I do not need an outlaying situation."
- I never needed an emergency fund
- If I worried about it then 6 months seemed prudent
- if you thins k it should be one year then do that

smitcat,

<< I never needed an emergency fund
- If I worried about it then 6 months seemed prudent
- if you thins k it should be one year then do that
>>

In summary, across your working life, you never have any financial emergency and/or unemployment that requires you to use your emergency fund and/or withdraw from your portfolio. You do not believe you are an outlying case.

I disagreed.

KlangFool
I answered your question so please answer this one....
So your math would need to take into account several years of 100% unemployment for a one year duration and unexpected expenses at the same time?
smitcat,

I am proposing a balanced approach. Do not go into the extreme.

A) 3 to 12 months of the emergency fund.

B) an AA of 70/30.

So, in the event of a financial emergency that wipe out the emergency fund and the person needs to withdraw from the portfolio, the damage would not be as bad as 100/0.

KlangFool

rascott
Posts: 995
Joined: Wed Apr 15, 2015 10:53 am

Re: Holding bonds vs 100% equities

Post by rascott » Thu Nov 07, 2019 10:26 am

nigel_ht wrote:
Thu Nov 07, 2019 9:00 am
rascott wrote:
Wed Nov 06, 2019 11:17 am
KlangFool wrote:
Wed Nov 06, 2019 10:45 am
rascott wrote:
Wed Nov 06, 2019 9:54 am

All 70/30 provides over 100/0 for a young accumulator with relatively small balances compared to their ongoing contributions is charge their portfolio a small insurance premium for little to no actual benefit. This is a bad as putting your money into a mutual fund charging 1 - 1.5% ERs.
rascott,

This is where I disagreed.

A) The additional stress of selling stock at a big loss every month while looking for a job.

B) The additional stress of knowing that you have less time to find a job.

You have to survive in order to succeed.

In the coming recession, many people will lose their jobs while the stock market is down. They would not know how long before they could find a new job again. If their money runs out before they find a job, they would be on the street.

Please note that the 1% additional return is not guaranteed either. It required someone not to withdraw from the portfolio for over 20 years. Too many people, this likelihood is slim to none.

<<This is a bad as putting your money into a mutual fund charging 1 - 1.5% ERs.>>

You are guaranteed to pay 1-1.5% ER. You are not guaranteed to earn 1% more with 100/0.

KlangFool

And if you go look at the actual $ balances between the two portfolios.... you'll see the nominal dollar difference is so small it's basically immaterial for the first decade with the young person starting at $0 and saving monthly. Being 70/30 in 2008 might have given you an extra few thousand dollars to draw on..... so maybe hold you over for an extra month or two, at best. Something that would be avoided by good practices of holding 6-12 months expenses in cash equivalents.

And you also ignore the idea that in your hypothetical this young person would need to either 1) be holding bonds in taxable accounts or 2) taking penalty inducing withdrawals from retirement accounts.

Both ideas are extremely anti-BHs, and would only should be done to avoid total destitution.
If you are holding 12 months expenses then you aren’t really 100/0 asset allocation anyway but 100-x/0/x and if there enough benefit (ie when the yield isn’t terrible like was in 2015) you can hold half of your 12 month buffer in VWSTX vs something else. So you’d end up 100-x/0.5x/0.5x. Whether that becomes 70/15/15 or 90/5/5 depends on portfolio size vs expenses.

How is that “anti-BH”?
Yes it's not purely 100/0...... it's basically impossible to be purely 100/0 unless you are selling equities to pay for your morning coffee. But cash management is different than investing in a bond fund....I wouldn't hold an EF in anything but a MM fund/ high yield savings. That's not really a bond allocation.

smitcat
Posts: 4193
Joined: Mon Nov 07, 2016 10:51 am

Re: Holding bonds vs 100% equities

Post by smitcat » Thu Nov 07, 2019 10:27 am

nigel_ht wrote:
Thu Nov 07, 2019 10:17 am
smitcat wrote:
Thu Nov 07, 2019 9:48 am
nigel_ht wrote:
Thu Nov 07, 2019 9:36 am
smitcat wrote:
Thu Nov 07, 2019 9:08 am
KlangFool wrote:
Thu Nov 07, 2019 8:36 am


SandysDad,

Even with an emergency fund of 6 to 12 months, there is no guarantee that the person may not need to withdraw from the portfolio. I had been unemployed for more than 1 year a few times across 20+ years of working.

<<It’s all about risk tolerance and if someone is 10+ years from retirement and wants to take the risk for the minimal additional potential return, it’s up to them.>>

Historically, the minimal additional potential return is only possible with 20 or more years of no withdrawal. Long-run = 20+ years. 100/0 only win over 70/30 with 20+ years.

KlangFool
"I had been unemployed for more than 1 year a few times across 20+ years of working."
- that is not typical frequency or duration
- there is most often a spousal income to cover costs
- there are often many ways to earn some income part time
- there is often a way to work at some other job to stem costs
- there is often a way to move to find employment
Risks are evaluated not just on probability but also on impact. A low probability high impact risk ends up yellow or red on a risk chart and some thought should be given to how to mitigate it.

How much thought is required depends on your safety net. Parents, spouse, etc are effective mitigating circumstances that you can say “this would be a red risk but because I can just go live with my parents until I get back on my feet it’s really green”. Not everyone can do that so that’s why allocations and financial plans aren’t one size fits all.

Saying everyone early career should be 100/0 is no more valid than saying everyone should be 70/30. As always, it depends.
"How much thought is required depends on your safety net. Parents, spouse, etc are effective mitigating circumstances that you can say “this would be a red risk but because I can just go live with my parents until I get back on my feet it’s really green”"
Never had any backstop or safety net. There was always a way to earn income but sometimes in jobs that were considered to be 'underemployed' positions. Other than perhaps the affect of taking a 'lower' level job they were always very helpful in removing any episodes of unemployment.
Try doing that after a car accident or major illness that limits your mobility and employability. We buy various insurances as a safety net when there aren’t other backstops.

Never had insurance? M’kay.

A more conservative asset allocation is just one potential tool of building a safety net for yourself and your family.

I’m in cardiac rehab and I thought I drew the short straw from having a heart attack at 54. There’s a 46 yo there.

He sure as heck didn’t plan to do that and statistically he’s a huge freaking outlier. Stuff happens in life.
"Try doing that after a car accident or major illness that limits your mobility and employability. We buy various insurances as a safety net when there aren’t other backstops."
So your thoughts are to have fixed income funds to cover the possibility of major illness as well?

"Never had insurance? M’kay."
I do not understand the question - we have many insurance policies.

"I’m in cardiac rehab and I thought I drew the short straw from having a heart attack at 54."
FWIW - just so happens I am in a hospital now

rascott
Posts: 995
Joined: Wed Apr 15, 2015 10:53 am

Re: Holding bonds vs 100% equities

Post by rascott » Thu Nov 07, 2019 10:29 am

nigel_ht wrote:
Thu Nov 07, 2019 10:17 am
smitcat wrote:
Thu Nov 07, 2019 9:48 am
nigel_ht wrote:
Thu Nov 07, 2019 9:36 am
smitcat wrote:
Thu Nov 07, 2019 9:08 am
KlangFool wrote:
Thu Nov 07, 2019 8:36 am


SandysDad,

Even with an emergency fund of 6 to 12 months, there is no guarantee that the person may not need to withdraw from the portfolio. I had been unemployed for more than 1 year a few times across 20+ years of working.

<<It’s all about risk tolerance and if someone is 10+ years from retirement and wants to take the risk for the minimal additional potential return, it’s up to them.>>

Historically, the minimal additional potential return is only possible with 20 or more years of no withdrawal. Long-run = 20+ years. 100/0 only win over 70/30 with 20+ years.

KlangFool
"I had been unemployed for more than 1 year a few times across 20+ years of working."
- that is not typical frequency or duration
- there is most often a spousal income to cover costs
- there are often many ways to earn some income part time
- there is often a way to work at some other job to stem costs
- there is often a way to move to find employment
Risks are evaluated not just on probability but also on impact. A low probability high impact risk ends up yellow or red on a risk chart and some thought should be given to how to mitigate it.

How much thought is required depends on your safety net. Parents, spouse, etc are effective mitigating circumstances that you can say “this would be a red risk but because I can just go live with my parents until I get back on my feet it’s really green”. Not everyone can do that so that’s why allocations and financial plans aren’t one size fits all.

Saying everyone early career should be 100/0 is no more valid than saying everyone should be 70/30. As always, it depends.
"How much thought is required depends on your safety net. Parents, spouse, etc are effective mitigating circumstances that you can say “this would be a red risk but because I can just go live with my parents until I get back on my feet it’s really green”"
Never had any backstop or safety net. There was always a way to earn income but sometimes in jobs that were considered to be 'underemployed' positions. Other than perhaps the affect of taking a 'lower' level job they were always very helpful in removing any episodes of unemployment.
Try doing that after a car accident or major illness that limits your mobility and employability. We buy various insurances as a safety net when there aren’t other backstops.

Never had insurance? M’kay.

A more conservative asset allocation is just one potential tool of building a safety net for yourself and your family.

I’m in cardiac rehab and I thought I drew the short straw from having a heart attack at 54. There’s a 46 yo there.

He sure as heck didn’t plan to do that and statistically he’s a huge freaking outlier. Stuff happens in life.

Yes, and that's why it's prudent to

1) have a significant EF/ liquidity access
2) have proper insurance..... including LT disability

A LT disability policy is a much cheaper way to insure agaisnt such unknowns than a 30 year old putting 30% of their retirement money in bonds.

Best wishes on your recovery.

nigel_ht
Posts: 19
Joined: Tue Jan 01, 2019 10:14 am

Re: Holding bonds vs 100% equities

Post by nigel_ht » Thu Nov 07, 2019 10:59 am

rascott wrote:
Thu Nov 07, 2019 10:26 am
nigel_ht wrote:
Thu Nov 07, 2019 9:00 am
rascott wrote:
Wed Nov 06, 2019 11:17 am
KlangFool wrote:
Wed Nov 06, 2019 10:45 am
rascott wrote:
Wed Nov 06, 2019 9:54 am

All 70/30 provides over 100/0 for a young accumulator with relatively small balances compared to their ongoing contributions is charge their portfolio a small insurance premium for little to no actual benefit. This is a bad as putting your money into a mutual fund charging 1 - 1.5% ERs.
rascott,

This is where I disagreed.

A) The additional stress of selling stock at a big loss every month while looking for a job.

B) The additional stress of knowing that you have less time to find a job.

You have to survive in order to succeed.

In the coming recession, many people will lose their jobs while the stock market is down. They would not know how long before they could find a new job again. If their money runs out before they find a job, they would be on the street.

Please note that the 1% additional return is not guaranteed either. It required someone not to withdraw from the portfolio for over 20 years. Too many people, this likelihood is slim to none.

<<This is a bad as putting your money into a mutual fund charging 1 - 1.5% ERs.>>

You are guaranteed to pay 1-1.5% ER. You are not guaranteed to earn 1% more with 100/0.

KlangFool

And if you go look at the actual $ balances between the two portfolios.... you'll see the nominal dollar difference is so small it's basically immaterial for the first decade with the young person starting at $0 and saving monthly. Being 70/30 in 2008 might have given you an extra few thousand dollars to draw on..... so maybe hold you over for an extra month or two, at best. Something that would be avoided by good practices of holding 6-12 months expenses in cash equivalents.

And you also ignore the idea that in your hypothetical this young person would need to either 1) be holding bonds in taxable accounts or 2) taking penalty inducing withdrawals from retirement accounts.

Both ideas are extremely anti-BHs, and would only should be done to avoid total destitution.
If you are holding 12 months expenses then you aren’t really 100/0 asset allocation anyway but 100-x/0/x and if there enough benefit (ie when the yield isn’t terrible like was in 2015) you can hold half of your 12 month buffer in VWSTX vs something else. So you’d end up 100-x/0.5x/0.5x. Whether that becomes 70/15/15 or 90/5/5 depends on portfolio size vs expenses.

How is that “anti-BH”?
Yes it's not purely 100/0...... it's basically impossible to be purely 100/0 unless you are selling equities to pay for your morning coffee. But cash management is different than investing in a bond fund....I wouldn't hold an EF in anything but a MM fund/ high yield savings. That's not really a bond allocation.
The point is that six months EF in MM or high yield and 6 months in something low risk with a higher yield isn’t a bad alternative to 100/0 + 12 months EF in MM. What the final percentages comes out to be depends. Might end up closer to 70/30 than 100/0.

Using VWITX or VWSTX over a CD ladder can be simpler when the yields are decent enough.

mathguy3021
Posts: 192
Joined: Sat Apr 09, 2011 9:30 pm

Re: Holding bonds vs 100% equities

Post by mathguy3021 » Thu Nov 07, 2019 1:06 pm

rascott wrote:
Thu Nov 07, 2019 12:05 am
mathguy3021 wrote:
Wed Nov 06, 2019 11:10 pm
rascott wrote:
Wed Nov 06, 2019 11:17 am
KlangFool wrote:
Wed Nov 06, 2019 10:45 am
rascott wrote:
Wed Nov 06, 2019 9:54 am

All 70/30 provides over 100/0 for a young accumulator with relatively small balances compared to their ongoing contributions is charge their portfolio a small insurance premium for little to no actual benefit. This is a bad as putting your money into a mutual fund charging 1 - 1.5% ERs.
rascott,

This is where I disagreed.

A) The additional stress of selling stock at a big loss every month while looking for a job.

B) The additional stress of knowing that you have less time to find a job.

You have to survive in order to succeed.

In the coming recession, many people will lose their jobs while the stock market is down. They would not know how long before they could find a new job again. If their money runs out before they find a job, they would be on the street.

Please note that the 1% additional return is not guaranteed either. It required someone not to withdraw from the portfolio for over 20 years. Too many people, this likelihood is slim to none.

<<This is a bad as putting your money into a mutual fund charging 1 - 1.5% ERs.>>

You are guaranteed to pay 1-1.5% ER. You are not guaranteed to earn 1% more with 100/0.

KlangFool

And if you go look at the actual $ balances between the two portfolios.... you'll see the nominal dollar difference is so small it's basically immaterial for the first decade with the young person starting at $0 and saving monthly. Being 70/30 in 2008 might have given you an extra few thousand dollars to draw on..... so maybe hold you over for an extra month or two, at best. Something that would be avoided by good practices of holding 6-12 months expenses in cash equivalents.

And you also ignore the idea that in your hypothetical this young person would need to either 1) be holding bonds in taxable accounts or 2) taking penalty inducing withdrawals from retirement accounts.

Both ideas are extremely anti-BHs, and would only should be done to avoid total destitution.
Stocks are not guaranteed to outperform bonds over the next 10 years. In fact, many experts including vanguard have projected much lower than historical returns over the next 10 years. Starting your career from high stock valuations have historically resulted in low returns over the next decade. Think about year 2000 to 2010. If you were 100% bonds, you would've outperformed stocks by a large margin over that time period. After the longest bull market in history, people seem to not understand that stocks can have horrible decades in performance. Therefore in the first 10 years of a young person's career, it is NOT a guaranteed loss of 1 or 1.5% a year if you decide to go 70/30. The statement about paying 1% to 1.5% expenses in mutual funds assumes that stocks are guaranteed to outperform bonds by 1 to 1.5% annually over the first decade of a young person's career.
You are concerned with a 10 year stock bull market, but ignore a 40 year bond bull market?

Expected returns of stocks and bonds are both exceptionally low right now. All we have is the fundamental expectation that stocks should outperform bonds.

Today looks nothing like 2000 for many reasons... stocks were much higher valued and bonds were much lower valued back then.

And if what you say comes to pass (poor equity performance over the next decade) .... that's even a BETTER reason for a young person to be accumulating a large equity position, via ongoing DCA.
I never said that bonds will outperform stocks over the next 10 years. I never said that today's environment is similar to 2000. I'm only mentioning year 2000 because your example of a high cost mutual fund implies that stocks are GUARANTEED to outperform over 10 years. Today's stock valuations are lower than 2000, but that doesn't guarantee outperformance. I am not ignoring the 40 year bond bull market. I don't hold bond funds that are interest rate sensitive. I only said that it is NOT guaranteed that stocks will outperform bonds over the next ten years.
Last edited by mathguy3021 on Thu Nov 07, 2019 1:29 pm, edited 2 times in total.

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Re: Holding bonds vs 100% equities

Post by rascott » Thu Nov 07, 2019 1:28 pm

It's quite funny reading back and forth between this thread and the Lifecycle Investing thread, on the Theory board.

Here we have folks recommending a decent slug of bonds for the young investor. Over there, the recommendation is that most young investors should not only be all stocks.... they should likely be leveraged 2:1 in equities for their first 10-15 years of accumulation

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Re: Holding bonds vs 100% equities

Post by ruralavalon » Thu Nov 07, 2019 1:35 pm

mathguy3021 wrote:
Thu Nov 07, 2019 1:06 pm
I never said that bonds will outperform stocks over the next 10 years. I never said that today's environment is similar to 2000. I am not ignoring the 40 year bond bull market. I don't hold bond funds that are interest rate sensitive. I only said that it is NOT guaranteed that stocks will outperform bonds over the next ten years.
Morningstar (1/10/2019), "Experts Forecast Long-Term Stock and Bond Returns: 2019 Edition". The author "suggest(s) that bonds will give U.S. equities a run for their money over the next decade."
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Re: Holding bonds vs 100% equities

Post by dogagility » Thu Nov 07, 2019 5:11 pm

KlangFool wrote:
Thu Nov 07, 2019 8:05 am
Unless a person can predict his future, there is always a possibility that he may need to withdraw from his portfolio. And, the withdrawals may happened in a recession. Across 20 years that 100/0 needs, there will be many recessions. In the coming recession, this no withdrawal needed myth will be exposed again.
Pure speculation that your life experience will apply to another individual.
Taking "risk" since 1995.

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Re: Holding bonds vs 100% equities

Post by nigel_ht » Fri Nov 08, 2019 12:18 am

rascott wrote:
Thu Nov 07, 2019 1:28 pm
It's quite funny reading back and forth between this thread and the Lifecycle Investing thread, on the Theory board.

Here we have folks recommending a decent slug of bonds for the young investor. Over there, the recommendation is that most young investors should not only be all stocks.... they should likely be leveraged 2:1 in equities for their first 10-15 years of accumulation
Eh, one individual who could “leverage” by borrowing from a relative at a cheap rate has success over a few months during a bull market.

$179k of his own money invested and invests about 25% of this amount per year or $44Kish. Assume that he’s saving half of net to estimate his yearly spend at $44K so his EF is 20% of his total portfolio. He’s 80/0/20 not counting his leveraged amount. 160+/0/20 including his leverage.

The downside is if he actually loses his job in a bear he’s $233k in debt and simply lucky that his relative won’t call his loan and probably just let him off till he gets back on his feet.

But say it’s a 50% drop and his loan was called. His $412K portfolio is suddenly $206K. He’s forced to sell and his EF loses $27K to cover the difference and he’s down to a net worth of $17K. Hope he finds a new job pretty quick.

Not sure I’d recommend this strategy unless you have a nice relative loaning you cash.

I mean it’s great if everything is awesome but not so great if the US China trade war goes sideways somehow and both economies go into the dumpster and triggering a global recession. Finding a new job in that scenario is tougher...especially if you are in the last round of layoffs late in the game without much severance and the job market fully cratered.

If the portfolio was smaller the AA of a 30 yo could be 60/0/40. Which could also safely be 60/20/20 with 6 mos in cash and 6 months in a short or intermediate bond fund.

So is a slug of bonds useful in a young investor’s portfolio?

Like everything else...it depends. But it sure as heck isn’t “anti-BH” as it was characterized earlier.

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Re: Holding bonds vs 100% equities

Post by rascott » Fri Nov 08, 2019 12:34 am

nigel_ht wrote:
Fri Nov 08, 2019 12:18 am
rascott wrote:
Thu Nov 07, 2019 1:28 pm
It's quite funny reading back and forth between this thread and the Lifecycle Investing thread, on the Theory board.

Here we have folks recommending a decent slug of bonds for the young investor. Over there, the recommendation is that most young investors should not only be all stocks.... they should likely be leveraged 2:1 in equities for their first 10-15 years of accumulation
Eh, one individual who could “leverage” by borrowing from a relative at a cheap rate has success over a few months during a bull market.

$179k of his own money invested and invests about 25% of this amount per year or $44Kish. Assume that he’s saving half of net to estimate his yearly spend at $44K so his EF is 20% of his total portfolio. He’s 80/0/20 not counting his leveraged amount. 160+/0/20 including his leverage.

The downside is if he actually loses his job in a bear he’s $233k in debt and simply lucky that his relative won’t call his loan and probably just let him off till he gets back on his feet.

But say it’s a 50% drop and his loan was called. His $412K portfolio is suddenly $206K. He’s forced to sell and his EF loses $27K to cover the difference and he’s down to a net worth of $17K. Hope he finds a new job pretty quick.

Not sure I’d recommend this strategy unless you have a nice relative loaning you cash.

I mean it’s great if everything is awesome but not so great if the US China trade war goes sideways somehow and both economies go into the dumpster and triggering a global recession. Finding a new job in that scenario is tougher...especially if you are in the last round of layoffs late in the game without much severance and the job market fully cratered.

If the portfolio was smaller the AA of a 30 yo could be 60/0/40. Which could also safely be 60/20/20 with 6 mos in cash and 6 months in a short or intermediate bond fund.

So is a slug of bonds useful in a young investor’s portfolio?

Like everything else...it depends. But it sure as heck isn’t “anti-BH” as it was characterized earlier.
I have serious questions about the setup...I think it's like everything else I've said on this thread... if you have very secure employment then you can change your positioning.

Things in life rarely work out in any linear fashion for most people, so that philosophy is more academic than practical for most.

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Re: Holding bonds vs 100% equities

Post by babystep » Fri Nov 08, 2019 2:45 am

Average duration of unemployment from 1990 to 2018. Max is about 39 weeks.

https://www.statista.com/statistics/217 ... in-the-us/

This indicates 1 year of emergency fund is good enough and probability is low that one would need to tap into 100/0 or 90/10 ?

I guess everyone's situation and comfort level is different. If someone is worried about unemployment of 1 year, few times in 20 years span then should they have more conservative AA like 70/30 instead of 100/0 ? But how does it help ? When 1 year of emergency fund is gone and still unemployed then wouldn't you need to tap into your investments irrespective of 100/0 or 70/30 ? If you have 70/30 and you tap into bonds then may be you are selling bonds at the wrong time ?

If one is worried about less likely 1+ year of unemployment then should they increase emergency funds to match that ?

Does this imply that if one has a larger emergency fund (say 18 months) then more aggressive AA like 100/0 or 90/10 is better instead of 70/30 ?

Let us say you were saving for 10 years and you have 120 months of expenses saved. If your unemployment is 14 months instead of 12 months then you sell 2 months of equity. Is it really that bad in big picture ?

Sorry too many questions :(

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Re: Holding bonds vs 100% equities

Post by dogagility » Fri Nov 08, 2019 5:29 am

babystep wrote:
Fri Nov 08, 2019 2:45 am
Average duration of unemployment from 1990 to 2018. Max is about 39 weeks.

https://www.statista.com/statistics/217 ... in-the-us/

This indicates 1 year of emergency fund is good enough and probability is low that one would need to tap into 100/0 or 90/10 ?

I guess everyone's situation and comfort level is different. If someone is worried about unemployment of 1 year, few times in 20 years span then should they have more conservative AA like 70/30 instead of 100/0 ? But how does it help ? When 1 year of emergency fund is gone and still unemployed then wouldn't you need to tap into your investments irrespective of 100/0 or 70/30 ? If you have 70/30 and you tap into bonds then may be you are selling bonds at the wrong time ?

If one is worried about less likely 1+ year of unemployment then should they increase emergency funds to match that ?

Does this imply that if one has a larger emergency fund (say 18 months) then more aggressive AA like 100/0 or 90/10 is better instead of 70/30 ?

Let us say you were saving for 10 years and you have 120 months of expenses saved. If your unemployment is 14 months instead of 12 months then you sell 2 months of equity. Is it really that bad in big picture ?

Sorry too many questions :(
This is reality. The decision on how much to invest and asset allocation are highly personal and based upon probabilities specific to your individual life situation.
It's the reason I think stating the entire population should always have an asset allocation between 30/70 - 70/30 is inappropriate.
Some people are perfectly comfortable with a 100/0 allocation due to safety nets specific to their life situation, others are not because of their specific life situation.
Taking "risk" since 1995.

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Re: Holding bonds vs 100% equities

Post by nigel_ht » Fri Nov 08, 2019 6:19 am

babystep wrote:
Fri Nov 08, 2019 2:45 am
Average duration of unemployment from 1990 to 2018. Max is about 39 weeks.

https://www.statista.com/statistics/217 ... in-the-us/

This indicates 1 year of emergency fund is good enough and probability is low that one would need to tap into 100/0 or 90/10 ?

I guess everyone's situation and comfort level is different. If someone is worried about unemployment of 1 year, few times in 20 years span then should they have more conservative AA like 70/30 instead of 100/0 ? But how does it help ? When 1 year of emergency fund is gone and still unemployed then wouldn't you need to tap into your investments irrespective of 100/0 or 70/30 ? If you have 70/30 and you tap into bonds then may be you are selling bonds at the wrong time ?

If one is worried about less likely 1+ year of unemployment then should they increase emergency funds to match that ?

Does this imply that if one has a larger emergency fund (say 18 months) then more aggressive AA like 100/0 or 90/10 is better instead of 70/30 ?

Let us say you were saving for 10 years and you have 120 months of expenses saved. If your unemployment is 14 months instead of 12 months then you sell 2 months of equity. Is it really that bad in big picture ?

Sorry too many questions :(
Well, 39 weeks was the average duration in 2012 and not the max so it says 6 mos is likely not enough for a 2008 like event if you lose your job. A year is better.

The other interesting thing is the trend line is for longer periods of unemployment overall.

With 120 months of expenses saved and a 1 year EF you are 90/0/10 allocation between stocks, bonds and cash. The issue would be in a 50% crash you only have 60 months saved but you have almost a whole year (I dunno that I’d wait till the last minute) for the market to recover and reduce your spend.

Recent bears have recovered quickly...but if it just sits around for a couple years before recovering then you’d cash out 4 months leaving you 56 months in the market.

Not the end of the world but your retirement nest egg did just take a large hit. If you have decades to recover you’re okay, just unhappy.

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Re: Holding bonds vs 100% equities

Post by KlangFool » Fri Nov 08, 2019 8:26 am

babystep wrote:
Fri Nov 08, 2019 2:45 am
Average duration of unemployment from 1990 to 2018. Max is about 39 weeks.

https://www.statista.com/statistics/217 ... in-the-us/

This indicates 1 year of emergency fund is good enough and probability is low that one would need to tap into 100/0 or 90/10 ?

I guess everyone's situation and comfort level is different. If someone is worried about unemployment of 1 year, few times in 20 years span then should they have more conservative AA like 70/30 instead of 100/0 ? But how does it help ? When 1 year of emergency fund is gone and still unemployed then wouldn't you need to tap into your investments irrespective of 100/0 or 70/30 ? If you have 70/30 and you tap into bonds then may be you are selling bonds at the wrong time ?

If one is worried about less likely 1+ year of unemployment then should they increase emergency funds to match that ?

Does this imply that if one has a larger emergency fund (say 18 months) then more aggressive AA like 100/0 or 90/10 is better instead of 70/30 ?

Let us say you were saving for 10 years and you have 120 months of expenses saved. If your unemployment is 14 months instead of 12 months then you sell 2 months of equity. Is it really that bad in big picture ?

Sorry too many questions :(
If you have 10 years of expenses saved, you are less than 7 years from FI. Why are you 100/0? You don't have 20 years needed for 100/0 to beat 70/30. You don't have the ability to take the risk. You don't have the need to take the risk.

Do you calculate the difference between 100/0 and 70/30 to reach your goal?

The difference is less than 1 year. But, if you lose 50%, you will work at least 5 more years. It is a lousy bet.

Beginning Value 10
Annual Savings 1
100/0 70/30
Year 10.10% 9.10%
1 ($12) ($12) 99%
2 ($14) ($14) 98%
3 ($17) ($16) 98%
4 ($19) ($19) 97%
5 ($22) ($21) 96%
6 ($26) ($24) 96%
7 ($29) ($28) 95%
8 ($33) ($31) 94%

KlangFool

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Re: Holding bonds vs 100% equities

Post by babystep » Fri Nov 08, 2019 9:55 am

"Let us say you were saving for 10 years and you have 120 months of expenses saved".
Assumption was that worked for 10 years and intend to work for 20+ years.

Wouldn't in the case of 14 months unemployment and 1 year of emergency fund, you will get the unemployment benefits and you wouldn't need to withdraw from investments for those two extra months ?

https://www.edd.ca.gov/unemployment/UI-Calculator.htm EDD says
" Your estimated weekly benefit will be $450"

California unemployment calculator says, you will get the $450 benefits for 26 weeks.
Last edited by babystep on Fri Nov 08, 2019 9:59 am, edited 1 time in total.

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Re: Holding bonds vs 100% equities

Post by babystep » Fri Nov 08, 2019 9:56 am

dogagility wrote:
Fri Nov 08, 2019 5:29 am
babystep wrote:
Fri Nov 08, 2019 2:45 am
Average duration of unemployment from 1990 to 2018. Max is about 39 weeks.

https://www.statista.com/statistics/217 ... in-the-us/

This indicates 1 year of emergency fund is good enough and probability is low that one would need to tap into 100/0 or 90/10 ?

I guess everyone's situation and comfort level is different. If someone is worried about unemployment of 1 year, few times in 20 years span then should they have more conservative AA like 70/30 instead of 100/0 ? But how does it help ? When 1 year of emergency fund is gone and still unemployed then wouldn't you need to tap into your investments irrespective of 100/0 or 70/30 ? If you have 70/30 and you tap into bonds then may be you are selling bonds at the wrong time ?

If one is worried about less likely 1+ year of unemployment then should they increase emergency funds to match that ?

Does this imply that if one has a larger emergency fund (say 18 months) then more aggressive AA like 100/0 or 90/10 is better instead of 70/30 ?

Let us say you were saving for 10 years and you have 120 months of expenses saved. If your unemployment is 14 months instead of 12 months then you sell 2 months of equity. Is it really that bad in big picture ?

Sorry too many questions :(
This is reality. The decision on how much to invest and asset allocation are highly personal and based upon probabilities specific to your individual life situation.
It's the reason I think stating the entire population should always have an asset allocation between 30/70 - 70/30 is inappropriate.
Some people are perfectly comfortable with a 100/0 allocation due to safety nets specific to their life situation, others are not because of their specific life situation.
This makes sense to me.

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Re: Holding bonds vs 100% equities

Post by smitcat » Fri Nov 08, 2019 12:35 pm

babystep wrote:
Fri Nov 08, 2019 9:55 am
"Let us say you were saving for 10 years and you have 120 months of expenses saved".
Assumption was that worked for 10 years and intend to work for 20+ years.

Wouldn't in the case of 14 months unemployment and 1 year of emergency fund, you will get the unemployment benefits and you wouldn't need to withdraw from investments for those two extra months ?

https://www.edd.ca.gov/unemployment/UI-Calculator.htm EDD says
" Your estimated weekly benefit will be $450"

California unemployment calculator says, you will get the $450 benefits for 26 weeks.
Of course you are correct - just as if someone with a longer term unemployment took any job to defray costs greatly extending the EF. Or a spouse that works or goes back to work to defray costs.

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Re: Holding bonds vs 100% equities

Post by pkcrafter » Fri Nov 08, 2019 1:46 pm

Wow, this thread is a classic and fascinating example of how AA recommendations can differ depending on if the responding poster is a risk seeker or risk averse. Once again, It's very clear that these two types of investors CANNOT understand or even see the other side. What is clear is 100% stocks should never be recommended to a new, inexperienced investor because if the new member is risk averse, he/she will panic sell. Furthermore, risk quizzes are almost useless because new investors are almost always excited about getting in when stock returns are high and the newbies don't accurately or realistically answer quiz questions.

On top of this, and underlying the problem of suggesting asset allocations, is inherent risk tolerance. Some investors are risk takers because they carry a risk-taking gene whereas others are risk averse to some degree. New investors most likely don't know their real risk tolerance, but the odds are they have some level of risk aversion, even if they think they are not bothered by market drops before actually investing and experiencing bad markets or even bad information without and market reaction.

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.

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Re: Holding bonds vs 100% equities

Post by ruralavalon » Fri Nov 08, 2019 2:25 pm

pkcrafter wrote:
Fri Nov 08, 2019 1:46 pm
Wow, this thread is a classic and fascinating example of how AA recommendations can differ depending on if the responding poster is a risk seeker or risk averse. Once again, It's very clear that these two types of investors CANNOT understand or even see the other side. What is clear is 100% stocks should never be recommended to a new, inexperienced investor because if the new member is risk averse, he/she will panic sell. Furthermore, risk quizzes are almost useless because new investors are almost always excited about getting in when stock returns are high and the newbies don't accurately or realistically answer quiz questions.

On top of this, and underlying the problem of suggesting asset allocations, is inherent risk tolerance. Some investors are risk takers because they carry a risk-taking gene whereas others are risk averse to some degree. New investors most likely don't know their real risk tolerance, but the odds are they have some level of risk aversion, even if they think they are not bothered by market drops before actually investing and experiencing bad markets or even bad information without and market reaction.

Paul
I agree.

If the investor is young and has not been through a stock market crash, its easy for the new investor to (incorrectly) assume that they would not panic and sell at just the wrong time. Many people do sell in a panic, and miss out on the recovery from a stock market crash.

Personal factors vary greatly. Will the investor have a pension? Is the investor's job job safe, is the employer and the industry worked in stable? Is investor in good health? Does the investor have a highly valued skill? Is there a large emergency fund? Are there dependents, or any debt?

There are unpredictable unkowns. No one is immune to serious disabling illness or accidental injury. Layoffs and job loss are facts of life. Apparently stable employers fail. The median job tenure of U.S. employees is about 4 years.

Asset allocation is a very personal decision. Each investor must decide on an allocation that is comfortable for them based on their own ability, willingness and need to take risk.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

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Re: Holding bonds vs 100% equities

Post by WS1 » Fri Nov 08, 2019 6:59 pm

pkcrafter wrote:
Fri Nov 08, 2019 1:46 pm
Wow, this thread is a classic and fascinating example of how AA recommendations can differ depending on if the responding poster is a risk seeker or risk averse. Once again, It's very clear that these two types of investors CANNOT understand or even see the other side. What is clear is 100% stocks should never be recommended to a new, inexperienced investor because if the new member is risk averse, he/she will panic sell. Furthermore, risk quizzes are almost useless because new investors are almost always excited about getting in when stock returns are high and the newbies don't accurately or realistically answer quiz questions.

On top of this, and underlying the problem of suggesting asset allocations, is inherent risk tolerance. Some investors are risk takers because they carry a risk-taking gene whereas others are risk averse to some degree. New investors most likely don't know their real risk tolerance, but the odds are they have some level of risk aversion, even if they think they are not bothered by market drops before actually investing and experiencing bad markets or even bad information without and market reaction.

Paul
People don’t even know their risk tolerance until they’ve lost real money. It was easy to shrug off losing two months salary at 27. How will my spouse and I react to losing a few years salary at 45 is the great mystery.

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Re: Holding bonds vs 100% equities

Post by Naris » Sun Nov 10, 2019 9:02 am

KlangFool wrote:
Thu Nov 07, 2019 8:36 am
Historically, the minimal additional potential return is only possible with 20 or more years of no withdrawal. Long-run = 20+ years. 100/0 only win over 70/30 with 20+ years.
I think people have already pointed out that KlangFool's criticisms of 100% equities effectively double-count the drawdowns for equities (i.e. the expected performance for stocks already accounts for the larger expected drawdowns that stocks experience), but I wanted to point out another issue with this point that I've seen KlangFool make repeatedly.

The statement quoted above is false. The accurate statement is not that 100/0 "only" wins over 70/30 with 20+ years, but that (historically) 100/0 virtually always wins over 70/30 with 20+ years.

100/0 has a higher expected return than 70/30. This is true whether your time horizon is 1 year, 10 years, or 50 years. It's not unreasonable to adopt a 100/0 portfolio because of the higher expected returns even if your time horizon is short enough that (based on historical data) it is not guaranteed to outperform 70/30.

If someone offered to let me pay $1 for a 50% chance to win $2.50, but said they'd only do the bet up to 5 times, the mere fact that I can't repeat the process enough times to guarantee that I come out ahead hardly means that this bet doesn't offer a positive expected value.

Few things in life are guaranteed and buying guarantees can be quite expensive. I think acting like 100/0 only offers any advantages when it's virtually certain to outperform is an enormous error in reasoning.

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Re: Holding bonds vs 100% equities

Post by Wiggums » Sun Nov 10, 2019 9:43 am

The last few posts were really good. This is definitely a topic that people will have very different opinions.

I was never bothered by a big downturn in the market or the financial crisis because my employment was stable. Worse they did to me in 32 years was to cancel my cost living increase twice. Towards the end of my career, I got sick and retired. that totally changed my perspective. Yes, I am fortunate to have saved the BHs way, never lost my job and have a pension. But that does not prevent me from seeing how different things could have been.

Unemployment would have cut into my savings, put a hold on my 401k contributions, reduced my pension and delayed payments for 10 years. sometimes people on here under estimate the time it will take to find employment at a salary and work location that works for them.

In my family, in this good economy, two people lost their jobs “due to the economy.” What? Yes, both companies eliminated an entire department. In their early 50’s, their salary is higher than what other companies want to pay. Ok, I’ll accept what the job pays. I’m sorry, we are afraid that you will leave as soon as you get an offer that pays more. Call it what you want, but that is reality for some people.

I got a baby bite from the telecom bust and it hurt. Since I don’t like pain, I decided from that point forward, I would eliminate the single stocks, stop day trading and buy/hold.

Many roads to FI. Life presents hurdles from time to time. I like a have a nice cushion for when I fall. Let’s face it, sometimes I get pushed. Be honest with yourself and choose a plan that is right for you.

Anyway, I just wanted to weigh in on this great discussion.

Good luck to all...

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Re: Holding bonds vs 100% equities

Post by KlangFool » Sun Nov 10, 2019 10:52 am

Naris wrote:
Sun Nov 10, 2019 9:02 am
KlangFool wrote:
Thu Nov 07, 2019 8:36 am
Historically, the minimal additional potential return is only possible with 20 or more years of no withdrawal. Long-run = 20+ years. 100/0 only win over 70/30 with 20+ years.
I think people have already pointed out that KlangFool's criticisms of 100% equities effectively double-count the drawdowns for equities (i.e. the expected performance for stocks already accounts for the larger expected drawdowns that stocks experience), but I wanted to point out another issue with this point that I've seen KlangFool make repeatedly.

The statement quoted above is false. The accurate statement is not that 100/0 "only" wins over 70/30 with 20+ years, but that (historically) 100/0 virtually always wins over 70/30 with 20+ years.

100/0 has a higher expected return than 70/30. This is true whether your time horizon is 1 year, 10 years, or 50 years. It's not unreasonable to adopt a 100/0 portfolio because of the higher expect
Naris,

<<100/0 has a higher expected return than 70/30. This is true whether your time horizon is 1 year, 10 years, or 50 years. >>

That statement is false. The reason why you believe that 100/0 has a higher expected return is because of the historical record. So, you cannot use the historical record of higher expected return without stating how 100/0 achieving this higher expected return.

The average return of 100/0 is 10.2%. But, we had a recession every 10 years or shorter period. The 100/0 usually suffer a big drop (50%) every 10 years or less. Then, it took many years to recover. For every 50% drop, it needs a 100% return to recover. Then, it needs a lot more to average out to 10.2% per year.

So, it is unreasonable to expect a higher return of 100/0 without taking the account of historical record that this higher expected return only achievable over a long period.

Just look at the chart of VTSAX across 20 years. This should be clear to anyone.

KlangFool

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Re: Holding bonds vs 100% equities

Post by Naris » Sun Nov 10, 2019 11:15 am

KlangFool wrote:
Sun Nov 10, 2019 10:52 am
Naris wrote:
Sun Nov 10, 2019 9:02 am
KlangFool wrote:
Thu Nov 07, 2019 8:36 am
Historically, the minimal additional potential return is only possible with 20 or more years of no withdrawal. Long-run = 20+ years. 100/0 only win over 70/30 with 20+ years.
I think people have already pointed out that KlangFool's criticisms of 100% equities effectively double-count the drawdowns for equities (i.e. the expected performance for stocks already accounts for the larger expected drawdowns that stocks experience), but I wanted to point out another issue with this point that I've seen KlangFool make repeatedly.

The statement quoted above is false. The accurate statement is not that 100/0 "only" wins over 70/30 with 20+ years, but that (historically) 100/0 virtually always wins over 70/30 with 20+ years.

100/0 has a higher expected return than 70/30. This is true whether your time horizon is 1 year, 10 years, or 50 years. It's not unreasonable to adopt a 100/0 portfolio because of the higher expect
Naris,

<<100/0 has a higher expected return than 70/30. This is true whether your time horizon is 1 year, 10 years, or 50 years. >>

That statement is false. The reason why you believe that 100/0 has a higher expected return is because of the historical record. So, you cannot use the historical record of higher expected return without stating how 100/0 achieving this higher expected return.

The average return of 100/0 is 10.2%. But, we had a recession every 10 years or shorter period. The 100/0 usually suffer a big drop (50%) every 10 years or less. Then, it took many years to recover. For every 50% drop, it needs a 100% return to recover. Then, it needs a lot more to average out to 10.2% per year.

So, it is unreasonable to expect a higher return of 100/0 without taking the account of historical record that this higher expected return only achievable over a long period.

Just look at the chart of VTSAX across 10 to 20 years. This should be clear to anyone.

KlangFool
I'm honestly astounded that anyone would try to debate this point. Do you know what the term "expected return" means? I'll quote Investopedia (https://www.investopedia.com/terms/e/expectedreturn.asp)
Investopedia wrote: The expected return is the profit or loss an investor anticipates on an investment that has known or anticipated rates of return (RoR). It is calculated by multiplying potential outcomes by the chances of them occurring and then totaling these results. For example, if an investment has a 50% chance of gaining 20% and a 50% chance of losing 10%, the expected return is 5% (50% x 20% + 50% x -10% = 5%).
This is really basic stuff. Based on historical data, stocks have a higher expected return and higher volatility than bonds. The higher volatility can cause stocks to underperform relative to bonds, but the typical scenario historically speaking is that stocks provide higher returns. Do you somehow disagree with this?

Another way of expressing my point: if you invest $100,000 for a year in either 100/0 or 70/30, based on historical data, the 100/0 investor will have more money than the 70/30 investor in more than half of scenarios and the mean portfolio of the 100/0 investor will also be larger -- the latter is literally what it means that 100/0 has a "higher expected return." You seem to be saying that since there will be some number of instances where the 70/30 investor will have a larger portfolio, then that that means the 100/0 approach doesn't have a higher "expected return" -- is that what you're arguing?

Obviously I'm setting aside the issue of whether historical data provides a good way of projecting future returns, but that's an issue that applies to both the 100/0 investor and the 70/30 investor. We have to use some mechanism for anticipating future returns, so we're left using historical data.

EDIT: Separately, I think you're significantly overstating how volatile stocks actually are. 50% drops are uncommon. It simply isn't accurate to state that "The 100/0 usually suffer a big drop (50%) every 10 years or less." I don't really care to get into the precise details here, but I want to note that you're making a number of factually inaccurate claims to bolster your arguments against a 100/0 portfolio.

EDIT2: In case anyone wants to verify that stocks really do have a higher expected return than bonds, you can check my example from above in your retirement projection calculator of choice. I used Firecalc to test the results of a $100k portfolio, running for 1 year, with $0 of spending. The results are below:
100/0: Mean = $107,896; Max = $151,843; Min = $64,374
70/30: Mean = $106,247; Max = $136,524; Min = $73,568

Thus, 70/30 has a higher minimum amount but a lower average return -- i.e. it has a lower expected return than 100/0. Sure, the difference isn't massive after one year, but the point stands: on average, 100/0 "wins" in comparison to 70/30 on much shorter timelines than 20 years. It certainly isn't the case that 100/0 "only" wins with 20+ year periods.

KlangFool
Posts: 14009
Joined: Sat Oct 11, 2008 12:35 pm

Re: Holding bonds vs 100% equities

Post by KlangFool » Sun Nov 10, 2019 11:37 am

Naris wrote:
Sun Nov 10, 2019 11:15 am

EDIT: Separately, I think you're significantly overstating how volatile stocks actually are. 50% drops are uncommon. It simply isn't accurate to state that "The 100/0 usually suffer a big drop (50%) every 10 years or less." I don't really care to get into the precise details here, but I want to note that you're making a number of factually inaccurate claims to bolster your arguments against a 100/0 portfolio.
Naris,

Please explain to me how historically the 100/0 achieve the 10.2% average annual return after suffering a big drop? What is the sequence? How many years did it take before it averages back to 10.2% per year? The short answer is it usually takes more than 1 year.

So, how could someone says that you could use the expected average return of 10.1% if the time period is 1 year?

Take a look at the 2008/2009 drop. How long before the 100/0 recover to previous level? How long before the 100/0 make it much higher than the previous level and average back to an annual 10.2%.

KlangFool

rascott
Posts: 995
Joined: Wed Apr 15, 2015 10:53 am

Re: Holding bonds vs 100% equities

Post by rascott » Sun Nov 10, 2019 11:39 am

KlangFool wrote:
Sun Nov 10, 2019 10:52 am
Naris wrote:
Sun Nov 10, 2019 9:02 am
KlangFool wrote:
Thu Nov 07, 2019 8:36 am
Historically, the minimal additional potential return is only possible with 20 or more years of no withdrawal. Long-run = 20+ years. 100/0 only win over 70/30 with 20+ years.
I think people have already pointed out that KlangFool's criticisms of 100% equities effectively double-count the drawdowns for equities (i.e. the expected performance for stocks already accounts for the larger expected drawdowns that stocks experience), but I wanted to point out another issue with this point that I've seen KlangFool make repeatedly.

The statement quoted above is false. The accurate statement is not that 100/0 "only" wins over 70/30 with 20+ years, but that (historically) 100/0 virtually always wins over 70/30 with 20+ years.

100/0 has a higher expected return than 70/30. This is true whether your time horizon is 1 year, 10 years, or 50 years. It's not unreasonable to adopt a 100/0 portfolio because of the higher expect
Naris,

<<100/0 has a higher expected return than 70/30. This is true whether your time horizon is 1 year, 10 years, or 50 years. >>

That statement is false. The reason why you believe that 100/0 has a higher expected return is because of the historical record. So, you cannot use the historical record of higher expected return without stating how 100/0 achieving this higher expected return.

The average return of 100/0 is 10.2%. But, we had a recession every 10 years or shorter period. The 100/0 usually suffer a big drop (50%) every 10 years or less. Then, it took many years to recover. For every 50% drop, it needs a 100% return to recover. Then, it needs a lot more to average out to 10.2% per year.

So, it is unreasonable to expect a higher return of 100/0 without taking the account of historical record that this higher expected return only achievable over a long period.

Just look at the chart of VTSAX across 20 years. This should be clear to anyone.

KlangFool


Expected return is an academic calculation. Stocks have a higher expected return than bonds..... this has nothing to do with backtesting anything over any past period, but is rather textbook finance.

Naris
Posts: 54
Joined: Tue Aug 28, 2018 2:42 pm

Re: Holding bonds vs 100% equities

Post by Naris » Sun Nov 10, 2019 11:51 am

KlangFool wrote:
Sun Nov 10, 2019 11:37 am
Naris wrote:
Sun Nov 10, 2019 11:15 am

EDIT: Separately, I think you're significantly overstating how volatile stocks actually are. 50% drops are uncommon. It simply isn't accurate to state that "The 100/0 usually suffer a big drop (50%) every 10 years or less." I don't really care to get into the precise details here, but I want to note that you're making a number of factually inaccurate claims to bolster your arguments against a 100/0 portfolio.
Naris,

Please explain to me how historically the 100/0 achieve the 10.2% average annual return after suffering a big drop? What is the sequence? How many years did it take before it averages back to 10.2% per year? The short answer is it usually takes more than 1 year.

So, how could someone says that you could use the expected average return of 10.1% if the time period is 1 year?

Take a look at the 2008/2009 drop. How long before the 100/0 recover to previous level? How long before the 100/0 make it much higher than the previous level and average back to an annual 10.2%.

KlangFool
The 10.2% average return includes the big drops -- this is what I was referring to when I said that others had pointed out that your criticisms effectively double-count the drawdowns. Obviously if you are a maximally unlucky market timer and invest all of your money in a lump sum the day before a massive stock market crash, then you'll probably get less than the average return. But if you're able to predict that the stock market will fall 50% a month after you invest all of your money, then you should be shorting everything anyway. No one has that type of foresight.

Sometimes stocks lose a 20% of their value (or more) in a year. Sometimes they gain 20% of their value (or more) in a year. It feels a bit odd to have to point this out when VTSAX has returned 24.88% YTD in 2019 (as of 11/8/19) (https://investor.vanguard.com/mutual-fu ... ance/vtsax). You do realize that stocks are volatile in both directions, right? Both upward and downward?

It's like you're starting with this bizarre assumption that we always to assume that equities drop 50% at the start of any investing period, and then we assume everything rolls forward normally from there (even though expected returns are typically higher immediately after a massive drop in stock prices).

I note that you did not respond to the numbers I posted above showing that the mean 1year return of a 100/0 portfolio is higher than the mean 1year return of a 70/30 portfolio. You can't just cherry-pick time periods to fit your theory. I never said that 100/0 would always outperform 70/30 over one year -- you're the one making the claim that 100/0 "only" outperforms 70/30 if the time period is 20+ years. But 100/0 not only can but usually outperforms 70/30 over much shorter time periods.

KlangFool
Posts: 14009
Joined: Sat Oct 11, 2008 12:35 pm

Re: Holding bonds vs 100% equities

Post by KlangFool » Sun Nov 10, 2019 12:02 pm

rascott wrote:
Sun Nov 10, 2019 11:39 am
KlangFool wrote:
Sun Nov 10, 2019 10:52 am
Naris wrote:
Sun Nov 10, 2019 9:02 am
KlangFool wrote:
Thu Nov 07, 2019 8:36 am
Historically, the minimal additional potential return is only possible with 20 or more years of no withdrawal. Long-run = 20+ years. 100/0 only win over 70/30 with 20+ years.
I think people have already pointed out that KlangFool's criticisms of 100% equities effectively double-count the drawdowns for equities (i.e. the expected performance for stocks already accounts for the larger expected drawdowns that stocks experience), but I wanted to point out another issue with this point that I've seen KlangFool make repeatedly.

The statement quoted above is false. The accurate statement is not that 100/0 "only" wins over 70/30 with 20+ years, but that (historically) 100/0 virtually always wins over 70/30 with 20+ years.

100/0 has a higher expected return than 70/30. This is true whether your time horizon is 1 year, 10 years, or 50 years. It's not unreasonable to adopt a 100/0 portfolio because of the higher expect
Naris,

<<100/0 has a higher expected return than 70/30. This is true whether your time horizon is 1 year, 10 years, or 50 years. >>

That statement is false. The reason why you believe that 100/0 has a higher expected return is because of the historical record. So, you cannot use the historical record of higher expected return without stating how 100/0 achieving this higher expected return.

The average return of 100/0 is 10.2%. But, we had a recession every 10 years or shorter period. The 100/0 usually suffer a big drop (50%) every 10 years or less. Then, it took many years to recover. For every 50% drop, it needs a 100% return to recover. Then, it needs a lot more to average out to 10.2% per year.

So, it is unreasonable to expect a higher return of 100/0 without taking the account of historical record that this higher expected return only achievable over a long period.

Just look at the chart of VTSAX across 20 years. This should be clear to anyone.

KlangFool


Expected return is an academic calculation. Stocks have a higher expected return than bonds..... this has nothing to do with backtesting anything over any past period, but is rather textbook finance.
rascott,

That may be your definition. But, my 10.2% annual average return is from historical data.

https://personal.vanguard.com/us/insigh ... ns?lang=en

KlangFool

KlangFool
Posts: 14009
Joined: Sat Oct 11, 2008 12:35 pm

Re: Holding bonds vs 100% equities

Post by KlangFool » Sun Nov 10, 2019 12:07 pm

Naris wrote:
Sun Nov 10, 2019 11:51 am
KlangFool wrote:
Sun Nov 10, 2019 11:37 am
Naris wrote:
Sun Nov 10, 2019 11:15 am

EDIT: Separately, I think you're significantly overstating how volatile stocks actually are. 50% drops are uncommon. It simply isn't accurate to state that "The 100/0 usually suffer a big drop (50%) every 10 years or less." I don't really care to get into the precise details here, but I want to note that you're making a number of factually inaccurate claims to bolster your arguments against a 100/0 portfolio.
Naris,

Please explain to me how historically the 100/0 achieve the 10.2% average annual return after suffering a big drop? What is the sequence? How many years did it take before it averages back to 10.2% per year? The short answer is it usually takes more than 1 year.

So, how could someone says that you could use the expected average return of 10.1% if the time period is 1 year?

Take a look at the 2008/2009 drop. How long before the 100/0 recover to previous level? How long before the 100/0 make it much higher than the previous level and average back to an annual 10.2%.

KlangFool
The 10.2% average return includes the big drops -- this is what I was referring to when I said that others had pointed out that your criticisms effectively double-count the drawdowns. Obviously if you are a maximally unlucky market timer and invest all of your money in a lump sum the day before a massive stock market crash,
Naris,

Or, the investor is overly optimistic and had been 100/0 for the last 10+ years. And, the portfolio is big enough that the investor do not have the time to recover from the big drop when it happened.

KlangFool

rascott
Posts: 995
Joined: Wed Apr 15, 2015 10:53 am

Re: Holding bonds vs 100% equities

Post by rascott » Sun Nov 10, 2019 12:34 pm

KlangFool wrote:
Sun Nov 10, 2019 12:02 pm
rascott wrote:
Sun Nov 10, 2019 11:39 am
KlangFool wrote:
Sun Nov 10, 2019 10:52 am
Naris wrote:
Sun Nov 10, 2019 9:02 am
KlangFool wrote:
Thu Nov 07, 2019 8:36 am
Historically, the minimal additional potential return is only possible with 20 or more years of no withdrawal. Long-run = 20+ years. 100/0 only win over 70/30 with 20+ years.
I think people have already pointed out that KlangFool's criticisms of 100% equities effectively double-count the drawdowns for equities (i.e. the expected performance for stocks already accounts for the larger expected drawdowns that stocks experience), but I wanted to point out another issue with this point that I've seen KlangFool make repeatedly.

The statement quoted above is false. The accurate statement is not that 100/0 "only" wins over 70/30 with 20+ years, but that (historically) 100/0 virtually always wins over 70/30 with 20+ years.

100/0 has a higher expected return than 70/30. This is true whether your time horizon is 1 year, 10 years, or 50 years. It's not unreasonable to adopt a 100/0 portfolio because of the higher expect
Naris,

<<100/0 has a higher expected return than 70/30. This is true whether your time horizon is 1 year, 10 years, or 50 years. >>

That statement is false. The reason why you believe that 100/0 has a higher expected return is because of the historical record. So, you cannot use the historical record of higher expected return without stating how 100/0 achieving this higher expected return.

The average return of 100/0 is 10.2%. But, we had a recession every 10 years or shorter period. The 100/0 usually suffer a big drop (50%) every 10 years or less. Then, it took many years to recover. For every 50% drop, it needs a 100% return to recover. Then, it needs a lot more to average out to 10.2% per year.

So, it is unreasonable to expect a higher return of 100/0 without taking the account of historical record that this higher expected return only achievable over a long period.

Just look at the chart of VTSAX across 20 years. This should be clear to anyone.

KlangFool


Expected return is an academic calculation. Stocks have a higher expected return than bonds..... this has nothing to do with backtesting anything over any past period, but is rather textbook finance.
rascott,

That may be your definition. But, my 10.2% annual average return is from historical data.

https://personal.vanguard.com/us/insigh ... ns?lang=en

KlangFool

It's not my definition of expected return.... expected return is a mathematical formula.

https://en.m.wikipedia.org/wiki/Expected_return

bgf
Posts: 1078
Joined: Fri Nov 10, 2017 9:35 am

Re: Holding bonds vs 100% equities

Post by bgf » Sun Nov 10, 2019 12:44 pm

KlangFool wrote:
Sun Nov 10, 2019 12:07 pm
Naris wrote:
Sun Nov 10, 2019 11:51 am
KlangFool wrote:
Sun Nov 10, 2019 11:37 am
Naris wrote:
Sun Nov 10, 2019 11:15 am

EDIT: Separately, I think you're significantly overstating how volatile stocks actually are. 50% drops are uncommon. It simply isn't accurate to state that "The 100/0 usually suffer a big drop (50%) every 10 years or less." I don't really care to get into the precise details here, but I want to note that you're making a number of factually inaccurate claims to bolster your arguments against a 100/0 portfolio.
Naris,

Please explain to me how historically the 100/0 achieve the 10.2% average annual return after suffering a big drop? What is the sequence? How many years did it take before it averages back to 10.2% per year? The short answer is it usually takes more than 1 year.

So, how could someone says that you could use the expected average return of 10.1% if the time period is 1 year?

Take a look at the 2008/2009 drop. How long before the 100/0 recover to previous level? How long before the 100/0 make it much higher than the previous level and average back to an annual 10.2%.

KlangFool
The 10.2% average return includes the big drops -- this is what I was referring to when I said that others had pointed out that your criticisms effectively double-count the drawdowns. Obviously if you are a maximally unlucky market timer and invest all of your money in a lump sum the day before a massive stock market crash,
Naris,

Or, the investor is overly optimistic and had been 100/0 for the last 10+ years. And, the portfolio is big enough that the investor do not have the time to recover from the big drop when it happened.

KlangFool
going back 10 years to 2009, if someone had a portfolio of $50k then and added $1000 per month, they'd have:

100/0 - $508,749
70/30 - $410,856

being 70/30 cost that investor $10,000 per year for the 10 year period.

stability isnt free.
“TE OCCIDERE POSSUNT SED TE EDERE NON POSSUNT NEFAS EST"

KlangFool
Posts: 14009
Joined: Sat Oct 11, 2008 12:35 pm

Re: Holding bonds vs 100% equities

Post by KlangFool » Sun Nov 10, 2019 12:52 pm

bgf wrote:
Sun Nov 10, 2019 12:44 pm
KlangFool wrote:
Sun Nov 10, 2019 12:07 pm
Naris wrote:
Sun Nov 10, 2019 11:51 am
KlangFool wrote:
Sun Nov 10, 2019 11:37 am
Naris wrote:
Sun Nov 10, 2019 11:15 am

EDIT: Separately, I think you're significantly overstating how volatile stocks actually are. 50% drops are uncommon. It simply isn't accurate to state that "The 100/0 usually suffer a big drop (50%) every 10 years or less." I don't really care to get into the precise details here, but I want to note that you're making a number of factually inaccurate claims to bolster your arguments against a 100/0 portfolio.
Naris,

Please explain to me how historically the 100/0 achieve the 10.2% average annual return after suffering a big drop? What is the sequence? How many years did it take before it averages back to 10.2% per year? The short answer is it usually takes more than 1 year.

So, how could someone says that you could use the expected average return of 10.1% if the time period is 1 year?

Take a look at the 2008/2009 drop. How long before the 100/0 recover to previous level? How long before the 100/0 make it much higher than the previous level and average back to an annual 10.2%.

KlangFool
The 10.2% average return includes the big drops -- this is what I was referring to when I said that others had pointed out that your criticisms effectively double-count the drawdowns. Obviously if you are a maximally unlucky market timer and invest all of your money in a lump sum the day before a massive stock market crash,
Naris,

Or, the investor is overly optimistic and had been 100/0 for the last 10+ years. And, the portfolio is big enough that the investor do not have the time to recover from the big drop when it happened.

KlangFool
going back 10 years to 2009, if someone had a portfolio of $50k then and added $1000 per month, they'd have:

100/0 - $508,749
70/30 - $410,856

being 70/30 cost that investor $10,000 per year for the 10 year period.

stability isnt free.
bgf,

1) Going back to 2009, how long after the 2009 crash, before the 100/0 person is 50K again. That is the discussion at hand. If the time period is long enough, 100/0 can win.

The risk of 100/0 is real.

2) If the portfolio was 500K before the crash, the result might be different. There will be a point when the portfolio is big enough that the risk of drop outweighs the possible gain and future annual contributions.

KlangFool

bgf
Posts: 1078
Joined: Fri Nov 10, 2017 9:35 am

Re: Holding bonds vs 100% equities

Post by bgf » Sun Nov 10, 2019 1:05 pm

i dont know and i dont care either way. the risk of 70/30, in my above example, was losing $100,000 in a 10 year period by investing 30% in bonds while accumulating and making regular contributions. no withdrawals were planned and none were needed.

the investor who chooses to be $100,000 poorer after 10 years just to hold $15k in bonds (30% of $50k portfolio) in case s/he gets fired during a financial crisis is being too conservative.
“TE OCCIDERE POSSUNT SED TE EDERE NON POSSUNT NEFAS EST"

KlangFool
Posts: 14009
Joined: Sat Oct 11, 2008 12:35 pm

Re: Holding bonds vs 100% equities

Post by KlangFool » Sun Nov 10, 2019 1:13 pm

bgf wrote:
Sun Nov 10, 2019 1:05 pm
i dont know and i dont care either way. the risk of 70/30, in my above example, was losing $100,000 in a 10 year period by investing 30% in bonds while accumulating and making regular contributions. no withdrawals were planned and none were needed.

the investor who chooses to be $100,000 poorer after 10 years just to hold $15k in bonds (30% of $50k portfolio) in case s/he gets fired during a financial crisis is being too conservative.
bgf,

So, you were counting on the investor being lucky and was not unemployed during the recession over that 10 years. Counting on being lucky is not a good planning strategy.

KlangFool

bgf
Posts: 1078
Joined: Fri Nov 10, 2017 9:35 am

Re: Holding bonds vs 100% equities

Post by bgf » Sun Nov 10, 2019 1:19 pm

KlangFool wrote:
Sun Nov 10, 2019 1:13 pm
bgf wrote:
Sun Nov 10, 2019 1:05 pm
i dont know and i dont care either way. the risk of 70/30, in my above example, was losing $100,000 in a 10 year period by investing 30% in bonds while accumulating and making regular contributions. no withdrawals were planned and none were needed.

the investor who chooses to be $100,000 poorer after 10 years just to hold $15k in bonds (30% of $50k portfolio) in case s/he gets fired during a financial crisis is being too conservative.
bgf,

So, you were counting on the investor being lucky and was not unemployed during the recession over that 10 years. Counting on being lucky is not a good planning strategy.

KlangFool
i was weighing the probability of losing out on $100,000 after ten years vs. the probability of being unemployed, during a recession, during a stock market crash, and otherwise unable to survive without having to sell down virtually the entire (small) retirement portfolio.
“TE OCCIDERE POSSUNT SED TE EDERE NON POSSUNT NEFAS EST"

KlangFool
Posts: 14009
Joined: Sat Oct 11, 2008 12:35 pm

Re: Holding bonds vs 100% equities

Post by KlangFool » Sun Nov 10, 2019 1:39 pm

bgf wrote:
Sun Nov 10, 2019 1:19 pm
KlangFool wrote:
Sun Nov 10, 2019 1:13 pm
bgf wrote:
Sun Nov 10, 2019 1:05 pm
i dont know and i dont care either way. the risk of 70/30, in my above example, was losing $100,000 in a 10 year period by investing 30% in bonds while accumulating and making regular contributions. no withdrawals were planned and none were needed.

the investor who chooses to be $100,000 poorer after 10 years just to hold $15k in bonds (30% of $50k portfolio) in case s/he gets fired during a financial crisis is being too conservative.
bgf,

So, you were counting on the investor being lucky and was not unemployed during the recession over that 10 years. Counting on being lucky is not a good planning strategy.

KlangFool
i was weighing the probability of losing out on $100,000 after ten years vs. the probability of being unemployed, during a recession, during a stock market crash, and otherwise unable to survive without having to sell down virtually the entire (small) retirement portfolio.
bgf,

In summary, you got lucky for the past 10+ years. But, that may or may not hold true for the next 10 years and your portfolio may not be small anymore. You have a lot more to lose this time.

I wish you the best of luck.

KlangFool

Workable Goblin
Posts: 68
Joined: Fri Mar 01, 2019 8:37 pm
Location: Honolulu, HI

Re: Holding bonds vs 100% equities

Post by Workable Goblin » Sun Nov 10, 2019 2:10 pm

rascott wrote:
Wed Nov 06, 2019 11:17 am
And if you go look at the actual $ balances between the two portfolios.... you'll see the nominal dollar difference is so small it's basically immaterial for the first decade with the young person starting at $0 and saving monthly. Being 70/30 in 2008 might have given you an extra few thousand dollars to draw on..... so maybe hold you over for an extra month or two, at best. Something that would be avoided by good practices of holding 6-12 months expenses in cash equivalents.
I would say more importantly (and astonishingly neglected by everyone here), the young person recently laid off would not actually have to rely entirely on their own portfolio to support them, but would probably be able to access resources from the government and possibly their own family and social circles. Unemployment insurance, for instance, could stretch out their ability to survive while looking for work very considerably, especially if they had a high savings rate and so the insurance payouts would be more nearly aligned with their expenses. Remember, in the actual 2008 recession, one of the big planks of the stimulus was actually increasing and stretching unemployment payments to help people for longer. And depending on their situation they might even be able to access other benefits like SNAP, Medicaid, and so on (particularly if they have few assets).

Similarly, if one of their close family members is still employed or otherwise has some advantage (for example, owning a paid-off house), then they might be able to receive some assistance from them. A lot of churches and other organizations will pass the hat around to help a member who is having trouble. There are food banks and food pantries, too. Of course, these latter potentials don't work as well in the event of a major downturn, when the church runs out of money, family members are stretched tight, and food banks have a lot of extra demand, but that doesn't mean that they necessarily stop existing. There's a lot more space between "being fired" and "going homeless" than just "how big is your e-fund + portfolio," for most people.

I think the combination of these things adds a lot of "invisible bonds" to what a lot of people have that tends to be neglected here, probably because most people posting here are pretty well off and have never accessed any of these programs.

User avatar
dogagility
Posts: 600
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Re: Holding bonds vs 100% equities

Post by dogagility » Sun Nov 10, 2019 2:21 pm

KlangFool wrote:
Sun Nov 10, 2019 1:13 pm
bgf wrote:
Sun Nov 10, 2019 1:05 pm
i dont know and i dont care either way. the risk of 70/30, in my above example, was losing $100,000 in a 10 year period by investing 30% in bonds while accumulating and making regular contributions. no withdrawals were planned and none were needed.
the investor who chooses to be $100,000 poorer after 10 years just to hold $15k in bonds (30% of $50k portfolio) in case s/he gets fired during a financial crisis is being too conservative.
bgf,
So, you were counting on the investor being lucky and was not unemployed during the recession over that 10 years. Counting on being lucky is not a good planning strategy.
KlangFool
That's an expensive insurance policy. About dollar for dollar. No thanks.
Taking "risk" since 1995.

Naris
Posts: 54
Joined: Tue Aug 28, 2018 2:42 pm

Re: Holding bonds vs 100% equities

Post by Naris » Sun Nov 10, 2019 2:26 pm

I hope this type of comment is allowed, but I want to make it as a parting note. I think KlangFool can sometimes add a valuable perspective of reminding people that things can go wrong unexpectedly. But the last few dozen posts are a perfect illustration of why I think it can be frustrating to engage with KlangFool in any type of detailed discussion of the actual relative risks.

For instance, KlangFool made a number of factual assertions:
KlangFool wrote:
Thu Nov 07, 2019 8:36 am
Historically, the minimal additional potential return is only possible with 20 or more years of no withdrawal. Long-run = 20+ years. 100/0 only win over 70/30 with 20+ years.
KlangFool wrote:
Sun Nov 10, 2019 10:52 am
Naris wrote:
Sun Nov 10, 2019 9:02 am
<<100/0 has a higher expected return than 70/30. This is true whether your time horizon is 1 year, 10 years, or 50 years. >>
That statement is false. The reason why you believe that 100/0 has a higher expected return is because of the historical record. So, you cannot use the historical record of higher expected return without stating how 100/0 achieving this higher expected return.
KlangFool wrote:
Sun Nov 10, 2019 10:52 am
The average return of 100/0 is 10.2%. But, we had a recession every 10 years or shorter period. The 100/0 usually suffer a big drop (50%) every 10 years or less.
KlangFool wrote:
Sun Nov 10, 2019 12:02 pm
rascott wrote:
Sun Nov 10, 2019 11:39 am

Expected return is an academic calculation. Stocks have a higher expected return than bonds..... this has nothing to do with backtesting anything over any past period, but is rather textbook finance.
rascott,

That may be your definition. But, my 10.2% annual average return is from historical data.

https://personal.vanguard.com/us/insigh ... ns?lang=en

KlangFool
(I'll point out here that I literally excerpted Investopedia's definition of "expected return" above this. Words have specific meanings; you don't get to just make up your own. Even beyond that, the Vanguard page KlangFool linked to reflects that stocks historically had a higher "Average annual return" than bonds, so I have no idea why he thought this supported his point.)
Naris wrote:
Sun Nov 10, 2019 11:15 am
Do you know what the term "expected return" means? I'll quote Investopedia (https://www.investopedia.com/terms/e/expectedreturn.asp)
Investopedia wrote: The expected return is the profit or loss an investor anticipates on an investment that has known or anticipated rates of return (RoR). It is calculated by multiplying potential outcomes by the chances of them occurring and then totaling these results. For example, if an investment has a 50% chance of gaining 20% and a 50% chance of losing 10%, the expected return is 5% (50% x 20% + 50% x -10% = 5%).
None of these factual assertions are true.

Yet, trying to point out these inaccuracies just causes the conversation to be shifted, so we end up with back and forths about whether people who haven't experienced prolonged unemployment are "lucky" or not.

I'm not objecting to pointing out that it's possible for people to lose their jobs, especially in downturns. The likelihood of job loss, particularly prolonged job loss, is certainly relevant to asset allocation. But it bothers me that KlangFool never admits when he was factually wrong or made inaccurate hyperbolic claims to argue for his preferred risk-averse conclusion.

I'm not sure it's possible to have a productive conversation with KlangFool about whether some risks are worthwhile, and particularly about what the actual detailed positives and negatives are of potentially more risky strategies. I hope that these exchanges at least illustrate for anyone reading KlangFool's comments why there is another perspective, as well as why I'm losing interest in discussing the relative merits of different asset allocations with KlangFool.

KlangFool
Posts: 14009
Joined: Sat Oct 11, 2008 12:35 pm

Re: Holding bonds vs 100% equities

Post by KlangFool » Sun Nov 10, 2019 3:28 pm

Naris wrote:
Sun Nov 10, 2019 2:26 pm
I hope this type of comment is allowed, but I want to make it as a parting note. I think KlangFool can sometimes add a valuable perspective of reminding people that things can go wrong unexpectedly. But the last few dozen posts are a perfect illustration of why I think it can be frustrating to engage with KlangFool in any type of detailed discussion of the actual relative risks.

For instance, KlangFool made a number of factual assertions:
KlangFool wrote:
Thu Nov 07, 2019 8:36 am
Historically, the minimal additional potential return is only possible with 20 or more years of no withdrawal. Long-run = 20+ years. 100/0 only win over 70/30 with 20+ years.
KlangFool wrote:
Sun Nov 10, 2019 10:52 am
Naris wrote:
Sun Nov 10, 2019 9:02 am
<<100/0 has a higher expected return than 70/30. This is true whether your time horizon is 1 year, 10 years, or 50 years. >>
That statement is false. The reason why you believe that 100/0 has a higher expected return is because of the historical record. So, you cannot use the historical record of higher expected return without stating how 100/0 achieving this higher expected return.
KlangFool wrote:
Sun Nov 10, 2019 10:52 am
The average return of 100/0 is 10.2%. But, we had a recession every 10 years or shorter period. The 100/0 usually suffer a big drop (50%) every 10 years or less.
KlangFool wrote:
Sun Nov 10, 2019 12:02 pm
rascott wrote:
Sun Nov 10, 2019 11:39 am

Expected return is an academic calculation. Stocks have a higher expected return than bonds..... this has nothing to do with backtesting anything over any past period, but is rather textbook finance.
rascott,

That may be your definition. But, my 10.2% annual average return is from historical data.

https://personal.vanguard.com/us/insigh ... ns?lang=en

KlangFool
(I'll point out here that I literally excerpted Investopedia's definition of "expected return" above this. Words have specific meanings; you don't get to just make up your own. Even beyond that, the Vanguard page KlangFool linked to reflects that stocks historically had a higher "Average annual return" than bonds, so I have no idea why he thought this supported his point.)
Naris wrote:
Sun Nov 10, 2019 11:15 am
Do you know what the term "expected return" means? I'll quote Investopedia (https://www.investopedia.com/terms/e/expectedreturn.asp)
Investopedia wrote: The expected return is the profit or loss an investor anticipates on an investment that has known or anticipated rates of return (RoR). It is calculated by multiplying potential outcomes by the chances of them occurring and then totaling these results. For example, if an investment has a 50% chance of gaining 20% and a 50% chance of losing 10%, the expected return is 5% (50% x 20% + 50% x -10% = 5%).
None of these factual assertions are true.

Yet, trying to point out these inaccuracies just causes the conversation to be shifted, so we end up with back and forths about whether people who haven't experienced prolonged unemployment are "lucky" or not.

I'm not objecting to pointing out that it's possible for people to lose their jobs, especially in downturns. The likelihood of job loss, particularly prolonged job loss, is certainly relevant to asset allocation. But it bothers me that KlangFool never admits when he was factually wrong or made inaccurate hyperbolic claims to argue for his preferred risk-averse conclusion.

I'm not sure it's possible to have a productive conversation with KlangFool about whether some risks are worthwhile, and particularly about what the actual detailed positives and negatives are of potentially more risky strategies. I hope that these exchanges at least illustrate for anyone reading KlangFool's comments why there is another perspective, as well as why I'm losing interest in discussing the relative merits of different asset allocations with KlangFool.
Naris,

Thank you for summarizing my points.

1) You are only looking at "expected return".

2) I am looking at the sequence of return risk and average annual return.

3) You are assuming that the expected returns are independent of the time period. I do not care about expected returns. I care about the average annual return over a time period.

4) With 10+ years of the bull market, if someone believes that the "expected return" is independent of the time period and the past, the show may go on.

5) Meanwhile, for someone that looks at the average annual return, the reversion to mean is about to happen.

To each its own.

KlangFool

mathguy3021
Posts: 192
Joined: Sat Apr 09, 2011 9:30 pm

Re: Holding bonds vs 100% equities

Post by mathguy3021 » Sun Nov 10, 2019 3:46 pm

I wonder if the pro 100% stocks crowd would change their views if we have another great depression, with a 80% or more crash in the stock market, or a Japan like stock market that declines for many years. None of these outcomes seem likely due to the past 10 years of US stock performance.

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