Why am I taking so much risk?

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bck63
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Why am I taking so much risk?

Post by bck63 » Sat Nov 16, 2019 6:56 am

I am hoping to get a broad range of thoughts on the issue of risk, as it relates to my personal situation and risk tolerance.

I am 56 years old, and my asset allocation is approximately 50/50. I am ten years from retirement. The closer I get to retirement, and the more I accumulate, the more anxious I get about going through a big loss. For instance, right now, the prospect of losing 20-25% of my savings is horrifying to me. I will have a very modest nest egg that I expect will meet my needs; I will live on my SS and savings.

I've begun looking more closely at portfolio allocation models, and using savings rate calculators. At the current rate for money market funds (I even used 1.5%), I would 1) reach a reasonable and workable savings goal, and 2) be able to have a desired withdrawal rate that would last more than 30 years.

Is there anyone who is extremely risk adverse? How do I know the proper amount of risk to take?

Thank you very much for reading and any responses would be greatly appreciated.

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SquawkIdent
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Re: Why am I taking so much risk?

Post by SquawkIdent » Sat Nov 16, 2019 7:15 am

Many others will chime in I'm sure but...

It sounds like you've "won the game". You will have enough to support your withdrawal needs and be comfortable. So that leads to the question, why take the risk of losing that?

It doesn't sound to me like you are super conservative and risk adverse, just worried a large 25% loss will affect you. And that is a reality with a 50% stock allocation. Have you looked at lower stock allocations? Maybe 20-30%? Would a 10-15% decline make you lose sleep at night? I personally would never want to totally cut out a stock allocation as having some actually reduces risk. See... https://www.youngresearch.com/authors/e ... -frontier/

As your portfolio grows I always try to look at things in dollar terms not just percentages. That makes the gain or loss potential more real. It sounds like maybe you've done that but if not give it a try. It's kind of eye opening.

Summary...you need to figure out what your "sleep at night and not mess with it" allocation is. It's not easy and takes time to figure out.

Good luck. :sharebeer

KlangFool
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Re: Why am I taking so much risk?

Post by KlangFool » Sat Nov 16, 2019 7:20 am

OP,

If 50/50 is too risky for you, change to 30/70. AA in the range of 70/30 to 30/70 are all reasonable.

KlangFool

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KingRiggs
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Re: Why am I taking so much risk?

Post by KingRiggs » Sat Nov 16, 2019 7:21 am

Equity markets will fall - it’s inevitable, but recoverable.

Inflation happens - it’s inexorable.

I worry much more about inflation in the long term than the next market decline.

You NEED equities with their larger expected return (and volatility) to overcome the perpetual drag of inflation.
Advice = noun | Advise = verb | | Roth, not ROTH

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JoeRetire
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Re: Why am I taking so much risk?

Post by JoeRetire » Sat Nov 16, 2019 7:22 am

bck63 wrote:
Sat Nov 16, 2019 6:56 am
I am 56 years old, and my asset allocation is approximately 50/50. I am ten years from retirement. The closer I get to retirement, and the more I accumulate, the more anxious I get about going through a big loss. For instance, right now, the prospect of losing 20-25% of my savings is horrifying to me.
Horrifying is bad.
I will have a very modest nest egg that I expect will meet my needs; I will live on my SS and savings.
If so you have "won the game" as they say.
I've begun looking more closely at portfolio allocation models, and using savings rate calculators. At the current rate for money market funds (I even used 1.5%), I would 1) reach a reasonable and workable savings goal, and 2) be able to have a desired withdrawal rate that would last more than 30 years.
What are your assumptions regarding inflation for the next 30 years?
How do I know the proper amount of risk to take?
If the amount of risk you are taking allows you to reach your financial goals without horrifying you, then it's proper.

It sounds like you have concluded that all your assets should be in money market funds. So do that and stop being so anxious.
It's the end of the world as we know it. | It's the end of the world as we know it. | It's the end of the world as we know it. | And I feel fine.

goblue100
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Re: Why am I taking so much risk?

Post by goblue100 » Sat Nov 16, 2019 7:42 am

bck63 wrote:
Sat Nov 16, 2019 6:56 am
I am hoping to get a broad range of thoughts on the issue of risk, as it relates to my personal situation and risk tolerance.

I am 56 years old, and my asset allocation is approximately 50/50. I am ten years from retirement. The closer I get to retirement, and the more I accumulate, the more anxious I get about going through a big loss. For instance, right now, the prospect of losing 20-25% of my savings is horrifying to me. I will have a very modest nest egg that I expect will meet my needs; I will live on my SS and savings.

I've begun looking more closely at portfolio allocation models, and using savings rate calculators. At the current rate for money market funds (I even used 1.5%), I would 1) reach a reasonable and workable savings goal, and 2) be able to have a desired withdrawal rate that would last more than 30 years.

Is there anyone who is extremely risk adverse? How do I know the proper amount of risk to take?

Thank you very much for reading and any responses would be greatly appreciated.
There was a time I would have told you that I was a 90/10 guy forever. Now at something like 2 years out from retirement, I'm at 60/40. At this point, 75% of new money is going in bonds, and I wouldn't mind getting to 50/50 by retirement. That feels right for me.

Why do I not go even more conservative? I know I need growth over a period that could easily last 35 years. I have to accept the chance of loss in order to get the gains I need. You say you don't need that growth, but I question that a little. If you take your expected yearly expenses and divide it into your portfolio, what do you get? If you have a 1,000,000 portfolio and 50,000 in yearly expenses, we would say your portfolio is 20x. If you have something like 40x in your portfolio now, then you probably don't need a bunch of growth and can go more conservative.

Larry Swedroe wrote a good article on risk. He talks about our need, ability and willingness to take risk. Might be worth a read.
https://thebamalliance.com/blog/how-you ... y-swedroe/
Financial planners are savers. They want us to be 95 percent confident we can finance a 30-year retirement even though there is an 82 percent probability of being dead by then. - Scott Burns

BlueCable
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Re: Why am I taking so much risk?

Post by BlueCable » Sat Nov 16, 2019 7:52 am

bck63 wrote:
Sat Nov 16, 2019 6:56 am
the current rate for money market funds (I even used 1.5%), I would 1) reach a reasonable and workable savings goal, and 2) be able to have a desired withdrawal rate that would last more than 30 years.
Have you accounted for inflation with this calculation?

You may want to consider using TIPS for a liability matching portfolio, which is what you are describing. You'd need to account for the taxes you'll owe on the nominal gains on the TIPS.

BlueCable
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Re: Why am I taking so much risk?

Post by BlueCable » Sat Nov 16, 2019 7:56 am

You are exposed to many risks in addition to the stock market prices falling. You have the risk of high inflation. You have the risk of increased expenses.

It is easier to ignore these risks because they do not involve a number decreasing on a statement, but ignore them to your detriment.

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celia
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Re: Why am I taking so much risk?

Post by celia » Sat Nov 16, 2019 8:04 am

It sounds like you need to change your Asset Allocation to something more conservative. Instead of 50/50, try 45/55. After a month, if you still can't sleep well at night (ie, worrying about money), then change it to 40/60. If you still can't sleep well at night after another month, turn it down to 35/65.

Dandy
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Re: Why am I taking so much risk?

Post by Dandy » Sat Nov 16, 2019 8:06 am

Risk has paid off very well during the longest bull market. That tends to dull the risk feeling for most. But as we all know steep declines happen -- as well as recoveries. It gets real important as human capital declines. You expect a modest nest egg at retirement so I guess you don't feel you will have won the game so to speak. But would be in decent shape.

I suggest considering 2 things:
1. Estimate your dollar amount of drawdown once you retire that will supplement Social Security. See if you feel comfortable with putting 10 years of those dollars in very safe fixed income e.g. FDIC products, Short term bond funds, money markets. The rest in intermediate bond funds. There is nothing magic about 10 and you don't want all your fixed income allocated to this "safe" asset group. The goal is to have a decent number of years worth of retirement funding "safe". That should help ease the concern about risk in retirement.
2. When you withdraw from your nest egg use mostly equity assets if they have had a good year and mostly "safe" fixed income if equities have had a bad year. This will help preserve your "safe" assets -- so they are more like an insurance than an ATM. When equities plunge it still will feel uncomfortable but you will have several years of safe retirement funding to draw upon. That might make a difference.

A 50/50 allocation is very often used when someone is 10 years or so from retirement. As you get closer you may also want to consider going to 45/55 or even 40/60 allocation. At some point asset preservation becomes more important than maximizing growth. You still get a decent growth with 40 or 45% allocated to equities.

I was forced to retire in 2008 at age 60 a really bad time for the market. I watched my nest egg go from enough to barely enough and was facing up to 30 years in retirement. I couldn't decide was 60/40 to aggressive? was 40/60 too conservative?
Putting X years worth of dollar drawdown in "safe" fixed income let me sleep well.

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Re: Why am I taking so much risk?

Post by DesertDiva » Sat Nov 16, 2019 8:15 am

Take time to determine your expenses in retirement. See where you can conserve. Since you are 10 years out, start making budget cuts now in preparation for the changeover. This could help you weather any future drops in the market.

Also remember that bonds come with their own set of risks.

FrankLUSMC
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Re: Why am I taking so much risk?

Post by FrankLUSMC » Sat Nov 16, 2019 8:44 am

How did you feel at the end of December 2018? Equities were down 20% in very short amount of time.
If it made you twitch a little then cut back your equities. If you just shrugged and kept chugging, then you are Ok where you are.

hudson
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Re: Why am I taking so much risk?

Post by hudson » Sat Nov 16, 2019 8:59 am

bck63 wrote:
Sat Nov 16, 2019 6:56 am
Is there anyone who is extremely risk adverse?
That's me. I don't like equities. I like fixed income especially 5 year 3% +/- CDs or Vanguard Risk Potential 1-2 bond funds that pay out around 3%...distribution yield...not SEC yield. I didn't depend on equities to get me into retirement. I focused on living below my means and socking extra funds away. I retired at social security full retirement age...66. I went pretty much fixed all the way. Do the math...if you can make it, I don't see anything wrong with a high fixed percentage. How do you figure it out? Take a stab at what feels right to you. If it doesn't feel right, adjust the sails.

If my roughly 3% plan above doesn't work out, I'll adjust my sails...after checking with this forum, Bernstein, Ferri, Larimore, Kevin M, Grabiner, DBR,and Swedroe.
Last edited by hudson on Sat Nov 16, 2019 9:34 am, edited 3 times in total.

Longdog
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Re: Why am I taking so much risk?

Post by Longdog » Sat Nov 16, 2019 9:01 am

You should only take risk commensurate with your willingness, ability, and need to do so. It sounds like the amount of risk you've taken until now has benefited you, but you no longer need or are willing to do so. Perhaps you have the ability; perhaps you don't. But to sleep well at night, you should reduce your equity exposure. Probably not to zero, though. I agree with KlangFool's recommendation that something on the order of 30/70 would probably be fine. You can start in that direction by not directing any new money into equities - put all new money into fixed income.
Steve

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Re: Why am I taking so much risk?

Post by GrowthSeeker » Sat Nov 16, 2019 9:32 am

There are different lenses through which we look at the world. This leads to various rules of thumb which, hopefully, help us make decisions about complex issues while having incomplete information. For example, there is the: "what if the market dropped 50% suddenly" idea. Well, then your 50:50 nest egg would take an immediate 25% loss. But then, think about the next step: "if the market dropped 50% suddenly, statistically how long until the market would recover?" Or, since the OP has 10 years remaining until retirement, "if the market dropped 50% now, and if I keep working for 10 years, investing the same amount as I would have, what is the probability my nest egg will be _____ at retirement" (fill in the blank). There is still 10 years of human capital. The answer would be different if there were only 5 years or 1 year of human capital remaining.

Which makes me think about the bond tent concept: dropping the stock percentage as you approach retirement and for early retirement, and then increasing it again, in an attempt to avoid Sequence Of Return Risk.

And the following is excellent, so I'm repeating it:
BlueCable wrote:
Sat Nov 16, 2019 7:56 am
You are exposed to many risks in addition to the stock market prices falling. You have the risk of high inflation. You have the risk of increased expenses.

It is easier to ignore these risks because they do not involve a number decreasing on a statement, but ignore them to your detriment.
But, one still has to be able to sleep at night.
(67 yo, retired, SS no pension, 40:60)
Just because you're paranoid doesn't mean they're NOT out to get you.

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Stinky
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Re: Why am I taking so much risk?

Post by Stinky » Sat Nov 16, 2019 9:39 am

bck63 wrote:
Sat Nov 16, 2019 6:56 am
For instance, right now, the prospect of losing 20-25% of my savings is horrifying to me.
Realize that the "loss" of 20-25% of your savings is just temporary. Stocks may not recover all of their value immediately, but historically they have recovered over time.

It's only a "loss" if you you decide to panic and sell stocks when their value is depressed.

I agree with other posters that almost all folks should have some equities in their allocations to combat inflation. It's important for you, because you could easily have a 30-40 year life ahead of you, and inflation (even at 2% per year) will erode your purchasing power.

If 50% equities is too high for you, downgrade to 40% or 30%.
It's a GREAT day to be alive - Travis Tritt

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Watty
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Re: Why am I taking so much risk?

Post by Watty » Sat Nov 16, 2019 9:41 am

bck63 wrote:
Sat Nov 16, 2019 6:56 am
I am 56 years old, and my asset allocation is approximately 50/50. I am ten years from retirement.
For perspective the Vanguard Target Date 2030 fund which is designed for someone who is retiring in about ten years is 75% stocks and 25% bonds.

https://investor.vanguard.com/mutual-fu ... file/VTHRX

Their 2020 fund for someone who is about to retire is 55% stocks and 45% bonds.

https://investor.vanguard.com/mutual-fu ... file/VTWNX

And there Retirement income fund which is designed for someone that is well into retirement is 30% stocks and 70% bonds.
bck63 wrote:
Sat Nov 16, 2019 6:56 am
Is there anyone who is extremely risk adverse? How do I know the proper amount of risk to take?
Compared to the 75% stocks that the 2030 fund has your 50% stock asset allocation already had a third less stocks so you already have a pretty conservative asset allocation.

It is often recommended that you plan your retirement assuming that you will live to be 95 so you're looking at almost a 40 year investing time frame from now.

Your ability to take risk "is what it" though and you have to listen to your gut or you might end up taking more risk than you can handle then you might do something like panic and sell your stocks at a market low.

A big problem is that if 50% stocks is too much for you then 40% might not really be any better. Part of your unease might also be that you could be in a bind if you have to stop working before you are planning to.

I would suggest that instead of reducing your stocks even more you might look at other ways to make you feel more comfortable. A few ideas;

1) There are all sorts of opinions on having a paid off mortgage but for me having a paid off house made my numbers work a lot better when I retired. Renting is right for some people but is there a chance that you could have a paid off house or condo by the time you retire?

2) See this web site to get a suggested Social Security claiming strategy.

https://opensocialsecurity.com/

It is very likely that it will suggest that you delay starting Social Security until you are 70 to get a larger check then. If so then you may need additional funds to pay your expenses between the time you retire and when you start Social Security. You may want to consider these funds to be in a separate portfolio and invest them more conservatively.

3) Increase your savings rate to make you feel more secure. This could involve spending less, working more overtime, or working some part time job. Even doing things like being a handyman or cutting the grass for elderly neighbors could bring in a couple of thousand dollars a year.

4) Run a "fire drill" with your numbers as if there is a bear market where stocks drop by 40% over two years. For example here are some made up numbers that you would want replace with your own numbers.
Assumptions;
$100K nest egg invested 50/50 so $50k in stocks and $50k in bonds.
New contributions: $2,000 a year.
Interest and dividends 2%.

If the stock market dropped 40% over two years then you would very roughly have;
a) $20K loss in stocks
b) $4,000 in new contributions
c) $4,000 in interest and dividends
d) It is not guaranteed but bonds often go up when stocks go down so assume $1,000 gain in your bond value.

The net impact to your portfolio over two years would be an $11,000 loss so you would then have $89,000. That does not account for inflation but while you are in the accumulation phase a 40% drop in stocks over two years would have a much reduction in your portfolio which might be something that you could live with.

pkcrafter
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Re: Why am I taking so much risk?

Post by pkcrafter » Sat Nov 16, 2019 9:46 am

bck63 wrote:
Sat Nov 16, 2019 6:56 am
I am hoping to get a broad range of thoughts on the issue of risk, as it relates to my personal situation and risk tolerance.

I am 56 years old, and my asset allocation is approximately 50/50. I am ten years from retirement. The closer I get to retirement, and the more I accumulate, the more anxious I get about going through a big loss. For instance, right now, the prospect of losing 20-25% of my savings is horrifying to me. I will have a very modest nest egg that I expect will meet my needs; I will live on my SS and savings.

I've begun looking more closely at portfolio allocation models, and using savings rate calculators. At the current rate for money market funds (I even used 1.5%), I would 1) reach a reasonable and workable savings goal, and 2) be able to have a desired withdrawal rate that would last more than 30 years.

Is there anyone who is extremely risk adverse? How do I know the proper amount of risk to take?

Thank you very much for reading and any responses would be greatly appreciated.
bck, the first thing you must realize is every decision you make involves some sort of compromise. For instance, if you want to avoid risk, you have to accept lower portfolio return. That's fine, except you really need to overcome inflation which can reduce your spending power over time. This means there is a limit on how "safe" your allocation is or can be. Based on what I've learned, the lowest equity exposure you can use over time without losing spending power is maaaybe 35% equity, but 40% is better. The potential portfolio loss between 35 an 40% equity isn't that much, so my recommendation is go to 40% and stay there. If it bothers you to see portfolio fluctuation, then try using a target fund, lifestrategy fund, or other blended stock/bond fund.

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.

7eight9
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Re: Why am I taking so much risk?

Post by 7eight9 » Sat Nov 16, 2019 9:59 am

pkcrafter wrote:
Sat Nov 16, 2019 9:46 am
bck63 wrote:
Sat Nov 16, 2019 6:56 am
I am hoping to get a broad range of thoughts on the issue of risk, as it relates to my personal situation and risk tolerance.

I am 56 years old, and my asset allocation is approximately 50/50. I am ten years from retirement. The closer I get to retirement, and the more I accumulate, the more anxious I get about going through a big loss. For instance, right now, the prospect of losing 20-25% of my savings is horrifying to me. I will have a very modest nest egg that I expect will meet my needs; I will live on my SS and savings.

I've begun looking more closely at portfolio allocation models, and using savings rate calculators. At the current rate for money market funds (I even used 1.5%), I would 1) reach a reasonable and workable savings goal, and 2) be able to have a desired withdrawal rate that would last more than 30 years.

Is there anyone who is extremely risk adverse? How do I know the proper amount of risk to take?

Thank you very much for reading and any responses would be greatly appreciated.
bck, the first thing you must realize is every decision you make involves some sort of compromise. For instance, if you want to avoid risk, you have to accept lower portfolio return. That's fine, except you really need to overcome inflation which can reduce your spending power over time. This means there is a limit on how "safe" your allocation is or can be. Based on what I've learned, the lowest equity exposure you can use over time without losing spending power is maaaybe 35% equity, but 40% is better. The potential portfolio loss between 35 an 40% equity isn't that much, so my recommendation is go to 40% and stay there. If it bothers you to see portfolio fluctuation, then try using a target fund, lifestrategy fund, or other blended stock/bond fund.

Paul
I'm not sure that any equity is necessary to keep up with inflation. An investor always has the option of purchasing TIPS.
I guess it all could be much worse. | They could be warming up my hearse.

Dude2
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Re: Why am I taking so much risk?

Post by Dude2 » Sat Nov 16, 2019 10:07 am

50/50 is still not giving us the full picture. Maybe there are ways to de-risk the existing portfolio. For example, reduce the exposure to inflation risk and duration risk by holding Short TIPS in tax-deferred.

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Re: Why am I taking so much risk?

Post by tibbitts » Sat Nov 16, 2019 10:08 am

7eight9 wrote:
Sat Nov 16, 2019 9:59 am
pkcrafter wrote:
Sat Nov 16, 2019 9:46 am
bck63 wrote:
Sat Nov 16, 2019 6:56 am
I am hoping to get a broad range of thoughts on the issue of risk, as it relates to my personal situation and risk tolerance.

I am 56 years old, and my asset allocation is approximately 50/50. I am ten years from retirement. The closer I get to retirement, and the more I accumulate, the more anxious I get about going through a big loss. For instance, right now, the prospect of losing 20-25% of my savings is horrifying to me. I will have a very modest nest egg that I expect will meet my needs; I will live on my SS and savings.

I've begun looking more closely at portfolio allocation models, and using savings rate calculators. At the current rate for money market funds (I even used 1.5%), I would 1) reach a reasonable and workable savings goal, and 2) be able to have a desired withdrawal rate that would last more than 30 years.

Is there anyone who is extremely risk adverse? How do I know the proper amount of risk to take?

Thank you very much for reading and any responses would be greatly appreciated.
bck, the first thing you must realize is every decision you make involves some sort of compromise. For instance, if you want to avoid risk, you have to accept lower portfolio return. That's fine, except you really need to overcome inflation which can reduce your spending power over time. This means there is a limit on how "safe" your allocation is or can be. Based on what I've learned, the lowest equity exposure you can use over time without losing spending power is maaaybe 35% equity, but 40% is better. The potential portfolio loss between 35 an 40% equity isn't that much, so my recommendation is go to 40% and stay there. If it bothers you to see portfolio fluctuation, then try using a target fund, lifestrategy fund, or other blended stock/bond fund.

Paul
I'm not sure that any equity is necessary to keep up with inflation. An investor always has the option of purchasing TIPS.
TIPS today may not keep up with their target inflation rate after taxes, depending on your tax rate. Whether they keep up with your personal inflation rate depends on what you spend money on.

hudson
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Re: Why am I taking so much risk?

Post by hudson » Sat Nov 16, 2019 10:21 am

Do stocks protect against inflation?

Dude2
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Re: Why am I taking so much risk?

Post by Dude2 » Sat Nov 16, 2019 10:32 am

hudson wrote:
Sat Nov 16, 2019 10:21 am
Do stocks protect against inflation?
Stocks offer a large upside potential, so they have the ability to return more than inflation. Some believe there is a relationship because as inflation rises companies can raise the prices they charge for their goods and services to compensate. However, what I've read on this forum says there is no guarantee at all that stocks will perform well in a rising inflation scenario, and there are examples of when they failed to do so.

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Re: Why am I taking so much risk?

Post by pkcrafter » Sat Nov 16, 2019 10:45 am

hudson wrote:
Sat Nov 16, 2019 10:21 am
Do stocks protect against inflation?

If you don't have any portfolio growth, then inflation can shrink your spending power by half in about 25 years. In other words, $1000 you have today will only buy half in 25 years of what the S1000 will buy today. Holding stocks is one of the only ways you can increase your portfolio and keep pace with the spending power loss.


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: Why am I taking so much risk?

Post by cashboy » Sat Nov 16, 2019 12:45 pm

bck63 wrote:
Sat Nov 16, 2019 6:56 am

The closer I get to retirement, and the more I accumulate, the more anxious I get about going through a big loss. For instance, right now, the prospect of losing 20-25% of my savings is horrifying to me.
i understand.


bck63 wrote:
Sat Nov 16, 2019 6:56 am
How do I know the proper amount of risk to take?
keep in mind that any losses, though probable/possible, are extremely unlikely to be permanent.

as others have said, adjust your AA %s. you can do it 'in steps' until you reach a point where it 'feels right'.

here is my story:

i started at 70/30 when working.

when i stopped working i adjusted AA, in steps, over time, until i reached 50/50 - and am happy with that.

some things to consider reading about AA - using 50/50 as am example:

https://awealthofcommonsense.com/2015/0 ... portfolio/

https://awealthofcommonsense.com/2014/0 ... portfolio/

https://personal.vanguard.com/us/insigh ... ns?lang=en
Three-Fund Portfolio: FSPSX - FXAIX - FXNAX (with slight tilt of CDs - CASH - Canned Beans - Rice - Bottled Water)

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bck63
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Re: Why am I taking so much risk?

Post by bck63 » Sat Nov 16, 2019 10:01 pm

Lots of great thoughts. Thank you very much.

KlangFool
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Re: Why am I taking so much risk?

Post by KlangFool » Sat Nov 16, 2019 10:42 pm

Stinky wrote:
Sat Nov 16, 2019 9:39 am
bck63 wrote:
Sat Nov 16, 2019 6:56 am
For instance, right now, the prospect of losing 20-25% of my savings is horrifying to me.
Realize that the "loss" of 20-25% of your savings is just temporary. Stocks may not recover all of their value immediately, but historically they have recovered over time.

It's only a "loss" if you you decide to panic and sell stocks when their value is depressed.
Stinky,

OP will be withdrawing in 10 years. So, if OP runs out of the Fixed Income/bond to sell, he would sell the stock. He has limited time to wait for recovery.

KlangFool

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Stinky
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Re: Why am I taking so much risk?

Post by Stinky » Sat Nov 16, 2019 11:19 pm

KlangFool wrote:
Sat Nov 16, 2019 10:42 pm
Stinky wrote:
Sat Nov 16, 2019 9:39 am
bck63 wrote:
Sat Nov 16, 2019 6:56 am
For instance, right now, the prospect of losing 20-25% of my savings is horrifying to me.
Realize that the "loss" of 20-25% of your savings is just temporary. Stocks may not recover all of their value immediately, but historically they have recovered over time.

It's only a "loss" if you you decide to panic and sell stocks when their value is depressed.
Stinky,

OP will be withdrawing in 10 years. So, if OP runs out of the Fixed Income/bond to sell, he would sell the stock. He has limited time to wait for recovery.

KlangFool
He will start withdrawing in 10 years. However, he has a total withdrawal timeline of 30-40 years from now. Hopefully, plenty of time for recovery if such a decline occurs.
It's a GREAT day to be alive - Travis Tritt

KlangFool
Posts: 15485
Joined: Sat Oct 11, 2008 12:35 pm

Re: Why am I taking so much risk?

Post by KlangFool » Sun Nov 17, 2019 7:04 am

Stinky wrote:
Sat Nov 16, 2019 11:19 pm
KlangFool wrote:
Sat Nov 16, 2019 10:42 pm
Stinky wrote:
Sat Nov 16, 2019 9:39 am
bck63 wrote:
Sat Nov 16, 2019 6:56 am
For instance, right now, the prospect of losing 20-25% of my savings is horrifying to me.
Realize that the "loss" of 20-25% of your savings is just temporary. Stocks may not recover all of their value immediately, but historically they have recovered over time.

It's only a "loss" if you you decide to panic and sell stocks when their value is depressed.
Stinky,

OP will be withdrawing in 10 years. So, if OP runs out of the Fixed Income/bond to sell, he would sell the stock. He has limited time to wait for recovery.

KlangFool
He will start withdrawing in 10 years. However, he has a total withdrawal timeline of 30-40 years from now. Hopefully, plenty of time for recovery if such a decline occurs.
Hope to be lucky is not a good planning strategy.

KlangFool

Miriam2
Posts: 2806
Joined: Fri Nov 14, 2014 11:51 am

Re: Why am I taking so much risk?

Post by Miriam2 » Mon Nov 18, 2019 5:17 am

bck63 wrote: I am hoping to get a broad range of thoughts on the issue of risk, as it relates to my personal situation and risk tolerance.

I am 56 years old, and my asset allocation is approximately 50/50. I am ten years from retirement. The closer I get to retirement, and the more I accumulate, the more anxious I get about going through a big loss. . . . Is there anyone who is extremely risk adverse? How do I know the proper amount of risk to take?
Here is a recent thread with many good ideas about one's AA entering retirement - "60/40 vs. 30/70 - Bernstein vs. Ferri"

www.bogleheads.org/forum/viewtopic.php?f=10&t=286097

Topic Author
bck63
Posts: 955
Joined: Fri Sep 28, 2018 4:59 pm

Re: Why am I taking so much risk?

Post by bck63 » Mon Nov 18, 2019 7:03 am

Miriam2 wrote:
Mon Nov 18, 2019 5:17 am
bck63 wrote: I am hoping to get a broad range of thoughts on the issue of risk, as it relates to my personal situation and risk tolerance.

I am 56 years old, and my asset allocation is approximately 50/50. I am ten years from retirement. The closer I get to retirement, and the more I accumulate, the more anxious I get about going through a big loss. . . . Is there anyone who is extremely risk adverse? How do I know the proper amount of risk to take?
Here is a recent thread with many good ideas about one's AA entering retirement - "60/40 vs. 30/70 - Bernstein vs. Ferri"

www.bogleheads.org/forum/viewtopic.php?f=10&t=286097
Thanks very much.

Mr.BB
Posts: 1158
Joined: Sun May 08, 2016 10:10 am

Re: Why am I taking so much risk?

Post by Mr.BB » Mon Nov 18, 2019 7:15 am

FrankLUSMC wrote:
Sat Nov 16, 2019 8:44 am
How did you feel at the end of December 2018? Equities were down 20% in very short amount of time.
If it made you twitch a little then cut back your equities. If you just shrugged and kept chugging, then you are Ok where you are.
+1
"We are what we repeatedly do. Excellence, then, is not an act, but a habit."

mary1492
Posts: 60
Joined: Thu Oct 17, 2019 3:02 am

Re: Why am I taking so much risk?

Post by mary1492 » Mon Nov 18, 2019 7:36 am

.....
Last edited by mary1492 on Wed Dec 04, 2019 10:26 pm, edited 1 time in total.

BlueCable
Posts: 309
Joined: Fri Jun 17, 2016 9:20 am

Re: Why am I taking so much risk?

Post by BlueCable » Mon Nov 18, 2019 7:49 am

mary1492 wrote:
Mon Nov 18, 2019 7:36 am
[

I am with you 100%.

I am as risk averse as they come. 55 years old, 2/98 AA (yes, that's 98% in CDs, Treasuries, and municipal bonds) and darn happy with it.

I smile when I read this post of yours, because like myself, you really do understand what is going on, the risks involved, and that it *is* a scary situation to potentially see a 20-25% fall in the bottom line of your portfolio statement. It's potentially many years of working, saving, investing, all erased in a short period of time. It really doesn't matter if it is just "paper losses", you're looking at your future based on what that bottom line shows.

For someone within sight of retirement, the prospect of losing 20-25% should be horrifying. The fact that there are so many for who it is not horrifying says a lot about the current environment and understanding of saving/investing these days.

Only you can determine the proper level of risk for yourself. How you go about determining that will vary based on the level of certainty you are looking for. The more certainty you are looking for, the less upside (and downside) you open yourself up to.

My way of making the determination was to take a step back and essentially ask myself "does it really matter to me if I receive the next 25% in one year, two years, five years, or ten years"? When I got to the point of "No, it really does not matter, and there is no reason for taking the risks associated with attaining it sooner", I was happy to adjust my portfolio/strategy to reflect what I was looking for going forward ... much more certainty with significantly less risk.

Do not let the masses scare you with "but inflation will kill you". In the attempt to attain more because you've been convinced by others that $1 million or $2 million will not be enough to survive a 30 or 40 year retirement when coupled with SS, you may very well find yourself with much less and no time to be waiting around for the market to potentially recover in your favor. I would contend that with a retirement fund of $1 million or $2 million any couple could have an extremely good retirement. Could it be more enjoyable with $3 million or $4 million? Absolutely. However, if the bottom were to fall out of the markets and that amount reduced to $500,000 or $750,000 with little time to be patient to see it (potentially) rebound, it would make a big impact to how the (nearly) retired couple approaches things.
Didn't the Trinity Study and others show that over the course of a retirement, 100% bond is more likely to fail than even 100% stock? I'd consider that significant risk.

Maybe less risk now that we have inflation-linked Treasurys.

mary1492
Posts: 60
Joined: Thu Oct 17, 2019 3:02 am

Re: Why am I taking so much risk?

Post by mary1492 » Mon Nov 18, 2019 8:25 am

.....
Last edited by mary1492 on Wed Dec 04, 2019 10:27 pm, edited 1 time in total.

hudson
Posts: 2348
Joined: Fri Apr 06, 2007 9:15 am

Re: Why am I taking so much risk?

Post by hudson » Mon Nov 18, 2019 8:57 am

BlueCable wrote:
Mon Nov 18, 2019 7:49 am
Didn't the Trinity Study and others show that over the course of a retirement, 100% bond is more likely to fail than even 100% stock? I'd consider that significant risk.
I think that is correct. Lots of sources say that one should never get lower than 20% equities or 20% fixed. For me that's a rule of thumb that doesn't work for me. I personally don't like equities, so I'll take my chances with 100% high quality fixed....not unlike mary1492's holdings.

I think that the risks for high quality fixed are mainly inflation and interest rates. As inflation and interest rates fluctuate, a high percentage fixed holder doesn't have to stand still; the investor can make adjustments to the portfolio according to market conditions. Sure, the investor has to be ready to allow for capital gains or losses. Sure the investor will have to take a hit if CDs need to be cashed early. Fixed income holdings just don't lose value like equities do. I think I read that high quality fixed income investments did OK during the Great Depression.
It's a different story if one holds long bonds or low quality bonds. I would think that one would want to be at the top center of the Morningstar Style Box (https://www.morningstar.com/InvGlossary ... e_box.aspx)...which is moderate interest rate sensitivity and high quality.

I agree that the Trinity Study is correct. Yes there are risks with high fixed allocations; there are the same risks with any equity/fixed allocation. I think that a high percentage fixed investor who watches the market and follows this forum can make changes as needed to minimize losses and maximize gains. I think that many fixed investors are more interested in the return of their money rather than the return ON their money.

hudson
Posts: 2348
Joined: Fri Apr 06, 2007 9:15 am

Re: Why am I taking so much risk?

Post by hudson » Mon Nov 18, 2019 9:16 am

mary1492 wrote:
Mon Nov 18, 2019 7:36 am
For instance, right now, the prospect of losing 20-25% of my savings is horrifying to me. I will have a very modest nest egg that I expect will meet my needs; I will live on my SS and savings.
In 2008, equity losses approached 50%. Pain is a great teacher! Equities came back with a vengeance, but I'd already learned my lesson. I like the Groucho Marx Portfolio! https://25iq.com/2016/01/29/a-dozen-thi ... ucho-marx/
Groucho quote: "Those are my principles, and if you don't like them... well, I have others."

I have no argument with anyone who is 100/0 equities, 70/30, or whatever. I think that investors should do their homework, read books, and follow this forum. Then the investor should go with what fits him or her. I mostly agree with Swedroe, Bernstein, Ferri, Larimore, and many forum contributors. I also disagree a little with each and go my own way.

KlangFool
Posts: 15485
Joined: Sat Oct 11, 2008 12:35 pm

Re: Why am I taking so much risk?

Post by KlangFool » Mon Nov 18, 2019 9:51 am

Folks,

As far as I understand and remember, the Trinity service is based on a portfolio size of 25 times annual expense. OP has a portfolio size much bigger than that. Aka, 3% SWR = 33 times. So, the comment and feedback has to be adjusted with that in mind.

KlangFool

BlueCable
Posts: 309
Joined: Fri Jun 17, 2016 9:20 am

Re: Why am I taking so much risk?

Post by BlueCable » Mon Nov 18, 2019 1:19 pm

KlangFool wrote:
Mon Nov 18, 2019 9:51 am
Folks,

As far as I understand and remember, the Trinity service is based on a portfolio size of 25 times annual expense. OP has a portfolio size much bigger than that. Aka, 3% SWR = 33 times. So, the comment and feedback has to be adjusted with that in mind.

KlangFool
I didn't see where that 3% was mentioned.

At 3%, an updated version of the Trinity Study shows a 28% failure rate for a 30 year retirement at 100% intermediate-term government bond. Decreasing to 75% bond has a 0% failure rate. Can the OP stomach a 50% equity drop causing a 12.5% portfolio decrease to improve historical success from 72% to 100%?

The OP suggests using Money Market funds rather than Intermediate bonds; i don't know whether that improves or degrades results historically.

https://www.forbes.com/sites/wadepfau/2 ... -to-2018/

The OP asked "How do I know the proper amount of risk to take?" In leiu of a crystal ball, I think historical data is worth considering. Historical data suggests the OP is actually taking more risk by excluding equities.

KlangFool
Posts: 15485
Joined: Sat Oct 11, 2008 12:35 pm

Re: Why am I taking so much risk?

Post by KlangFool » Mon Nov 18, 2019 1:25 pm

BlueCable wrote:
Mon Nov 18, 2019 1:19 pm
KlangFool wrote:
Mon Nov 18, 2019 9:51 am
Folks,

As far as I understand and remember, the Trinity service is based on a portfolio size of 25 times annual expense. OP has a portfolio size much bigger than that. Aka, 3% SWR = 33 times. So, the comment and feedback has to be adjusted with that in mind.

KlangFool
I didn't see where that 3% was mentioned.

At 3%, an updated version of the Trinity Study shows a 28% failure rate for a 30 year retirement at 100% intermediate-term government bond. Decreasing to 75% bond has a 0% failure rate. Can the OP stomach a 50% equity drop causing a 12.5% portfolio decrease to improve historical success from 72% to 100%?

The OP suggests using Money Market funds rather than Intermediate bonds; i don't know whether that improves or degrades results historically.

https://www.forbes.com/sites/wadepfau/2 ... -to-2018/

The OP asked "How do I know the proper amount of risk to take?" In leiu of a crystal ball, I think historical data is worth considering. Historical data suggests the OP is actually taking more risk by excluding equities.
BlueCable,

From OP,

<<I've begun looking more closely at portfolio allocation models, and using savings rate calculators. At the current rate for money market funds (I even used 1.5%), I would 1) reach a reasonable and workable savings goal, and 2) be able to have a desired withdrawal rate that would last more than 30 years.>>

A portfolio with 1.5% return rate that can last 30 years will have SWR much lower than 4%.

KlangFool

stocknoob4111
Posts: 1237
Joined: Sun Jan 07, 2018 12:52 pm

Re: Why am I taking so much risk?

Post by stocknoob4111 » Mon Nov 18, 2019 1:28 pm

goblue100 wrote:
Sat Nov 16, 2019 7:42 am
There was a time I would have told you that I was a 90/10 guy forever. Now at something like 2 years out from retirement, I'm at 60/40. At this point, 75% of new money is going in bonds, and I wouldn't mind getting to 50/50 by retirement. That feels right for me.
The problem is that the 40% part of your portfolio isn't keeping up with inflation which is currently at 2.3% according to the BLS website.. more like 3% if you include other categories like Food and Energy. I don't know what the alternative is but we are already at the point negative real rates after taxes.

The fear is that runaway inflation like the 70s may return if current policies aren't changed.

BlueCable
Posts: 309
Joined: Fri Jun 17, 2016 9:20 am

Re: Why am I taking so much risk?

Post by BlueCable » Mon Nov 18, 2019 1:33 pm

KlangFool wrote:
Mon Nov 18, 2019 1:25 pm


A portfolio with 1.5% return rate that can last 30 years will have SWR much lower than 4%.

KlangFool
I didn't interpret 1.5% as the withdrawal rate. I interpreted 1.5% as the interest rate, and that the OP would additionally withdraw principle.

If the withdrawal rate is 1.5%, someone can do 100% Stock or 100% bond, and likely be fine. They could probably also do 100% gold or 100% pork belly futures. At that point, it's not a question of risk.

KlangFool
Posts: 15485
Joined: Sat Oct 11, 2008 12:35 pm

Re: Why am I taking so much risk?

Post by KlangFool » Mon Nov 18, 2019 1:36 pm

BlueCable wrote:
Mon Nov 18, 2019 1:33 pm
KlangFool wrote:
Mon Nov 18, 2019 1:25 pm


A portfolio with 1.5% return rate that can last 30 years will have SWR much lower than 4%.

KlangFool
I didn't interpret 1.5% as the withdrawal rate. I interpreted 1.5% as the interest rate, and that the OP would additionally withdraw principle.

If the withdrawal rate is 1.5%, someone can do 100% Stock or 100% bond, and likely be fine. They could probably also do 100% gold or 100% pork belly futures. At that point, it's not a question of risk.
BlueCable,

<<I interpreted 1.5% as the interest rate, and that the OP would additionally withdraw principle.>>

Correct. If you do the math, you would find that the portfolio would have to bigger than 25X in order for this to work over 30 years.

KlangFool

csm
Posts: 339
Joined: Sun Mar 27, 2016 7:52 am

Re: Why am I taking so much risk?

Post by csm » Mon Nov 18, 2019 2:14 pm

mary1492 wrote:
Mon Nov 18, 2019 7:36 am

I am as risk averse as they come. 55 years old, 2/98 AA (yes, that's 98% in CDs, Treasuries, and municipal bonds) and darn happy with it.
Mary1492, I have found your recent posts interesting because I am also risk averse and I have a defined benefit pension with COLA to cover our fixed expenses in retirement so feel I do not have to take risk with our portfolio. I'm having a difficult time determining my AA for investments which are currently around 50/50 but I'm leaning towards a 30/70 or even more conservative allocation.

Could you provide more details on how you structure your holdings, e.g. do you use CD ladders and, if so, do you purchase CDs outright or use a brokerage; which Treasuries and bond funds, if in fact, you purchase mutual funds. I assume perhaps i-Bonds as well (I've been purchasing the maximum allowable for the past five years and intend to continue).

Thanks!

Topic Author
bck63
Posts: 955
Joined: Fri Sep 28, 2018 4:59 pm

Re: Why am I taking so much risk?

Post by bck63 » Mon Nov 18, 2019 4:00 pm

mary1492 wrote:
Mon Nov 18, 2019 7:36 am
bck63 wrote:
Sat Nov 16, 2019 6:56 am
I am hoping to get a broad range of thoughts on the issue of risk, as it relates to my personal situation and risk tolerance.

I am 56 years old, and my asset allocation is approximately 50/50. I am ten years from retirement. The closer I get to retirement, and the more I accumulate, the more anxious I get about going through a big loss. For instance, right now, the prospect of losing 20-25% of my savings is horrifying to me. I will have a very modest nest egg that I expect will meet my needs; I will live on my SS and savings.

I've begun looking more closely at portfolio allocation models, and using savings rate calculators. At the current rate for money market funds (I even used 1.5%), I would 1) reach a reasonable and workable savings goal, and 2) be able to have a desired withdrawal rate that would last more than 30 years.

Is there anyone who is extremely risk adverse? How do I know the proper amount of risk to take?

Thank you very much for reading and any responses would be greatly appreciated.
I am with you 100%.

I am as risk averse as they come. 55 years old, 2/98 AA (yes, that's 98% in CDs, Treasuries, and municipal bonds) and darn happy with it.

I smile when I read this post of yours, because like myself, you really do understand what is going on, the risks involved, and that it *is* a scary situation to potentially see a 20-25% fall in the bottom line of your portfolio statement. It's potentially many years of working, saving, investing, all erased in a short period of time. It really doesn't matter if it is just "paper losses", you're looking at your future based on what that bottom line shows.

For someone within sight of retirement, the prospect of losing 20-25% should be horrifying. The fact that there are so many for who it is not horrifying says a lot about the current environment and understanding of saving/investing these days.

Only you can determine the proper level of risk for yourself. How you go about determining that will vary based on the level of certainty you are looking for. The more certainty you are looking for, the less upside (and downside) you open yourself up to.

My way of making the determination was to take a step back and essentially ask myself "does it really matter to me if I receive the next 25% in one year, two years, five years, or ten years"? When I got to the point of "No, it really does not matter, and there is no reason for taking the risks associated with attaining it sooner", I was happy to adjust my portfolio/strategy to reflect what I was looking for going forward ... much more certainty with significantly less risk.

Do not let the masses scare you with "but inflation will kill you". In the attempt to attain more because you've been convinced by others that $1 million or $2 million will not be enough to survive a 30 or 40 year retirement when coupled with SS, you may very well find yourself with much less and no time to be waiting around for the market to potentially recover in your favor. I would contend that with a retirement fund of $1 million or $2 million any couple could have an extremely good retirement. Could it be more enjoyable with $3 million or $4 million? Absolutely. However, if the bottom were to fall out of the markets and that amount reduced to $500,000 or $750,000 with little time to be patient to see it (potentially) rebound, it would make a big impact to how the (nearly) retired couple approaches things.
Thank you very much for your perspective. It helped a lot.

Topic Author
bck63
Posts: 955
Joined: Fri Sep 28, 2018 4:59 pm

Re: Why am I taking so much risk?

Post by bck63 » Thu Jan 09, 2020 4:28 pm

Watty wrote:
Sat Nov 16, 2019 9:41 am
bck63 wrote:
Sat Nov 16, 2019 6:56 am
I am 56 years old, and my asset allocation is approximately 50/50. I am ten years from retirement.
For perspective the Vanguard Target Date 2030 fund which is designed for someone who is retiring in about ten years is 75% stocks and 25% bonds.

https://investor.vanguard.com/mutual-fu ... file/VTHRX

Their 2020 fund for someone who is about to retire is 55% stocks and 45% bonds.

https://investor.vanguard.com/mutual-fu ... file/VTWNX

And there Retirement income fund which is designed for someone that is well into retirement is 30% stocks and 70% bonds.
bck63 wrote:
Sat Nov 16, 2019 6:56 am
Is there anyone who is extremely risk adverse? How do I know the proper amount of risk to take?
Compared to the 75% stocks that the 2030 fund has your 50% stock asset allocation already had a third less stocks so you already have a pretty conservative asset allocation.

It is often recommended that you plan your retirement assuming that you will live to be 95 so you're looking at almost a 40 year investing time frame from now.

Your ability to take risk "is what it" though and you have to listen to your gut or you might end up taking more risk than you can handle then you might do something like panic and sell your stocks at a market low.

A big problem is that if 50% stocks is too much for you then 40% might not really be any better. Part of your unease might also be that you could be in a bind if you have to stop working before you are planning to.

I would suggest that instead of reducing your stocks even more you might look at other ways to make you feel more comfortable. A few ideas;

1) There are all sorts of opinions on having a paid off mortgage but for me having a paid off house made my numbers work a lot better when I retired. Renting is right for some people but is there a chance that you could have a paid off house or condo by the time you retire?

2) See this web site to get a suggested Social Security claiming strategy.

https://opensocialsecurity.com/

It is very likely that it will suggest that you delay starting Social Security until you are 70 to get a larger check then. If so then you may need additional funds to pay your expenses between the time you retire and when you start Social Security. You may want to consider these funds to be in a separate portfolio and invest them more conservatively.

3) Increase your savings rate to make you feel more secure. This could involve spending less, working more overtime, or working some part time job. Even doing things like being a handyman or cutting the grass for elderly neighbors could bring in a couple of thousand dollars a year.

4) Run a "fire drill" with your numbers as if there is a bear market where stocks drop by 40% over two years. For example here are some made up numbers that you would want replace with your own numbers.
Assumptions;
$100K nest egg invested 50/50 so $50k in stocks and $50k in bonds.
New contributions: $2,000 a year.
Interest and dividends 2%.

If the stock market dropped 40% over two years then you would very roughly have;
a) $20K loss in stocks
b) $4,000 in new contributions
c) $4,000 in interest and dividends
d) It is not guaranteed but bonds often go up when stocks go down so assume $1,000 gain in your bond value.

The net impact to your portfolio over two years would be an $11,000 loss so you would then have $89,000. That does not account for inflation but while you are in the accumulation phase a 40% drop in stocks over two years would have a much reduction in your portfolio which might be something that you could live with.
Watty - I am just realizing I did not say thank you for this great response to my post. It has been really helpful and I continue to look back on it and use it. It is helping. Thank you!

dharrythomas
Posts: 1024
Joined: Tue Jun 19, 2007 4:46 pm

Re: Why am I taking so much risk?

Post by dharrythomas » Thu Jan 09, 2020 10:07 pm

Watty wrote:
Sat Nov 16, 2019 9:41 am
bck63 wrote:
Sat Nov 16, 2019 6:56 am
I am 56 years old, and my asset allocation is approximately 50/50. I am ten years from retirement.
For perspective the Vanguard Target Date 2030 fund which is designed for someone who is retiring in about ten years is 75% stocks and 25% bonds.

https://investor.vanguard.com/mutual-fu ... file/VTHRX

Their 2020 fund for someone who is about to retire is 55% stocks and 45% bonds.

https://investor.vanguard.com/mutual-fu ... file/VTWNX

And there Retirement income fund which is designed for someone that is well into retirement is 30% stocks and 70% bonds.
bck63 wrote:
Sat Nov 16, 2019 6:56 am
Is there anyone who is extremely risk adverse? How do I know the proper amount of risk to take?
Compared to the 75% stocks that the 2030 fund has your 50% stock asset allocation already had a third less stocks so you already have a pretty conservative asset allocation.

It is often recommended that you plan your retirement assuming that you will live to be 95 so you're looking at almost a 40 year investing time frame from now.

Your ability to take risk "is what it" though and you have to listen to your gut or you might end up taking more risk than you can handle then you might do something like panic and sell your stocks at a market low.

A big problem is that if 50% stocks is too much for you then 40% might not really be any better. Part of your unease might also be that you could be in a bind if you have to stop working before you are planning to.

I would suggest that instead of reducing your stocks even more you might look at other ways to make you feel more comfortable. A few ideas;

1) There are all sorts of opinions on having a paid off mortgage but for me having a paid off house made my numbers work a lot better when I retired. Renting is right for some people but is there a chance that you could have a paid off house or condo by the time you retire?

2) See this web site to get a suggested Social Security claiming strategy.

https://opensocialsecurity.com/

It is very likely that it will suggest that you delay starting Social Security until you are 70 to get a larger check then. If so then you may need additional funds to pay your expenses between the time you retire and when you start Social Security. You may want to consider these funds to be in a separate portfolio and invest them more conservatively.

3) Increase your savings rate to make you feel more secure. This could involve spending less, working more overtime, or working some part time job. Even doing things like being a handyman or cutting the grass for elderly neighbors could bring in a couple of thousand dollars a year.

4) Run a "fire drill" with your numbers as if there is a bear market where stocks drop by 40% over two years. For example here are some made up numbers that you would want replace with your own numbers.
Assumptions;
$100K nest egg invested 50/50 so $50k in stocks and $50k in bonds.
New contributions: $2,000 a year.
Interest and dividends 2%.

If the stock market dropped 40% over two years then you would very roughly have;
a) $20K loss in stocks
b) $4,000 in new contributions
c) $4,000 in interest and dividends
d) It is not guaranteed but bonds often go up when stocks go down so assume $1,000 gain in your bond value.

The net impact to your portfolio over two years would be an $11,000 loss so you would then have $89,000. That does not account for inflation but while you are in the accumulation phase a 40% drop in stocks over two years would have a much reduction in your portfolio which might be something that you could live with.
The Vanguard website, links above, says that 2030 is ~69% stocks and 2020 is about 51% stocks.

smectym
Posts: 839
Joined: Thu May 26, 2011 5:07 pm

Re: Why am I taking so much risk?

Post by smectym » Thu Jan 09, 2020 11:47 pm

If you’re having anxiety about too much risk in the portfolio, I would argue that you’re definitionally correct: because if you’re having anxiety about it then you have too much risk in the portfolio.

You should trust your view, or instinct, however we want to characterize the amalgam of opinion and emotion that composes your risk aversion. You’re not wrong and there are lots of solid reasons to adopt a more conservative allocation as one approaches retirement.

The caveat is that one should proceed very slowly. Big and sudden lurches in portfolio allocation are probably not wise. Make a small incremental reallocation. Then pause. Re-evaluate in 3 months. Then, If necessary, make another modest switch toward risk-off.

User avatar
Watty
Posts: 18731
Joined: Wed Oct 10, 2007 3:55 pm

Re: Why am I taking so much risk?

Post by Watty » Thu Jan 09, 2020 11:56 pm

dharrythomas wrote:
Thu Jan 09, 2020 10:07 pm
The Vanguard website, links above, says that 2030 is ~69% stocks and 2020 is about 51% stocks.
That is interesting, for the 2030 fund on the product overview tab it still says;
The 2030 fund invests in 4 Vanguard index funds, holding approximately 75% of assets in stocks and 25% in bonds.
but on the Portfolio and Management tab it says.
68.64% Stocks
31.31% Bonds
0.05% Short-term reserves

as of 11/30/19
I don't know why there is so much difference.

User avatar
Watty
Posts: 18731
Joined: Wed Oct 10, 2007 3:55 pm

Re: Why am I taking so much risk?

Post by Watty » Thu Jan 09, 2020 11:57 pm

dharrythomas wrote:
Thu Jan 09, 2020 10:07 pm
The Vanguard website, links above, says that 2030 is ~69% stocks and 2020 is about 51% stocks.
That is interesting, for the 2030 fund on the product overview tab it still says;
The 2030 fund invests in 4 Vanguard index funds, holding approximately 75% of assets in stocks and 25% in bonds.
but on the Portfolio and Management tab it says.
68.64% Stocks
31.31% Bonds
0.05% Short-term reserves

as of 11/30/19
I don't know why there is so much difference.

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