I have a wild [asset allocation] theory. Poke some holes in it.

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zeal
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I have a wild [asset allocation] theory. Poke some holes in it.

Post by zeal » Mon Feb 10, 2020 10:15 am

Heavy bond allocation upon initially beginning investing. 50/50 asset allocation or greater, perhaps even 0/100 stocks/bonds.

Once the $ amount of bonds equals a comfortable number, then all future contributions go to stocks (whatever your desired US/Int'l split is). My "comfortable number" for example would be that my emergency fund plus bond holdings equal 1-2 years' worth of expenses--in the event we are faced with a situation where our emergency fund is not sufficient, we would have our bond "backup" emergency fund... The emergency fund for our emergency fund, to be replenished when we are back on our feet and the market recovers (and stocks are "full price" again).
  • From then on, the only additional contributions to bonds are just to keep your $ amount of bonds up with inflation/lifestyle creep. Assuming bonds roughly keep up with inflation, likely no additional buying of bonds during the majority of the accumulation phase. In fact, you may even be selling some to buy more stocks.
x years from retirement, all future contributions go to bonds to bring you up to a comfortable $ amount for retirement (e.g., the usual 10-20 years' worth of expenses). Obviously x is a very personal number which is determined by desired bond holdings in retirement, how much you can contribute, value of current portfolio, etc.
  • From then on, the only additional contributions to stocks are just in accounts where buying bonds doesn't make sense to you (perhaps Roth IRAs, taxable accounts).
This idea is based simply off the assumption that the value of the stock market will go up over the long term, so ideally one would like to invest heavily in stocks for the longest possible period while they are young and stocks are the "cheapest" in the investor's lifetime. The initial investment in bonds is a lot like building up your initial emergency fund. When you don't have much money it feels like it takes forever, but once you have it the peace of mind is there and the job is merely maintaining it. Basically, the idea is to buy bonds for a couple years, buy stocks for the majority of your working years, then buy bonds for your last few working years.

This is by no means my actual plan--just a fun idea I came up with and was curious how Bogleheads will take it apart. After writing it out and rereading, it's kind of like paying off/overpaying your debts before you begin investing--100% focused on one thing at a time rather than doing it all at once. Some might find it interesting while others might find it ludicrous. Thanks for any input!

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Re: I have a wild theory. Poke some holes in it.

Post by KlangFool » Mon Feb 10, 2020 10:23 am

OP,

Please evaluate your approach against the following simpler approach.

A) An emergency fund of 3 to 6 months, 6 to 12 months, 12 to 24 months. Aka, increase your emergency fund as your portfolio gets bigger.

B) Fixed AA of 60/40 all the time.

The idea is by keeping a fixed AA of 60/40, you will always "buy low". You will not buy a bond or stock when they are expensive.

<<the value of the stock market will go up over the long term,>>

The stock market oscillates. Ditto for the bond market. By keeping a fixed AA, you buy whatever is on sale.

This is a dummy approach. No market timing or adjustment of AA is needed. The person does not need to be timed correctly when he/she adjusted the AA.

KlangFool

TheLaughingCow
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Re: I have a wild theory. Poke some holes in it.

Post by TheLaughingCow » Mon Feb 10, 2020 11:08 am

Your plan makes sense to me

chevca
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Re: I have a wild theory. Poke some holes in it.

Post by chevca » Mon Feb 10, 2020 11:31 am

Sounds like a fancy way of saying one wants a real big and tiered emergency fund built up before investing. I don't see any reason to call it other than what it is.

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firebirdparts
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Re: I have a wild theory. Poke some holes in it.

Post by firebirdparts » Mon Feb 10, 2020 11:36 am

It's a luxurious kind of a plan, and of course works backwards compared to the "life cycle investing" concept. If times and returns are kind of normal and boring, then the duration of saving up 2 years expenses in bonds is going to really hurt the overall life-long returns of somebody with for example a 15% savings rate. It would just take too long. That was me, basically. Back then, a 15% savings rate was considered a lot. My wife kept telling me to stop saving, in fact.

Now, that said, as you may have already noticed on this site, there are lots of people who already saved up a lot more before they ever create an account here. I don't that is too typical, but certainly people can do it. For the kind of person who saves up more than 2 years expenses before age 30, then this would be ideal for them. They could be super-conservative but during the earning years also be 80% equities, the same person. That's a useful idea.

I guess this is just another way of finding out that investing style is not all that important as long as you have good investments. Saving is a whole lot more important.
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JupiterJones
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Re: I have a wild theory. Poke some holes in it.

Post by JupiterJones » Mon Feb 10, 2020 11:39 am

So you want to miss out on stock growth during the very early period while you're building up your bond allocation?

Then you want to slowly drift into a sensible stock/bond ratio over the next several years?

At which point you begin overweighting stocks, and thus exposing yourself to more risk than you'd otherwise be comfortable with?

Then you finally start adding more bonds back in to get it where you want it?

I don't know... sounds kind of goofy to me. I'm admittedly old-fashioned, but those swings in asset allocation strike me as unnecessary, compared to just picking an allocation that you feel good about with and sticking with it.

What if there's a big rally during the time you're 100% in bonds? What if there's a huge recession during the time you're way overweighted in stocks and your portfolio winds up tanking far more than you're comfy with?
Stay on target...

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Re: I have a wild theory. Poke some holes in it.

Post by rich126 » Mon Feb 10, 2020 11:43 am

JupiterJones wrote:
Mon Feb 10, 2020 11:39 am
So you want to miss out on stock growth during the very early period while you're building up your bond allocation?

Then you want to slowly drift into a sensible stock/bond ratio over the next several years?

At which point you begin overweighting stocks, and thus exposing yourself to more risk than you'd otherwise be comfortable with?

Then you finally start adding more bonds back in to get it where you want it?

I don't know... sounds kind of goofy to me. I'm admittedly old-fashioned, but those swings in asset allocation strike me as unnecessary, compared to just picking an allocation that you feel good about with and sticking with it.

What if there's a big rally during the time you're 100% in bonds? What if there's a huge recession during the time you're way overweighted in stocks and your portfolio winds up tanking far more than you're comfy with?
Missing out early on stock gains may be painful later. It sounds more like a plan for a higher income individual who can save a lot of money quickly and losing out on some gains early won't hurt as much as it would for a more average person.

Also an emergency fund is important but when I was younger I never had much of one. My money went to a house and my salary wasn't that high. Fortunately the job was very stable so the need for a 6 month emergency fund was extremely low. Now once you have a family and a less stable job, it becomes a lot more important.

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Taylor Larimore
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"Poke some holes in it." -- Here's one.

Post by Taylor Larimore » Mon Feb 10, 2020 11:43 am

Bogleheads:

To my knowledge, ALL Target Retirement Funds, designed by experts, start with a high allocation to stocks and low allocation to bonds. This ratio reverses as the investor ages.

When we are out of step in a parade we might be right, but it is wise to reconsider.

Best wishes.
Taylor
Jack Bogle's Words of Wisdom: "As we age, we usually have (1) more wealth to protect, (2) less time to recoup severe losses, (3) greater need for income, and (4) perhaps an increased nervousness as markets jump around. All four of these factors suggest more bonds as we age."
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CyberBob
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Re: I have a wild theory. Poke some holes in it.

Post by CyberBob » Mon Feb 10, 2020 11:48 am

You may enjoy Rick Ferri's Flight Path Approach to Age-Based Asset Allocation, which also suggests more conservative allocations early in ones investing career and in later years.

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Re: I have a wild theory. Poke some holes in it.

Post by Ben Mathew » Mon Feb 10, 2020 12:01 pm

This is a good approach at its core, with some possibilities for improvements. It's fairly close to the lifecycle investing approach, which has a lot of advantages over typical asset allocation strategies.

Lifecycle investing tells us that you minimize stock risk by spreading it out as much as possible over a lifetime. That means getting heavy into stocks as early as possible, which is the core of what you are proposing. The main difference from your approach is that there is not a fixed x after which you invest only in bonds. Rather than switch 100% to bonds for future contributions, one would keep rebalancing back to the target AA. This would be an improvement over your proposed strategy.

Another difference between your approach and the lifecycle approach would be the early bond buildup for emergency funds. Lifecycle investing would emphasize the importance of building up your stock position as early as possible. A substantial buildup of bonds very early in life might be too expensive.
This idea is based simply off the assumption that the value of the stock market will go up over the long term, so ideally one would like to invest heavily in stocks for the longest possible period while they are young and stocks are the "cheapest" in the investor's lifetime.
Lifecycle investing would say that spreading stock risk over as many years as possible reduces risk, not eliminate them. Even over the long term, stocks might not go up as much as expected. But the odds are better because you've spread your stock investment out over your lifetime.

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Re: I have a wild theory. Poke some holes in it.

Post by Vanguard Fan 1367 » Mon Feb 10, 2020 12:08 pm

I like the Asset Allocation approach, which I started in 2014 after reading John Bogle. I like the thought of staying between 70/30 and 30/70. It would be nice if I could quote who said that but I think that it makes sense. I believe that with the wife's input we for a while had 80% Stocks during this latest bull market, which worked out fine, but now we are back to between 70/30 and 30/70.

Long terms studies on staying within those borders shows that things have worked out well for those investors.

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Re: I have a wild theory. Poke some holes in it.

Post by alex_686 » Mon Feb 10, 2020 12:13 pm

This sounds like Constant Proportion Portfolio Insurance. It is a convex rebalancing technique. Having a fix percentage would be a concave technique.

https://en.m.wikipedia.org/wiki/Constan ... _insurance

Mr. Rumples
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Re: I have a wild theory. Poke some holes in it.

Post by Mr. Rumples » Mon Feb 10, 2020 12:29 pm

Your plan sort of sounds like a version of a rising equity glide-path:

https://www.kitces.com/blog/should-equi ... ly-better/

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Re: I have a wild theory. Poke some holes in it.

Post by Top99% » Mon Feb 10, 2020 12:36 pm

I think it partly depends on how secure one's job is. If you work in a volatile area like technology having a 1-2 year emergency fund in bonds, CDs or something similar is almost a necessity. If you are one of those few lucky people who have stable employment prospects stocks return more than bonds most of the time so you increase your odds of meeting your target nest egg size by increasing your allocation to them.
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Re: I have a wild theory. Poke some holes in it.

Post by james22 » Mon Feb 10, 2020 12:37 pm

Search this forum for Zvi Bodie.

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Re: I have a wild theory. Poke some holes in it.

Post by MathWizard » Mon Feb 10, 2020 12:42 pm

You have to accept volatility risk sometime. Better to do that when you are young rather than when you
are old.

I agree that you want an EF, or liquidity fund as I call it, but after that, I would recommend stock heavy first,
then go to bonds.

If you can get historical bond returns and total stock returns, you could do a modified Trinity study.
In that study, the AA stayed the same. You are proposing a changing AA which is the opposite
of a target date retirement fund. You could compare Trinity, with target date, and with your strategy, and
see what the the outcome would be with say a 70 year time frame (40 year accumulation and 30 year retirement.)

You would also have to consider how much is invested in the 40 years, and what that profile looks like. In my case, which
I suspect is typical, contributions start small and grow in real terms, as my career progressed, and loans were paid off.

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Re: I have a wild theory. Poke some holes in it.

Post by MathWizard » Mon Feb 10, 2020 12:51 pm

CyberBob wrote:
Mon Feb 10, 2020 11:48 am
You may enjoy Rick Ferri's Flight Path Approach to Age-Based Asset Allocation, which also suggests more conservative allocations early in ones investing career and in later years.
Thanks for this, I had not seen it.

This is probably a good idea. It is not mathematically optimal, but behavior in investing is very important.

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Re: I have a wild theory. Poke some holes in it.

Post by garlandwhizzer » Mon Feb 10, 2020 1:35 pm

The expected real returns of bonds going forward are zero real or close to it, which makes it likely that the heavy bond portfolio will likely show close to zero real inflation adjusted return for the foreseeable future. This is especially damaging to portfolio value growth if you're holding 100% bonds. Markets at present are such that forward expected real returns on quality bonds are about zero in the US and less than zero in other DMs. It has not always been that way especially during the massive bond bull market that lasted more than 3 decades following 1982 when bonds were not only safe but also produced robust returns. Those days are over for the foreseeable future. Backtesting in bonds now gives results that are a joke. As I see it there is no way now to get substantial positive real returns going forward without taking on portfolio risk. The more risk you take on with equity, the higher your expected positive returns. If you have a secure income stream and an adequate emergency fund I believe it's reasonable for investors in the early or mid-accumulation phase who are not risk averse to be 100% in stocks, rather than 100% in bonds. Bonds are important for stability but they are lousy at present for expected returns. 10 year Treasuries currently yield less than the last 12 months of inflation, indicating their real returns are negative, not exactly what you want in the accumulation phase.

Garland Whizzer

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Re: I have a wild theory. Poke some holes in it.

Post by KlangFool » Mon Feb 10, 2020 1:48 pm

OP,

The bottom line is very simple. What is your saving rate in terms of your annual expense?

A) If you save 1 year of your expense every year, you would start investing in the stock after 2 years.

B) If you save 10% of your annual expense every year, you would need to wait 10 years before you start investing in the stock. Even assuming 40 years of investing, waiting 10 years is too much.

I believe in a simpler and balanced approach.

<< A) An emergency fund of 3 to 6 months, 6 to 12 months, 12 to 24 months. Aka, increase your emergency fund as your portfolio gets bigger.

B) Fixed AA of 60/40 all the time.>>

This works across all the saving rates.

KlangFool

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Re: I have a wild theory. Poke some holes in it.

Post by JBTX » Mon Feb 10, 2020 2:41 pm

CyberBob wrote:
Mon Feb 10, 2020 11:48 am
You may enjoy Rick Ferri's Flight Path Approach to Age-Based Asset Allocation, which also suggests more conservative allocations early in ones investing career and in later years.
I am really glad I did not follow that model.

For the typical clueless investor that may be the way to go. But hopefully, with proper education and expectations, a young investor can stick with the ups and downs.

vipertom1970
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Re: I have a wild theory. Poke some holes in it.

Post by vipertom1970 » Mon Feb 10, 2020 3:07 pm

Thanks God I did the opposite of the OP's theory !
100% equities first 25 years and then 60/40(40% bonds = 22x expenses and will never rebalance).

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Re: I have a wild theory. Poke some holes in it.

Post by Sandtrap » Mon Feb 10, 2020 3:11 pm

KlangFool wrote:
Mon Feb 10, 2020 10:23 am
OP,

Please evaluate your approach against the following simpler approach.

A) An emergency fund of 3 to 6 months, 6 to 12 months, 12 to 24 months. Aka, increase your emergency fund as your portfolio gets bigger.

B) Fixed AA of 60/40 all the time.

The idea is by keeping a fixed AA of 60/40, you will always "buy low". You will not buy a bond or stock when they are expensive.

<<the value of the stock market will go up over the long term,>>

The stock market oscillates. Ditto for the bond market. By keeping a fixed AA, you buy whatever is on sale.

This is a dummy approach. No market timing or adjustment of AA is needed. The person does not need to be timed correctly when he/she adjusted the AA.

KlangFool
+1
Great points.

OP: keep it simple, go with what works and is proven, re-inventing the wheel isn't needed though sometimes fun.
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Re: I have a wild theory. Poke some holes in it.

Post by GetMeToRetirement » Mon Feb 10, 2020 3:34 pm

"How to make a million dollars: first, get a million dollars..."

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Re: I have a wild theory. Poke some holes in it.

Post by FoolMeOnce » Mon Feb 10, 2020 3:50 pm

vipertom1970 wrote:
Mon Feb 10, 2020 3:07 pm
Thanks God I did the opposite of the OP's theory !
100% equities first 25 years and then 60/40(40% bonds = 22x expenses and will never rebalance).
This is actually what the OP is proposing. Just with a big emergency fund.

OP's proposal: build an emergency fund OP is comfortable with, invest 100% stocks, then start adding bonds when approaching retirement. There's nothing "wild" about this theory. It's 100% equities for young investors, gliding to a healthy dose of bonds toward retirement. It just involves an emergency fund that is a bit larger than the common range of recommendations.

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Re: I have a wild theory. Poke some holes in it.

Post by fortyofforty » Mon Feb 10, 2020 7:25 pm

OP,

I would suggest that, when young and starting out, you will have no real idea how large an emergency fund you'll want or need. It is almost impossible to estimate your expenses, your dependents, or your lifestyle early in life. As your assets grow, so usually do your expenses.
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Re: I have a wild theory. Poke some holes in it.

Post by lock.that.stock » Mon Feb 10, 2020 8:40 pm

I understand your logic however from my vantage point there are some flaws. Consider the following:

- How long will it take you to save 2 years worth of emergency funds? Consider the opportunity cost of holding out on stock investments while you build up 2 years worth of emergency funds. Consider the compounding effect of the gains you would have earned had you started out by doing the reverse (heavy stocks while younger, heavy bonds while older).

- Once you get to your 2 year target savings of emergency funds and after missing out on the stock market while you were saving, now you start injecting money into stocks. How long will it take you to save enough "stock" money to at least match or exceed your bond allocation (so you can get to a 50/50 allocation)? Consider your age and whether you would be better off investing even more in stocks (80/20 if you're 20-40). How long till you get to a reasonable stock allocation.

- If you invest in stocks early - you can put away some of the appreciation / dividends towards your emergency fund. That might help you save faster without missing out on the returns from stocks.

Side note - why do you feel the need to save 2 year's worth of emergency fund? Seems excessive to me.

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zeal
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Re: I have a wild theory. Poke some holes in it.

Post by zeal » Mon Feb 10, 2020 11:03 pm

Really great points from all responses, thanks for your feedback. I enjoyed reading the links to Rick Ferri's Flight Path Approach and reading about Zvi Bodie was very new to me as well.

Agreed--it is essentially building up a giant emergency fund (or maybe a "behavioral buffer" is a good term) initially before beginning investing. An emergency fund is a personal number, so someone more risk-averse might like a heavy initial bond holding in order to be comfortable with the fluctuations of their 401k balance due to stock exposure throughout their working years. Those who are more risk-tolerant would probably say it's phooey and just go 100% stocks from the get-go. To each his own!

I often see on this site someone stating that saving rate is more important than asset allocation, especially in the early years. The fact that I've seen this repeated so much is actually what gave me the idea. If AA isn't that important initially, then someone with a high saving rate investing 100% in bonds for a year or two wouldn't really be that big of a deal--they're done with this little step quickly and, assuming their income will increase during their working lifetime (as well as contributions), their equity holdings will quickly dwarf their bond holdings.

Like others said, this strategy might work for high-income/high-saving-rate individuals, but the average investor is likely better off staying in the 30/70 to 70/30 range. That being said, I am an average, boring investor with an average, boring plan of my own. It's interesting thought problems like this that keep my mind going as I continue plugging away with my average, boring plan. :) Thanks again.

Also, to clarify, a couple questions others asked: our saving rate is ~30% currently and I don't feel the need to save 2 years' worth of expenses as an emergency fund. I just threw that number out there to appeal to those on the site more conservative than me. My own emergency fund is more along the lines of 6-months' expenses and we are very comfortable there for now. We are currently 90/10 stocks/bonds and my plan is age-20 in bonds (I just turned 31) until we hit 60/40, where I hope to stay for the duration of retirement. I may modify the 60/40 plan as I get closer to retirement/decumulation since I don't know much about that animal yet!

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Re: I have a wild theory. Poke some holes in it.

Post by CurlyDave » Mon Feb 10, 2020 11:24 pm

garlandwhizzer wrote:
Mon Feb 10, 2020 1:35 pm
The expected real returns of bonds going forward are zero real or close to it, which makes it likely that the heavy bond portfolio will likely show close to zero real inflation adjusted return for the foreseeable future. This is especially damaging to portfolio value growth if you're holding 100% bonds. Markets at present are such that forward expected real returns on quality bonds are about zero in the US and less than zero in other DMs. It has not always been that way especially during the massive bond bull market that lasted more than 3 decades following 1982 when bonds were not only safe but also produced robust returns. Those days are over for the foreseeable future. Backtesting in bonds now gives results that are a joke. As I see it there is no way now to get substantial positive real returns going forward without taking on portfolio risk. The more risk you take on with equity, the higher your expected positive returns. If you have a secure income stream and an adequate emergency fund I believe it's reasonable for investors in the early or mid-accumulation phase who are not risk averse to be 100% in stocks, rather than 100% in bonds. Bonds are important for stability but they are lousy at present for expected returns. 10 year Treasuries currently yield less than the last 12 months of inflation, indicating their real returns are negative, not exactly what you want in the accumulation phase.

Garland Whizzer
+1

While I am now long past the accumulation phase this is very much the strategy I used to accumulate our portfolio.

The only major difference is that I never had a dedicated emergency fund. I always considered our entire portfolio to be our emergency fund. Every 6 months or so, I would "war game" how we would access this in a real emergency to minimize the pain of a forced withdrawal. The point was not to plan out what to do in absolute detail, but to know what to access first in an emergency. If the situtation ever arose, this would buy us enough time to plan out the rest of the access in much greater detail.

I realize this is not the usual recommendation, but do I really want to have 6-12 months of expenses in essentially "dead" cash or bonds, or am I willing to put it to work, taking the chance that I might have to withdraw some at a very bad time? For us, the gamble paid off.

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Re: I have a wild theory. Poke some holes in it.

Post by Unladen_Swallow » Tue Feb 11, 2020 1:48 am

zeal wrote:
Mon Feb 10, 2020 10:15 am
Heavy bond allocation upon initially beginning investing. 50/50 asset allocation or greater, perhaps even 0/100 stocks/bonds.

Once the $ amount of bonds equals a comfortable number, then all future contributions go to stocks (whatever your desired US/Int'l split is). My "comfortable number" for example would be that my emergency fund plus bond holdings equal 1-2 years' worth of expenses--in the event we are faced with a situation where our emergency fund is not sufficient, we would have our bond "backup" emergency fund... The emergency fund for our emergency fund, to be replenished when we are back on our feet and the market recovers (and stocks are "full price" again).
  • From then on, the only additional contributions to bonds are just to keep your $ amount of bonds up with inflation/lifestyle creep. Assuming bonds roughly keep up with inflation, likely no additional buying of bonds during the majority of the accumulation phase. In fact, you may even be selling some to buy more stocks.
x years from retirement, all future contributions go to bonds to bring you up to a comfortable $ amount for retirement (e.g., the usual 10-20 years' worth of expenses). Obviously x is a very personal number which is determined by desired bond holdings in retirement, how much you can contribute, value of current portfolio, etc.
  • From then on, the only additional contributions to stocks are just in accounts where buying bonds doesn't make sense to you (perhaps Roth IRAs, taxable accounts).
This idea is based simply off the assumption that the value of the stock market will go up over the long term, so ideally one would like to invest heavily in stocks for the longest possible period while they are young and stocks are the "cheapest" in the investor's lifetime. The initial investment in bonds is a lot like building up your initial emergency fund. When you don't have much money it feels like it takes forever, but once you have it the peace of mind is there and the job is merely maintaining it. Basically, the idea is to buy bonds for a couple years, buy stocks for the majority of your working years, then buy bonds for your last few working years.

This is by no means my actual plan--just a fun idea I came up with and was curious how Bogleheads will take it apart. After writing it out and rereading, it's kind of like paying off/overpaying your debts before you begin investing--100% focused on one thing at a time rather than doing it all at once. Some might find it interesting while others might find it ludicrous. Thanks for any input!
Seems as good as a plan as any. Do it.

I don't like the idea of bonds for an emergency fund. I would much rather use bank savings.


If you add to bond funds, let that be as an investment vehicle rather than Emergency.
"I think it's much more interesting to live not knowing than to have answers which might be wrong." - Richard Feynman

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Re: I have a wild theory. Poke some holes in it.

Post by msk » Tue Feb 11, 2020 2:19 am

The one regret I have in my investing life (5 decades so far) is that I was not more aggressive in my younger days. I would have learned what I have to date much earlier and gotten much richer by now. I took more risks than the BH philosophy, but in retrospect not enough. A 25 year-old can lose ALL his (puny) savings and do very well over the next several decades. Difference between those aiming for FIRE and wealth. BH philosophy is for those aiming for slightly-younger, slightly more comfortable retirement. Bogle would not have made his billions by following BH advice. Just an opinion.

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Re: I have a wild theory. Poke some holes in it.

Post by firebirdparts » Tue Feb 11, 2020 8:39 am

zeal wrote:
Mon Feb 10, 2020 11:03 pm
I often see on this site someone stating that saving rate is more important than asset allocation, especially in the early years.
Whoa, here. I think we're getting a little over-confident. Savings rate is especially important in the early years. This assumes you favor risky investing. It is rational to do so. If you favor safe investments with low returns, then it's not quite so clear that savings rate in the early years is going to have a lot of impact.

You're mixing two rules of thumb and I am just saying they don't compound well. They're both true, but they don't mix well.
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Re: I have a wild theory. Poke some holes in it.

Post by jmk » Thu Feb 13, 2020 10:53 pm

I actually do something similar, except I only buy enough bonds to cover the NPV of my core expense stream till estimated death. This amount changes each year of course. The rest goes into stocks for discretionary income/charity.

Financologist
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Re: I have a wild theory. Poke some holes in it.

Post by Financologist » Thu Feb 13, 2020 11:16 pm

I've always wondered whether investors who faced major downturns early in they're investing lives were more inclined to heavily weight to bonds over time. And if that is true then perhaps a high bond allocation early in one's investing life could create more stability and thus encourage increased risk through stock investment over time.

Ping Pong
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Re: I have a wild theory. Poke some holes in it.

Post by Ping Pong » Fri Feb 14, 2020 5:42 am

A variation that might work for OP is to start with an AA like 50% stocks. Once the dollar amount in bonds equals the maximum they want to hold in bonds, then all new contributions would go to stocks. Basically it turns into an emergency fund plus 100% stocks.

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Re: I have a wild theory. Poke some holes in it.

Post by Dandy » Fri Feb 14, 2020 11:25 am

That is what I did - by accident rather than a well thought out plan. When I started my employment in 1971!! my company had an investment plan - A fixed account earning double digits and two "funds". I knew nothing about the "funds" and they sounded risky vs a double digit "safe" fixed income account. They also had a company match of 3%. I saved aggressively for many years and built a nice sized fixed income asset. Later the company offered their own mutual funds and I got a bit more investment savvy so I made my allocation about 50/50.

Of course the double digit fixed income account's interest gradually dropped but the interest on the balance and my contributions/company matches made any moderate equity "corrections" seem small. That shielded me from making panic moves.

Saving aggressively and having that base of "safe" fixed income worked for me. I'm sure not as well as if I had taken more equity risk earlier. So, I wouldn't recommend a very large fixed income base but it is nice to have a decent sized one. Also, don't think the extra has to be 100% equities but could be reasonably aggressive until a few years from retirement age.

sharukh
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Re: I have a wild theory. Poke some holes in it.

Post by sharukh » Fri Feb 14, 2020 10:02 pm

Flight path asset allocation

This is what I did

https://www.google.com/amp/s/www.forbes ... ation/amp/

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firebirdparts
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Re: I have a wild theory. Poke some holes in it.

Post by firebirdparts » Sat Feb 15, 2020 4:15 am

Financologist wrote:
Thu Feb 13, 2020 11:16 pm
I've always wondered whether investors who faced major downturns early in they're investing lives were more inclined to heavily weight to bonds over time. And if that is true then perhaps a high bond allocation early in one's investing life could create more stability and thus encourage increased risk through stock investment over time.
For me, no. For mutual fund investors like us, after the mutual fund recovers, it's the opposite. You think it'll recover. If it recovers and you miss out, you'll say "I don't want to miss out" the next time. That's me anyway.
A fool and your money are soon partners

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celia
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Re: I have a wild theory. Poke some holes in it.

Post by celia » Sat Feb 15, 2020 4:45 am

OP, Have you ever heard that the one thing that most impacts your future wealth is the amount you are able to save when you are young? This implies that compounding works wonders, especially when you give it lots of time.

Suppose person B saves up $50k in Bonds in their 20s while person S saves up $50k in Stock funds. Both will retire at age 65. While person B plugs along with a small almost-guaranteed growth rate, S has an account that likely grows at maybe 5 times the growth rate that B has. Some years S will have a negative growth (the markets decline), but overall S’s balance not only grows but compounds (ie, the Growth itself generates growth besides the growth on the 50K).

Even though S is taking more risks, even if the account loses money, there is a lot of time to re-save the part that was lost. And when S is halfway to age 65, she can start lowering the risk, by holding some bonds. Meanwhile person B is starting to hold Stocks. The percent of bonds that S owns can be the same percent of stocks that B owns.


At 65, both B and S have portfolios that are 50/50 stocks/bonds. But who has the bigger value in their account? S who started up compounding Stocks in their 20s or B who started compounding Stocks at the half-way point?

jello_nailer
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Re: I have a wild theory. Poke some holes in it.

Post by jello_nailer » Sat Feb 15, 2020 6:22 am

GetMeToRetirement wrote:
Mon Feb 10, 2020 3:34 pm
"How to make a million dollars: first, get a million dollars..."
Who are you? Steve Martin?
Great post GetMe, well done.

Uncorrelated
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Re: I have a wild [asset allocation] theory. Poke some holes in it.

Post by Uncorrelated » Sat Feb 15, 2020 9:55 am

This problem was studied by Merton in 1969. The solution is somewhat hidden away on the wikipedia page (https://en.wikipedia.org/wiki/Merton%27 ... io_problem). As you can see the optimal proportion of stocks allocated is a constant, but what is often forgotten is that future savings are a part of your portfolio.

For example, suppose that you have calculated the optimal proportion of stocks as 60% of your portfolio. Your current net worth is $30k and your future savings equal $500k. This means that you should have ($30k + $500k) * 60% = $318k allocated to stocks! A leveraged position of around 10x. If you have no future savings, the logic no longer applies.

For further reading you can refer to Life-Cycle Investing and Leverage: Buying Stock on Margin Can Reduce Retirement Risk or my topic on optimal time-varying asset allocations. I strongly recommend avoiding simple rules such as 100-age in bonds or linear glidepaths which are discussed on many financial blogs, as they perform quite poorly.

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