Am I crazy to keep 100% stocks when I FIRE?

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mrnice404
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Re: Am I crazy to keep 100% stocks when I FIRE?

Post by mrnice404 »

KlangFool wrote: Tue Jul 09, 2024 2:37 pm That means you should have 10 years in fixed income/cash. You should be 67% stock and 33% bond. My recommendation is for 60:40.
Sorry for the stupid question. But are the (33%) bonds part of the 10 years fixed income, or are these seperate issues? The latter would mean if my portfolio is 15 years of expenses, 10 years I should keep cash and the remaining 5 years I should divide over 67% stocks and 33% bonds? (or 60/40). Just to be clear
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William Million
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Re: Am I crazy to keep 100% stocks when I FIRE?

Post by William Million »

Every person has to look into the mirror and determine their own risk tolerance. I'm a stock guy, but would not be 100% stocks so close to retirement.

Other problem with 100% stocks is now is a great time to lock in fixed income. Returns are much higher than they've been in years. If you decide later to move from equities into fixed income, you might be doing it as 1% interest rates. Some fixed income also provides gunpowder to move to equities if they fall by 50% and there are great deals right and left.
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Re: Am I crazy to keep 100% stocks when I FIRE?

Post by jg12345 »

mrnice404 wrote: Tue Jul 09, 2024 2:35 pm
jg12345 wrote: Tue Jul 09, 2024 2:20 pm In your case, global aggregate hedged to EUR is ok, or you could also have a ladder of individual bonds
I have heard many times about BND. I believe it is also available hedged to EUR. Or a similair ETF.

If I would only withdraw money from my portfolio for about 15 years (and will hold it after that for say 25 years), would you say a short term bond ETF, intermediate, or long term bonds would be best? Or a mix (which BND is?).

I am aware there must be all kinds of smart choices, combinations, etc. But for a complete newbie (with some psychological resitance to bonds ;-), I am looking for a simple one-fund solution.
BND is for US people.

For a complete newbie, I suggest you start by reading the boglewiki, and something about duration.

There, you will also see that the bond ETF suggested is Global Bond Aggregate hedged to EUR ireland-based ticker AGGH (for the ishares one, there are others), ter 0.1%.

the duration is close to an intermediate term ETF of US bonds that is often named by US investors
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Re: Am I crazy to keep 100% stocks when I FIRE?

Post by KlangFool »

mrnice404 wrote: Tue Jul 09, 2024 1:57 pm

Small detail, it is 15 years of my part of the collective expenses. My partner and I both share 50%-50%. So in worst case scenario, there would be a bit leeway, if in dramatic years I contribute a bit less (within reasonable way, not unlimited of course).
mrnice404,

In the worst case, both of you are unemployed and your partner has no money. Hence, your money only lasted 7.5 years.

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Re: Am I crazy to keep 100% stocks when I FIRE?

Post by jg12345 »

KlangFool wrote: Tue Jul 09, 2024 2:37 pm
mrnice404 wrote: Tue Jul 09, 2024 1:57 pm
KlangFool wrote: Tue Jul 09, 2024 1:52 pm B) We are asking your portfolio size in terms of annual expense. Not the actual amount. 5 Years? 10 Years? 20 years?
Current portfolio is about 15 years of expenses (if I quit working right now).

Small detail, it is 15 years of my part of the collective expenses. My partner and I both share 50%-50%. So in worst case scenario, there would be a bit leeway, if in dramatic years I contribute a bit less (within reasonable way, not unlimited of course).
mrnice404,

Then, you should not be 100% stock. That means you should have 10 years in fixed income/cash. You should be 67% stock and 33% bond. My recommendation is for 60:40.

KlangFool
wait, if OP has portfolio size of 15 years expenses, and 10 years should be bonds, then he should be 67% bonds and 33% stocks, or am I missing something? but then at that level probably stocks are so low one doesn't need all those bonds so you suggest 60-40 instead? I feel I might be missing something
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HomerJ
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Re: Am I crazy to keep 100% stocks when I FIRE?

Post by HomerJ »

mrnice404 wrote: Tue Jul 09, 2024 2:05 pm
A $1 million 60/40 portfolio would be throwing off $20,000 a year just in interest from the bonds, and $9,000 a year from stock dividends. That's nearly $30,000 a year without even touching the principal.
Does this only happen if you own bonds directly yourself, or also if you have a bond ETF? Are the dividends more or less stable, even during a crash?
You don't have to own individual bonds. A bond fund or bond ETF will give you the same dividends.

Remember you are thinking fairly short-term here. I'd put a couple of years of expenses in money-markets, and another couple of years in a short-term bond fund (or CDs)

Stock dividends can indeed be cut during a crash, so not 100% stable..
Last edited by HomerJ on Tue Jul 09, 2024 3:04 pm, edited 1 time in total.
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Re: Am I crazy to keep 100% stocks when I FIRE?

Post by KlangFool »

mrnice404 wrote: Tue Jul 09, 2024 2:46 pm
KlangFool wrote: Tue Jul 09, 2024 2:37 pm That means you should have 10 years in fixed income/cash. You should be 67% stock and 33% bond. My recommendation is for 60:40.
Sorry for the stupid question. But are the (33%) bonds part of the 10 years fixed income, or are these seperate issues? The latter would mean if my portfolio is 15 years of expenses, 10 years I should keep cash and the remaining 5 years I should divide over 67% stocks and 33% bonds? (or 60/40). Just to be clear
Sorry, I messed up the number. It should be 33:67. Hence, the 30:70 should be your number.

If you prefer 10 years in cash, then put 5 years in stock. 33:67.

Or, just keep 10 years in cash and put all new money into stock.

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Re: Am I crazy to keep 100% stocks when I FIRE?

Post by KlangFool »

jg12345 wrote: Tue Jul 09, 2024 2:58 pm
KlangFool wrote: Tue Jul 09, 2024 2:37 pm
mrnice404 wrote: Tue Jul 09, 2024 1:57 pm
KlangFool wrote: Tue Jul 09, 2024 1:52 pm B) We are asking your portfolio size in terms of annual expense. Not the actual amount. 5 Years? 10 Years? 20 years?
Current portfolio is about 15 years of expenses (if I quit working right now).

Small detail, it is 15 years of my part of the collective expenses. My partner and I both share 50%-50%. So in worst case scenario, there would be a bit leeway, if in dramatic years I contribute a bit less (within reasonable way, not unlimited of course).
mrnice404,

Then, you should not be 100% stock. That means you should have 10 years in fixed income/cash. You should be 67% stock and 33% bond. My recommendation is for 60:40.

KlangFool
wait, if OP has portfolio size of 15 years expenses, and 10 years should be bonds, then he should be 67% bonds and 33% stocks, or am I missing something? but then at that level probably stocks are so low one doesn't need all those bonds so you suggest 60-40 instead? I feel I might be missing something
I messed up the number. See my above post.

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Re: Am I crazy to keep 100% stocks when I FIRE?

Post by KlangFool »

HomerJ wrote: Tue Jul 09, 2024 2:59 pm
mrnice404 wrote: Tue Jul 09, 2024 2:05 pm
A $1 million 60/40 portfolio would be throwing off $20,000 a year just in interest from the bonds, and $9,000 a year from stock dividends. That's nearly $30,000 a year without even touching the principal.
Does this only happen if you own bonds directly yourself, or also if you have a bond ETF? Are the dividends more or less stable, even during a crash?
You don't have to own individual bonds. A bond fund or bond ETF will give you the same dividends.

Remember you are thinking fairly short-term here. I'd put a couple of years of expenses in money-markets, and another couple of years in a short-term bond fund.

Stock dividends can indeed be cut during a crash, so not 100% stable..
Or, OP just keep that 10 years in cash.

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Re: Am I crazy to keep 100% stocks when I FIRE?

Post by Harmanic »

The real question is how easy it will be to go back to work if you need to supplement your investment income.
The question isn't at what age I want to retire, it's at what income. | - George Foreman
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mrnice404
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Re: Am I crazy to keep 100% stocks when I FIRE?

Post by mrnice404 »

KlangFool wrote: Tue Jul 09, 2024 3:01 pm Or, OP just keep that 10 years in cash.
Besides the allocation, cash is for me more attractive (than bonds). This is in part, because I understand it (as opposed to bonds) ;-). And because in my country cash is taxed 0,3% and bonds 2,0% (unrealized gains). At least, under current tax laws.

When I proposed in other fora (Reddit etc) that I might keep 2 years in cash, people were saying this was a bad idea and I should only keep 6 months. I am not sure. Perhaps they didn't realize (or I didn't point it out enough) that I am not keeping any other fixed income assets.

If you were taxed on your bonds 1,7% more than cash each year (entire bond portfolio), would you still choose bonds, or would you go for cash?
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Re: Am I crazy to keep 100% stocks when I FIRE?

Post by Nicolas »

It’s not crazy, I did it. Eight years retired and still 100% stock.
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Re: Am I crazy to keep 100% stocks when I FIRE?

Post by KlangFool »

mrnice404 wrote: Tue Jul 09, 2024 3:47 pm
KlangFool wrote: Tue Jul 09, 2024 3:01 pm Or, OP just keep that 10 years in cash.
Besides the allocation, cash is for me more attractive (than bonds). This is in part, because I understand it (as opposed to bonds) ;-). And because in my country cash is taxed 0,3% and bonds 2,0% (unrealized gains). At least, under current tax laws.

When I proposed in other fora (Reddit etc) that I might keep 2 years in cash, people were saying this was a bad idea and I should only keep 6 months. I am not sure. Perhaps they didn't realize (or I didn't point it out enough) that I am not keeping any other fixed income assets.

If you were taxed on your bonds 1,7% more than cash each year (entire bond portfolio), would you still choose bonds, or would you go for cash?
mrnice404,

If you cannot understand bond, then, use cash. Don't invest on anything that you cannot understand.

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Re: Am I crazy to keep 100% stocks when I FIRE?

Post by KlangFool »

Harmanic wrote: Tue Jul 09, 2024 3:37 pm The real question is how easy it will be to go back to work if you need to supplement your investment income.
With or without a recession?

Normally, bad things tend to happen at the same time in a recession.

In a recession, stock and housing market crashes and folks are unemployed.

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Re: Am I crazy to keep 100% stocks when I FIRE?

Post by Harmanic »

KlangFool wrote: Tue Jul 09, 2024 4:27 pm
Harmanic wrote: Tue Jul 09, 2024 3:37 pm The real question is how easy it will be to go back to work if you need to supplement your investment income.
With or without a recession?

Normally, bad things tend to happen at the same time in a recession.

In a recession, stock and housing market crashes and folks are unemployed.

KlangFool
But having 100% in stocks at age 40 and having to go back to work at age 50 might be easier than doing the same at age 70 and needing to go back to work at age 80.

There was a Rational Reminder podcast where the guest mentioned this when asked about the SWR for a FIRE retiree and he said that it is higher than a traditional retiree for this reason.
The question isn't at what age I want to retire, it's at what income. | - George Foreman
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Re: Am I crazy to keep 100% stocks when I FIRE?

Post by markus75 »

mrnice404 wrote: Tue Jul 09, 2024 3:47 pm
Besides the allocation, cash is for me more attractive (than bonds). This is in part, because I understand it (as opposed to bonds) ;-). And because in my country cash is taxed 0,3% and bonds 2,0% (unrealized gains). At least, under current tax laws.
How much is the yield you will get currently from cash in your country?

A very short duration bond ETF is like cash.
For example iShares Euro Govt Bond 0-1yr UCITS ETF
ISIN: IE00B3FH7618
Currently you will get 3.4% (yield to worst).

or you can use euro moneymarket funds which paying out 4.0% currently.
Last edited by markus75 on Tue Jul 09, 2024 5:03 pm, edited 1 time in total.
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Re: Am I crazy to keep 100% stocks when I FIRE?

Post by KlangFool »

Harmanic wrote: Tue Jul 09, 2024 4:29 pm
KlangFool wrote: Tue Jul 09, 2024 4:27 pm
Harmanic wrote: Tue Jul 09, 2024 3:37 pm The real question is how easy it will be to go back to work if you need to supplement your investment income.
With or without a recession?

Normally, bad things tend to happen at the same time in a recession.

In a recession, stock and housing market crashes and folks are unemployed.

KlangFool
But having 100% in stocks at age 40 and having to go back to work at age 50 might be easier than doing the same at age 70 and needing to go back to work at age 80.

There was a Rational Reminder podcast where the guest mentioned this when asked about the SWR for a FIRE retiree and he said that it is higher than a traditional retiree for this reason.
OP's portfolio is at 15 years of annual expense. In a 50% stock market crashes, it will not last 10 years.

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Re: Am I crazy to keep 100% stocks when I FIRE?

Post by BirdFood »

mrnice404 wrote: Tue Jul 09, 2024 1:57 pm
KlangFool wrote: Tue Jul 09, 2024 1:52 pm B) We are asking your portfolio size in terms of annual expense. Not the actual amount. 5 Years? 10 Years? 20 years?
Current portfolio is about 15 years of expenses (if I quit working right now).

Small detail, it is 15 years of my part of the collective expenses. My partner and I both share 50%-50%. So in worst case scenario, there would be a bit leeway, if in dramatic years I contribute a bit less (within reasonable way, not unlimited of course).
If that portfolio drops by fifty percent in a stock crash, and you only have eight years of expenses, is that OK with both you and your partner? Is the chance of maximum wealth such a high priority that you would happily embrace the chance of poverty, if you could have avoided that poverty by not gambling on the wealth?

Also, what if your partner also loses half or more of their money?

I feel that some of this may be a misunderstanding of bonds. It sounds like you're assuming that bonds are totally unpredictable, and just as likely as stocks to crash by fifty percent or more. But that's not accurate. Edited to say: That's NOT to say you should invest in bonds if you don't understand them. But the 100% equities position suggests that you don't think there are any safe places to put any of your money, and that's not accurate.
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Re: Am I crazy to keep 100% stocks when I FIRE?

Post by HomerJ »

Nicolas wrote: Tue Jul 09, 2024 4:09 pm It’s not crazy, I did it. Eight years retired and still 100% stock.
I bet on black on roulette three times in a row and it all worked out!
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Re: Am I crazy to keep 100% stocks when I FIRE?

Post by Bernmaster »

I like the 100% stock plan. Worst case you have to go back to work, best case you’re rich. Sounds fair to me 8-) .
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Re: Am I crazy to keep 100% stocks when I FIRE?

Post by Fireishere »

HomerJ wrote: Tue Jul 09, 2024 1:59 pm
A 60/40 portfolio would only drop to $700,000 ($300,000/$400,000), AND you could pull the $40,000 from the bond side while waiting for stocks to recover. 5 years in, you'd be at $500,000 ($300,000/$200,000), and when the market came back and went up 100%, you would fully recover on the stock side, and be back at $800,000.
So you wouldn’t rebalance your portfolio back to 60/40 after a drop? What’s the logic here? The way I see it is that you’re not willing to buy stocks when they’re much cheaper.
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Re: Am I crazy to keep 100% stocks when I FIRE?

Post by markus75 »

Fireishere wrote: Wed Jul 10, 2024 1:16 am
HomerJ wrote: Tue Jul 09, 2024 1:59 pm
A 60/40 portfolio would only drop to $700,000 ($300,000/$400,000), AND you could pull the $40,000 from the bond side while waiting for stocks to recover. 5 years in, you'd be at $500,000 ($300,000/$200,000), and when the market came back and went up 100%, you would fully recover on the stock side, and be back at $800,000.
So you wouldn’t rebalance your portfolio back to 60/40 after a drop? What’s the logic here? The way I see it is that you’re not willing to buy stocks when they’re much cheaper.
It makes sense. The OP doesn't want to buy bonds now even though they are cheaper.
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Re: Am I crazy to keep 100% stocks when I FIRE?

Post by HomerJ »

Fireishere wrote: Wed Jul 10, 2024 1:16 am
HomerJ wrote: Tue Jul 09, 2024 1:59 pm
A 60/40 portfolio would only drop to $700,000 ($300,000/$400,000), AND you could pull the $40,000 from the bond side while waiting for stocks to recover. 5 years in, you'd be at $500,000 ($300,000/$200,000), and when the market came back and went up 100%, you would fully recover on the stock side, and be back at $800,000.
So you wouldn’t rebalance your portfolio back to 60/40 after a drop? What’s the logic here? The way I see it is that you’re not willing to buy stocks when they’re much cheaper.
During accumulation, I would rebalance. In my first years of retirement, probably not. The cash is there for safety, to pay bills.
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mrnice404
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Re: Am I crazy to keep 100% stocks when I FIRE?

Post by mrnice404 »

markus75 wrote: Tue Jul 09, 2024 4:32 pm
How much is the yield you will get currently from cash in your country?

A very short duration bond ETF is like cash.
For example iShares Euro Govt Bond 0-1yr UCITS ETF
ISIN: IE00B3FH7618
Currently you will get 3.4% (yield to worst).

or you can use euro moneymarket funds which paying out 4.0% currently.
On Raisin, I see CD that pay about 3,6%. After paying tax 3,3% remains.
Since on bonds, moneymarkets, etc I pay 2% tax, it should pay 5,3% to equal to CDs.

For CD I can fix the interest rate for X years. I have no idea how that works for bonds. And CD's are insured up to 100k per bank. So it's pretty risk free (if bank goes broke, the country/government guarantees pay out within 7 days).
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Re: Am I crazy to keep 100% stocks when I FIRE?

Post by mrnice404 »

Nicolas wrote: Tue Jul 09, 2024 4:09 pm It’s not crazy, I did it. Eight years retired and still 100% stock.
That's nice to hear. Could you tell me a bit more? How many years of annual expenses was your portfolio when you retired? How many years are you going to withdraw? Lifelong or until some pension income kicks in? How much % do you generally draw?

In the last 8 years there must have been some (minor?) stock crashes. How did you manage at that time? Did you stress much? How did you remain calm?
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Re: Am I crazy to keep 100% stocks when I FIRE?

Post by jg12345 »

mrnice404 wrote: Wed Jul 10, 2024 12:50 pm
markus75 wrote: Tue Jul 09, 2024 4:32 pm
How much is the yield you will get currently from cash in your country?

A very short duration bond ETF is like cash.
For example iShares Euro Govt Bond 0-1yr UCITS ETF
ISIN: IE00B3FH7618
Currently you will get 3.4% (yield to worst).

or you can use euro moneymarket funds which paying out 4.0% currently.
On Raisin, I see CD that pay about 3,6%. After paying tax 3,3% remains.
Since on bonds, moneymarkets, etc I pay 2% tax, it should pay 5,3% to equal to CDs.

For CD I can fix the interest rate for X years. I have no idea how that works for bonds. And CD's are insured up to 100k per bank. So it's pretty risk free (if bank goes broke, the country/government guarantees pay out within 7 days).
wait: if a CD gets 3.6% tax free, and bonds are taxed 2%, the equivalent return must be approx 3.6 / 0.98 =3.7%, not 5.3%

I am assuming tax is only on interest, right? or is there an extra wealth tax? I am not getting the 2% tax
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Re: Am I crazy to keep 100% stocks when I FIRE?

Post by mrnice404 »

BirdFood wrote: Tue Jul 09, 2024 6:36 pm Is the chance of maximum wealth such a high priority that you would happily embrace the chance of poverty, if you could have avoided that poverty by not gambling on the wealth?
I feel that the chance of poverty is neglectable (<1%). And even if that happens, I can take my pension 7 years earlier (cutting my withdrawal period by half), there is still one stable income from my partner, etc.

But besides that, it is not that I want to maximize the wealth. It's more that I like simplicity in my portfolio. Stocks I understand. Bonds not. That is the reason why I am avoiding it. Others suggested then use cash in stead. That is much more appealing for me (also because of taxes, see other comments)
I feel that some of this may be a misunderstanding of bonds. It sounds like you're assuming that bonds are totally unpredictable, and just as likely as stocks to crash by fifty percent or more. But that's not accurate.
That is very true. I have spent months, if not half a year, before gathering understanding and therefor courage to invest in stocks. Now I will have to do the same for bonds. But prefer not (maybe not very rational).

If I take a quick glance at mixed funds, in 2022 they actually seem to performed poorer than 100% stock funds. That suprises me. But as I mentioned, I didn't really read up on the topic.
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Re: Am I crazy to keep 100% stocks when I FIRE?

Post by mrnice404 »

jg12345 wrote: Wed Jul 10, 2024 12:58 pm
wait: if a CD gets 3.6% tax free, and bonds are taxed 2%, the equivalent return must be approx 3.6 / 0.98 =3.7%, not 5.3%

I am assuming tax is only on interest, right? or is there an extra wealth tax? I am not getting the 2% tax
It's a stupid system in my country. Lot of people, especially investors, complain a lot. It probably will change in the future, but when we have to see. As for now we pay 36% tax on a FICTIVE interest we made.

If you have 100.000 cash/CD, it is assumed you made in 2023 0,92%. On this so called profit, you pay 36% tax. That is 100.000 x 0,92% x 36%= 100.000 x 0,33% = 331 euro.

If you have the same 100.000 in bonds (or stocks), it is assumed you made 6,17% profit. Even if this is not the case! You might even have lost money. But you still have to pay 100.000 x 6,17% x 36% = 100.000 x 2,22% = 2221 euro.

So bonds are heavily penalized in our system. The 6,17% assumed profit might be reasonable for stocks (debatable), but not for bonds.

The difference between bonds (2,22% tax on your entire sum, not only the interest) and cash (0,33%) is 1,9%. So I think bonds should earn at least 2% more, to negate this difference. And CDs are riskfree. This is the reason most people in my country (currently) choose for CDs I believe.

But I have no clue about bond duration, sensitivity to interest rate changes, etc. So there might be more issues in to the bond vs cash comparison than the 2% difference.

I would be very much interested in rule of thumbs that for instance state that if a 60:40 stock:bond allocation builds in sufficient stability, to what this would equal if you substitute bonds with cash. Would it become 80:20 stocks:cash, or 50:50, or doesn't it make any difference and it would remain 60:40?

I assume cash is more stable (bond prices do fluctuate, cash not), so I am guessing you need a lower % if you are using cash in stead of bonds. But I am just guessing here.

Edit: in my country, unrealized (fictive) gains are taxed. So even if you didn't sell one single stock or bond, you pay taxes over your full portfolio value.
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Re: Am I crazy to keep 100% stocks when I FIRE?

Post by BirdFood »

mrnice404 wrote: Wed Jul 10, 2024 1:11 pm But besides that, it is not that I want to maximize the wealth. It's more that I like simplicity in my portfolio. Stocks I understand. Bonds not. That is the reason why I am avoiding it. Others suggested then use cash in stead. That is much more appealing for me (also because of taxes, see other comments)
I think that going 100% equities would be taking a huge risk just for the sake of simplicity. If it's that or putting your "bond" allocation into cash, the cash is better.
mrnice404 wrote: Wed Jul 10, 2024 1:11 pm I feel that some of this may be a misunderstanding of bonds. It sounds like you're assuming that bonds are totally unpredictable, and just as likely as stocks to crash by fifty percent or more. But that's not accurate.
My response to not understanding all the complexities of bond funds--and liking them less and less the closer I come to understanding them, at least for my situation--is to buy individual bonds, specifically US Treasuries. Those are, IMO, infinitely easier to understand, IF you assume that you will not be selling them before maturity. There is, of course, always some chance that something will go very wrong with your planning and you have to sell them before maturity, but I think that the likely loss from that risk materializing is a lot lower than the risk of putting that same money into stocks.
mrnice404 wrote: Wed Jul 10, 2024 1:11 pm That is very true. I have spent months, if not half a year, before gathering understanding and therefor courage to invest in stocks. Now I will have to do the same for bonds. But prefer not (maybe not very rational).

If I take a quick glance at mixed funds, in 2022 they actually seem to performed poorer than 100% stock funds. That suprises me. But as I mentioned, I didn't really read up on the topic.
Mixed funds in 2022 would absolutely perform poorer than 100% stock funds.

The average return on stocks is normally better than the average return on bonds. But that extra return comes at higher risk--when stocks go bad, they go really, really bad. So the "mixed" status isn't for increasing the size of gain, it's for reducing the size of loss.

And I believe 2022 was a good year for stocks and (quoting) "the worst year on record for bonds."

If you had to sell bonds--either bond funds OR individual bonds far from maturity--during 2022, that would be a problem, because with interest rates rising, your old bonds, at old lower interest rates, would be much less desirable. They would be an old, rickety money-making machine, spitting out maybe one or two percent, and people would want the new, shiny money-making machines that are spitting out 4 or 5 percent. They'll only take your old rickety bonds at a substantial discount.

But if you had individual bonds, and held them to maturity, the nominal principal that makes up that old rickety machine is just as large as it was when you bought it. You get it back.

You did miss out on the increased interest rates. Your money might not have grown as fast as inflation. But that will also be true if you're invested in cash. With cash, you just get what the bank or HYSA pays you, and when interest rates go down, you follow them down, quite quickly. While if you were to buy a two-year or five-year or ten-year or thirty-year Treasury security, you'd keep on getting the interest rate that you bought it at, until the end of that period. (Also true, yes, if you buy a CD of a similar term.)

Right now those interest rates are pretty decent--good enough for me to commit a glob of money a few years into the future, in individual Treasuries. I know that as long as I'm not forced to sell before maturity, I will get it all back, and I'll get those interest payments (or in the case of TIPS, also inflation adjustments) along the way. It's always possible that interest rates will go up, and I'll be sorry I didn't wait, but I'm going with a predictable plan rather than waiting to see.

Now, this is in the US, with the US tax climate. Based on your most recent post, it sounds like the break-even between cash/CDs and bonds may be different.
Nicolas
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Re: Am I crazy to keep 100% stocks when I FIRE?

Post by Nicolas »

Deleted
Last edited by Nicolas on Tue Jul 16, 2024 1:25 pm, edited 2 times in total.
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jg12345
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Re: Am I crazy to keep 100% stocks when I FIRE?

Post by jg12345 »

mrnice404 wrote: Wed Jul 10, 2024 1:31 pm
jg12345 wrote: Wed Jul 10, 2024 12:58 pm
wait: if a CD gets 3.6% tax free, and bonds are taxed 2%, the equivalent return must be approx 3.6 / 0.98 =3.7%, not 5.3%

I am assuming tax is only on interest, right? or is there an extra wealth tax? I am not getting the 2% tax
It's a stupid system in my country. Lot of people, especially investors, complain a lot. It probably will change in the future, but when we have to see. As for now we pay 36% tax on a FICTIVE interest we made.

If you have 100.000 cash/CD, it is assumed you made in 2023 0,92%. On this so called profit, you pay 36% tax. That is 100.000 x 0,92% x 36%= 100.000 x 0,33% = 331 euro.

If you have the same 100.000 in bonds (or stocks), it is assumed you made 6,17% profit. Even if this is not the case! You might even have lost money. But you still have to pay 100.000 x 6,17% x 36% = 100.000 x 2,22% = 2221 euro.

So bonds are heavily penalized in our system. The 6,17% assumed profit might be reasonable for stocks (debatable), but not for bonds.

The difference between bonds (2,22% tax on your entire sum, not only the interest) and cash (0,33%) is 1,9%. So I think bonds should earn at least 2% more, to negate this difference. And CDs are riskfree. This is the reason most people in my country (currently) choose for CDs I believe.

But I have no clue about bond duration, sensitivity to interest rate changes, etc. So there might be more issues in to the bond vs cash comparison than the 2% difference.

I would be very much interested in rule of thumbs that for instance state that if a 60:40 stock:bond allocation builds in sufficient stability, to what this would equal if you substitute bonds with cash. Would it become 80:20 stocks:cash, or 50:50, or doesn't it make any difference and it would remain 60:40?

I assume cash is more stable (bond prices do fluctuate, cash not), so I am guessing you need a lower % if you are using cash in stead of bonds. But I am just guessing here.

Edit: in my country, unrealized (fictive) gains are taxed. So even if you didn't sell one single stock or bond, you pay taxes over your full portfolio value.
I see. thanks for clarifying. it seems CDs might be a very favourable option then, instead of bonds.

You are [usually] correct. volatility of CDs is none, so it's lower than volatility of bonds.

so, if the target volatility you want from portfolio is the same, you could need less % of portfolio going to CD than going to bonds. now, with the fact that bonds are (in theory [based on long historical trends], not so much in recent years) negatively correlated [to stocks], the decrease of % points going to non-stock holding should be there (I think) but rather small.

edits in [ ]
Last edited by jg12345 on Wed Jul 10, 2024 2:21 pm, edited 1 time in total.
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howard71
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Re: Am I crazy to keep 100% stocks when I FIRE?

Post by howard71 »

VTI I've been holding for a long time is up around 270% beating the pants off anything else I hold.

Meanwhile I own long term bonds that I've had just about as long and some of them are even in the red.

So obviously I wish I'd had it all in VTI.

Problem is, if it works out for you you'll feel like a genius and if not, you'll regret it and feel like a fool.

I opted for an all-weather portfolio years before I retired. It's reasonable safe/conservative and gives me a decent return without having to worry much about it.
jg12345
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Re: Am I crazy to keep 100% stocks when I FIRE?

Post by jg12345 »

jg12345 wrote: Wed Jul 10, 2024 2:17 pm
mrnice404 wrote: Wed Jul 10, 2024 1:31 pm
jg12345 wrote: Wed Jul 10, 2024 12:58 pm
wait: if a CD gets 3.6% tax free, and bonds are taxed 2%, the equivalent return must be approx 3.6 / 0.98 =3.7%, not 5.3%

I am assuming tax is only on interest, right? or is there an extra wealth tax? I am not getting the 2% tax
It's a stupid system in my country. Lot of people, especially investors, complain a lot. It probably will change in the future, but when we have to see. As for now we pay 36% tax on a FICTIVE interest we made.

If you have 100.000 cash/CD, it is assumed you made in 2023 0,92%. On this so called profit, you pay 36% tax. That is 100.000 x 0,92% x 36%= 100.000 x 0,33% = 331 euro.

If you have the same 100.000 in bonds (or stocks), it is assumed you made 6,17% profit. Even if this is not the case! You might even have lost money. But you still have to pay 100.000 x 6,17% x 36% = 100.000 x 2,22% = 2221 euro.

So bonds are heavily penalized in our system. The 6,17% assumed profit might be reasonable for stocks (debatable), but not for bonds.

The difference between bonds (2,22% tax on your entire sum, not only the interest) and cash (0,33%) is 1,9%. So I think bonds should earn at least 2% more, to negate this difference. And CDs are riskfree. This is the reason most people in my country (currently) choose for CDs I believe.

But I have no clue about bond duration, sensitivity to interest rate changes, etc. So there might be more issues in to the bond vs cash comparison than the 2% difference.

I would be very much interested in rule of thumbs that for instance state that if a 60:40 stock:bond allocation builds in sufficient stability, to what this would equal if you substitute bonds with cash. Would it become 80:20 stocks:cash, or 50:50, or doesn't it make any difference and it would remain 60:40?

I assume cash is more stable (bond prices do fluctuate, cash not), so I am guessing you need a lower % if you are using cash in stead of bonds. But I am just guessing here.

Edit: in my country, unrealized (fictive) gains are taxed. So even if you didn't sell one single stock or bond, you pay taxes over your full portfolio value.
I see. thanks for clarifying. it seems CDs might be a very favourable option then, instead of bonds.

You are [usually] correct. volatility of CDs is none, so it's lower than volatility of bonds.

so, if the target volatility you want from portfolio is the same, you could need less % of portfolio going to CD than going to bonds. now, with the fact that bonds are (in theory [based on long historical trends], not so much in recent years) negatively correlated [to stocks], the decrease of % points going to non-stock holding should be there (I think) but rather small.

edits in [ ]
seems I am wrong.

I have backtested portfolios with BND and VT vs TBIL (3 months US treasury bills, so basically cash) and VT

even both of them at 60-40, BND and VT has a slightly lower volatility

Have no time to check EUR equivalent, but it seems you might just need the same %
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momopi
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Re: Am I crazy to keep 100% stocks when I FIRE?

Post by momopi »

mrnice404 wrote: Mon Jul 08, 2024 5:01 am
  • The 100% global stocks is only my taxable account. My pension/SS is not included in this indication. Also not the money in my house (roughly the mortgage is about 50% of the value).
If you were to sell 10% of your stock holdings today, how much of it would go to taxes?
BatBuckeye
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Re: Am I crazy to keep 100% stocks when I FIRE?

Post by BatBuckeye »

Dear mrnice404,

I find it interesting that in your question you use the word crazy. Maybe you are self describing what you propose.
Since you just recently achieved FI (congratulations!) I would not advise 100%. Would you advise your best friend to do the same?

There many reasons why people follow 60/40, 70/30 or 50/50.

How 'bout 70/30? What've you got to lose?
Topic Author
mrnice404
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Re: Am I crazy to keep 100% stocks when I FIRE?

Post by mrnice404 »

momopi wrote: Wed Jul 10, 2024 6:01 pm If you were to sell 10% of your stock holdings today, how much of it would go to taxes?
In my country we pay taxes on unrealized (fictive) gains. So it doesn't matter if you sell stocks or not. You pay taxes over the full 100% of your portfolio value. Roughly 2,2% over the net value on 1 jan. See one of my previous comments with an example
Topic Author
mrnice404
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Re: Am I crazy to keep 100% stocks when I FIRE?

Post by mrnice404 »

jg12345 wrote: Wed Jul 10, 2024 2:41 pm I have backtested portfolios with BND and VT vs TBIL (3 months US treasury bills, so basically cash) and VT

even both of them at 60-40, BND and VT has a slightly lower volatility

Have no time to check EUR equivalent, but it seems you might just need the same %
Thanks for checking that out for me!

Which figures did you enter (portfolio value, etc) for this simulation?

I assume with a high witdrawalrate compared to portfolio value, a certain bond/cash allocation might jump from say 80 to 90% succes chance. But if you are already around 99% succes chance, the differences between bond/cash might not lead to a noticeable impact.

I will also try it out in my own calculator, https://earlyretirementcalc.com/, and see what the difference is
grahamite
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Re: Am I crazy to keep 100% stocks when I FIRE?

Post by grahamite »

The days of TINA are over. When you can get about a 4-5% yield in Treasuries and longer term government bonds you really aren't giving up much in the way of return while greatly reducing your risk. Especially as returns are likely to be lower than the long term historical average of 10% a year because of the high starting valuations. So this hardly feels like the time to be greedy (although of course investor psychology being the way it is investors are at their greediest when recent returns have been most generous assuming jam today and a lot more jam tomorrow).

Sequence of return risk is the main thing to consider. And you can greatly reduce it by having a few years expenses in short term bonds which can be sold during down years in the stock market to buy some time for stock markets to at least partially recover. It feels as though 80/20 might work quite well for you. You'll still get 80% participation in the remainder of the bull market and you'll earn a decent return on the 20% bond portion and you'll be glad of it if the bull market does end especially if the end is near.
Nicolas
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Re: Am I crazy to keep 100% stocks when I FIRE?

Post by Nicolas »

mrnice404 wrote: Wed Jul 10, 2024 1:31 pm
jg12345 wrote: Wed Jul 10, 2024 12:58 pm
wait: if a CD gets 3.6% tax free, and bonds are taxed 2%, the equivalent return must be approx 3.6 / 0.98 =3.7%, not 5.3%

I am assuming tax is only on interest, right? or is there an extra wealth tax? I am not getting the 2% tax
It's a stupid system in my country. Lot of people, especially investors, complain a lot. It probably will change in the future, but when we have to see. As for now we pay 36% tax on a FICTIVE interest we made.

If you have 100.000 cash/CD, it is assumed you made in 2023 0,92%. On this so called profit, you pay 36% tax. That is 100.000 x 0,92% x 36%= 100.000 x 0,33% = 331 euro.

If you have the same 100.000 in bonds (or stocks), it is assumed you made 6,17% profit. Even if this is not the case! You might even have lost money. But you still have to pay 100.000 x 6,17% x 36% = 100.000 x 2,22% = 2221 euro.

So bonds are heavily penalized in our system. The 6,17% assumed profit might be reasonable for stocks (debatable), but not for bonds.

The difference between bonds (2,22% tax on your entire sum, not only the interest) and cash (0,33%) is 1,9%. So I think bonds should earn at least 2% more, to negate this difference. And CDs are riskfree. This is the reason most people in my country (currently) choose for CDs I believe.

But I have no clue about bond duration, sensitivity to interest rate changes, etc. So there might be more issues in to the bond vs cash comparison than the 2% difference.

I would be very much interested in rule of thumbs that for instance state that if a 60:40 stock:bond allocation builds in sufficient stability, to what this would equal if you substitute bonds with cash. Would it become 80:20 stocks:cash, or 50:50, or doesn't it make any difference and it would remain 60:40?

I assume cash is more stable (bond prices do fluctuate, cash not), so I am guessing you need a lower % if you are using cash in stead of bonds. But I am just guessing here.

Edit: in my country, unrealized (fictive) gains are taxed. So even if you didn't sell one single stock or bond, you pay taxes over your full portfolio value.
This is an argument for Americans avoiding international stocks. The governments of some countries penalize the locals through taxation for investing in their own countries. They are dissuaded from investing. Wouldn’t this depress the share prices of companies in those countries?
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jg12345
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Re: Am I crazy to keep 100% stocks when I FIRE?

Post by jg12345 »

mrnice404 wrote: Thu Jul 11, 2024 4:01 am
jg12345 wrote: Wed Jul 10, 2024 2:41 pm I have backtested portfolios with BND and VT vs TBIL (3 months US treasury bills, so basically cash) and VT

even both of them at 60-40, BND and VT has a slightly lower volatility

Have no time to check EUR equivalent, but it seems you might just need the same %
Thanks for checking that out for me!

Which figures did you enter (portfolio value, etc) for this simulation?

I assume with a high witdrawalrate compared to portfolio value, a certain bond/cash allocation might jump from say 80 to 90% succes chance. But if you are already around 99% succes chance, the differences between bond/cash might not lead to a noticeable impact.

I will also try it out in my own calculator, https://earlyretirementcalc.com/, and see what the difference is
for volatility, the value is irrelevant. I have used 1000 or 10000 I don't remember. volatility (i.e., STDEV) is in %. the only figures entered are the ones I mentioned, the years were all years available (I set it to 1970 - 2024), although I cannot say whether all years were used
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Topic Author
mrnice404
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Re: Am I crazy to keep 100% stocks when I FIRE?

Post by mrnice404 »

KlangFool wrote: Tue Jul 09, 2024 2:59 pm
Sorry, I messed up the number. It should be 33:67. Hence, the 30:70 should be your number.
I am curious. This is very specific. How did you calculate this? I assume with some function that relies on the ratio of portfolio worth vs yearly spending. Does it also take the withdrawal period into account?
KlangFool
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Re: Am I crazy to keep 100% stocks when I FIRE?

Post by KlangFool »

mrnice404 wrote: Fri Jul 12, 2024 2:58 am
KlangFool wrote: Tue Jul 09, 2024 2:59 pm
Sorry, I messed up the number. It should be 33:67. Hence, the 30:70 should be your number.
I am curious. This is very specific. How did you calculate this? I assume with some function that relies on the ratio of portfolio worth vs yearly spending. Does it also take the withdrawal period into account?
It is very simple.

The basic rule of thumb is to keep at least 10 years of expenses in fixed income or cash. Your portfolio is at 15 years. The asset allocation comes to 30:70.

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