Why not 100% Stocks?

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letsgobobby
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Re: Why not 100% Stocks?

Post by letsgobobby » Sun Oct 19, 2014 8:58 am

My stock portfolio is still 100% stocks.
Last edited by letsgobobby on Sun Oct 19, 2014 9:49 am, edited 1 time in total.

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wshang
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Re: Why not 100% Stocks?

Post by wshang » Sun Oct 19, 2014 9:37 am

Yesterdaysnews wrote:Teleradiology from third world nations? That's pretty absurd when considering the regulations involved in practicing medicine.
Ha, ha. That's just the thing. Regulations are based upon sentiment, politics and influence. Wait till "they" figure out changing regulations increases competition in medicine and when enter into the virtual world of medicine. In my field, it just takes someone to put a tissue processor on a plane bound every night for India or China. Of course the brainiacs who reportedly are interested in lowering healthcare costs haven't "figured" this out (or are disingenuous about lowering healthcare costs, keeping the reimbursement system in place - you can decide that one). :oops: Anyway, I would caution anyone in medicine, don't be so smug about our salary; it just takes political will.

Anyway, this is getting off topic. If you really are feeling bulletproof, why not forget about stocks and go with some modification of Zvi Bodie's strategy - all options or options married with some CD's or Treasuries? I don't get it. Studies have shown a more dependable consistent and higher return with a mixture of asset classes - of course anyone is welcome to pick their own poison.

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Yesterdaysnews
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Re: Why not 100% Stocks?

Post by Yesterdaysnews » Sun Oct 19, 2014 11:15 am

I don't feel bullet proof but being replaced by 3rd world teleradiology is really low on my list of worries lol. As of now, Medicare will not reimburse a radiological interpretation unless it is performed on US soil, not to mention all the licensure and credential requirements etc. There are a LOT of barriers to that happening in my lifetime. Now, continued reimbursement cuts is a real threat to income, but fortunately I haven't noticed any significant changes so far. But, that is certainly a on the radar, usually a slow process.

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Re: Why not 100% Stocks?

Post by Johno » Sun Oct 19, 2014 12:05 pm

Riceman wrote:
Johno wrote:
And I've noted that some of the posts trying to be witty as if counting kitchen utensils in the asset allocation is the problem haven't actually said if they own a house.
If I had a house, I would have counted it in my bloated definition (I also forgot to include potential inheritance 20 years down the line and stable situation on both sides of the family).

My point is that there are many things (social security, pensions, relative job security, prospect of inheritance, prospect of short life expectancy, etc) that are important additional factors in determining the proper allocation of one's investable assets. Because there are so many additional factors, the term "100% stocks" is a simplification that describes only the allocation of one's investment portfolio, and when a person says she is 100% stocks, she shouldn't need to defend herself against the definition police.

With that out of the way, I am 100% stocks, and I think it's a great fit for my situation, since I have numerous other factors that stabilize my financial situation outside of my investment portfolio.
There are important additional factors which aren't tangible assets the person owns right now. But a house is a tangible asset the person owns right now, if so, just like stocks or bonds or cash. As a follow up post said, people can say they're the Queen of England if they want, but if they have a $500k house, $500k stocks and a $100k 'emergency fund' their (tangible current) asset portfolio is 45% stocks, that's the fact, no 'bloat' in that definition.

And again 'investable assets' is an invention of the financial industry. It means the assets they can hope to make you pay them to manage, the ones *they* care about. I don't see that it has any valid meaning for the individual.

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TheTimeLord
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Re: Why not 100% Stocks?

Post by TheTimeLord » Sun Oct 19, 2014 12:12 pm

Johno wrote:
Riceman wrote:
Johno wrote:
And I've noted that some of the posts trying to be witty as if counting kitchen utensils in the asset allocation is the problem haven't actually said if they own a house.
If I had a house, I would have counted it in my bloated definition (I also forgot to include potential inheritance 20 years down the line and stable situation on both sides of the family).

My point is that there are many things (social security, pensions, relative job security, prospect of inheritance, prospect of short life expectancy, etc) that are important additional factors in determining the proper allocation of one's investable assets. Because there are so many additional factors, the term "100% stocks" is a simplification that describes only the allocation of one's investment portfolio, and when a person says she is 100% stocks, she shouldn't need to defend herself against the definition police.

With that out of the way, I am 100% stocks, and I think it's a great fit for my situation, since I have numerous other factors that stabilize my financial situation outside of my investment portfolio.
There are important additional factors which aren't tangible assets the person owns right now. But a house is a tangible asset the person owns right now, if so, just like stocks or bonds or cash. As a follow up post said, people can say they're the Queen of England if they want, but if they have a $500k house, $500k stocks and a $100k 'emergency fund' their (tangible current) asset portfolio is 45% stocks, that's the fact, no 'bloat' in that definition.

And again 'investable assets' is an invention of the financial industry. It means the assets they can hope to make you pay them to manage, the ones *they* care about. I don't see that it has any valid meaning for the individual.
I disagree but count things however you like. A $500K house in most cases has property taxes and upkeep that can rival rent. I am stunned at anyone who thinks investable assets is a marketing scheme. BTW, I don't count my paid off cars as part of my AA either but they are tangible assets.
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Re: Why not 100% Stocks?

Post by Johno » Sun Oct 19, 2014 12:33 pm

StarbuxInvestor wrote:
Johno wrote:
Riceman wrote:
Johno wrote:
And I've noted that some of the posts trying to be witty as if counting kitchen utensils in the asset allocation is the problem haven't actually said if they own a house.
If I had a house, I would have counted it in my bloated definition (I also forgot to include potential inheritance 20 years down the line and stable situation on both sides of the family).
There are important additional factors which aren't tangible assets the person owns right now. But a house is a tangible asset the person owns right now, if so, just like stocks or bonds or cash. As a follow up post said, people can say they're the Queen of England if they want, but if they have a $500k house, $500k stocks and a $100k 'emergency fund' their (tangible current) asset portfolio is 45% stocks, that's the fact, no 'bloat' in that definition.

And again 'investable assets' is an invention of the financial industry. It means the assets they can hope to make you pay them to manage, the ones *they* care about. I don't see that it has any valid meaning for the individual.
I disagree but count things however you like. A $500K house in most cases has property taxes and upkeep that can rival rent. I am stunned at anyone who thinks investable assets is a marketing scheme. BTW, I don't count my paid off cars as part of my AA either but they are tangible assets.
You may also say and count as you like, but there's no logic to saying something is not an asset because it has expenses associated with it. The house is in fact an asset, the person with $500k house and $500k stocks has in fact a portfolio with less risk than the renter with $1000k in stocks, the person going from one portfolio to the other has in fact increased risk, not 'remained at 100% stocks in both cases'. The tree does makes a noise in the forest when it falls whether you hear it or not. :D

And I didn't say 'investible assets' was a 'scheme', it's just a concept with validity mainly from the POV of sellers of financial services, not individual investors, except insofar as they are concerned with limits or perquisites the sellers of financial services impose or give based on 'investible' assets.

My paid off car is a negligible % of my assets, my house isn't. And if one's car isn't a negligible % of assets, it's back to the other person's comment before: nothing wrong with just starting off in investing, but if one's financial asset portfolio is of the same order of magnitude value as one's car, it doesn't really matter much what's in it now.

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TheTimeLord
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Re: Why not 100% Stocks?

Post by TheTimeLord » Sun Oct 19, 2014 12:53 pm

Johno wrote:
StarbuxInvestor wrote:
Johno wrote:
Riceman wrote:
Johno wrote:
And I've noted that some of the posts trying to be witty as if counting kitchen utensils in the asset allocation is the problem haven't actually said if they own a house.
If I had a house, I would have counted it in my bloated definition (I also forgot to include potential inheritance 20 years down the line and stable situation on both sides of the family).
There are important additional factors which aren't tangible assets the person owns right now. But a house is a tangible asset the person owns right now, if so, just like stocks or bonds or cash. As a follow up post said, people can say they're the Queen of England if they want, but if they have a $500k house, $500k stocks and a $100k 'emergency fund' their (tangible current) asset portfolio is 45% stocks, that's the fact, no 'bloat' in that definition.

And again 'investable assets' is an invention of the financial industry. It means the assets they can hope to make you pay them to manage, the ones *they* care about. I don't see that it has any valid meaning for the individual.
I disagree but count things however you like. A $500K house in most cases has property taxes and upkeep that can rival rent. I am stunned at anyone who thinks investable assets is a marketing scheme. BTW, I don't count my paid off cars as part of my AA either but they are tangible assets.
You may also say and count as you like, but there's no logic to saying something is not an asset because it has expenses associated with it. The house is in fact an asset, the person with $500k house and $500k stocks has in fact a portfolio with less risk than the renter with $1000k in stocks, the person going from one portfolio to the other has in fact increased risk, not 'remained at 100% stocks in both cases'. The tree does makes a noise in the forest when it falls whether you hear it or not. :D

And I didn't say 'investible assets' was a 'scheme', it's just a concept with validity mainly from the POV of sellers of financial services, not individual investors, except insofar as they are concerned with limits or perquisites the sellers of financial services impose or give based on 'investible' assets.

My paid off car is a negligible % of my assets, my house isn't. And if one's car isn't a negligible % of assets, it's back to the other person's comment before: nothing wrong with just starting off in investing, but if one's financial asset portfolio is of the same order of magnitude value as one's car, it doesn't really matter much what's in it now.
Problem is your house doesn't generate income and can't be partially sold. Add to that everyone needs to live somewhere whether it is your house, an apartment or your parents basement. Home equity is more prepaid rent than an investable asset. The only function mine has in my investment plan is to help pay for LTC, i.e. Paying a different rent.
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avalpert
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Re: Why not 100% Stocks?

Post by avalpert » Sun Oct 19, 2014 1:35 pm

StarbuxInvestor wrote:
Problem is your house doesn't generate income
Sure it does, just because you pay it to yourself doesn't change that. You could always rent it out and get a rental yourself.

and can't be partially sold.
Real estate isn't the only investment that is illiquid - if it weren't their 'home' but instead a rental property would the illiquidty matter in this discussion?
Home equity is more prepaid rent than an investable asset.
I am no fan of looking at a home purchase as primarily an investment decision rather than a consumption decision - but no, home equity is most certainly not more prepaid rent than an investable asset and that is a way of looking at it that seems tailor made to poor consumption and investment decisions. Whether or not to get a mortage/pay one off should in no way be measured against some mythical rental prepayment and that is exactly what this leads to.

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TheTimeLord
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Re: Why not 100% Stocks?

Post by TheTimeLord » Sun Oct 19, 2014 3:33 pm

avalpert wrote:
StarbuxInvestor wrote:
Problem is your house doesn't generate income
Sure it does, just because you pay it to yourself doesn't change that. You could always rent it out and get a rental yourself.

I really don't think the interest, taxes or upkeep are paying yourself. You could rent it out but then it isn't your home it is a rntal property for which you take depreciation and on top of the interest, taxes and upkeep you are now paying rent for where you are living.

and can't be partially sold.
Real estate isn't the only investment that is illiquid - if it weren't their 'home' but instead a rental property would the illiquidty matter in this discussion?

If it was a true rental you would probably count the positive cash flow generated because it would be an investment generating income (hopefully).
Home equity is more prepaid rent than an investable asset.
I am no fan of looking at a home purchase as primarily an investment decision rather than a consumption decision - but no, home equity is most certainly not more prepaid rent than an investable asset and that is a way of looking at it that seems tailor made to poor consumption and investment decisions. Whether or not to get a mortage/pay one off should in no way be measured against some mythical rental prepayment and that is exactly what this leads to.

Not sure we are disagreeing here or what you point is. I am mostly a cash flow guy and I have found looking at things from that perspective to be very useful. If I own my house going into retirement my expenses are hopefully less than if I rent or if I am paying a mortgage. For the purpose of setting a number or figuring my SWR I am going to use my expenses and not try to account for home equity. And I am going to set my AA from that perspective becuase what I need to cover is my expenses. If I sell the house and take money out I would then consider only what is taken out part of my investible assets.
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Re: Why not 100% Stocks?

Post by LadyGeek » Sun Oct 19, 2014 3:50 pm

The above is an often discussed point of contention which won't be resolved here.

See the wiki: Owning vs renting (Impact on portfolio (negative bonds))

Feel free to continue the discussion in the referenced thread: Mortgage as a "reverse bond" in Allocation Planning, or start a new thread.
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Re: Why not 100% Stocks?

Post by Johno » Mon Oct 20, 2014 10:40 am

StarbuxInvestor wrote:
Problem is your house doesn't generate income and can't be partially sold. Add to that everyone needs to live somewhere whether it is your house, an apartment or your parents basement. Home equity is more prepaid rent than an investable asset. The only function mine has in my investment plan is to help pay for LTC, i.e. Paying a different rent.
This may not be resolved as in everyone who is wrong agreeing so (the internet wouldn't any fun if that ever happened :D ) but an owned house is an asset, period, and none of the reasons you've given why it isn't stand any logical scrutiny.

The fact you have to live someplace and a house doesn't pay you cash doesn't make a house not an asset, just like the expenses of the house don't make it not an asset. If you own the house you're subject to gain and loss on value of the money you *invested* in that *asset*. If you rent you didn't make that investment and aren't subject to that gain and loss, just like if you didn't buy stock you aren't subject to its gains and losses. If you set up a big bank account of many years future rent that's also an asset, but of distinctly different risk/return characteristics than real estate, that's an allocation to cash.

Just because cash flow analysis of renting v buying a home is prudent, doesn't make the home buy option not an investment in an asset. You're confusing two different things. The $500k house/$500k stock person plainly does not have the same risk profile as $1000k stock renter, so it's plainly not correct or else not very meaningful to say those two are both '100% stocks'. Or can anyone directly address that example?

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Re: Why not 100% Stocks?

Post by TheTimeLord » Mon Oct 20, 2014 10:50 am

Johno wrote:
StarbuxInvestor wrote:
Problem is your house doesn't generate income and can't be partially sold. Add to that everyone needs to live somewhere whether it is your house, an apartment or your parents basement. Home equity is more prepaid rent than an investable asset. The only function mine has in my investment plan is to help pay for LTC, i.e. Paying a different rent.
This may not be resolved as in everyone who is wrong agreeing so (the internet wouldn't any fun if that ever happened :D ) but an owned house is an asset, period, and none of the reasons you've given why it isn't stand any logical scrutiny.

The fact you have to live someplace and a house doesn't pay you cash doesn't make a house not an asset, just like the expenses of the house don't make it not an asset. If you own the house you're subject to gain and loss on value of the money you *invested* in that *asset*. If you rent you didn't make that investment and aren't subject to that gain and loss, just like if you didn't buy stock you aren't subject to its gains and losses. If you set up a big bank account of many years future rent that's also an asset, but of distinctly different risk/return characteristics than real estate, that's an allocation to cash.

Just because cash flow analysis of renting v buying a home is prudent, doesn't make the home buy option not an investment in an asset. You're confusing two different things. The $500k house/$500k stock person plainly does not have the same risk profile as $1000k stock renter, so it's plainly not correct or else not very meaningful to say those two are both '100% stocks'. Or can anyone directly address that example?
No one is saying a house isn't an asset, so is your car, jewelry and collectibles. The question is whether you consider it an investable asset and part of your AA or not. When I calculate my net worth I include my house when I calculate my AA for investable assets I don't. Whether my house goes up or down in value I can still live in it and use it for shelter, its primary function. If my investable assets go down I might be able to buy things or pay expenses, which is their primary purpose. A change in the value off my house does little (property taxes change) to effect my ability to pay expenses one way or the other. But if someone else wants to approach it from a different POV that is most certainly their right.
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Re: Why not 100% Stocks?

Post by longinvest » Mon Oct 20, 2014 12:23 pm

That's why I like the Need, Ability, and Willingness to take risk approach to selecting one's investment portfolio Asset Allocation. You could rationally chose to be 100% in stocks (in your investment portfolio) if you have the the ability to do so (through owning your house and having a pension, for example).

How often does one have all of the 3: ability, need, and willingness for a 100% stock portfolio? My guess: not very often. I think that one is most likely not to have the need for it when there is ability. In most cases, it gets down to a willingness to take more risk than absolutely needed.
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Re: Why not 100% Stocks?

Post by dbr » Mon Oct 20, 2014 1:21 pm

longinvest wrote:That's why I like the Need, Ability, and Willingness to take risk approach to selecting one's investment portfolio Asset Allocation. You could rationally chose to be 100% in stocks (in your investment portfolio) if you have the the ability to do so (through owning your house and having a pension, for example).

How often does one have all of the 3: ability, need, and willingness for a 100% stock portfolio? My guess: not very often. I think that one is most likely not to have the need for it when there is ability. In most cases, it gets down to a willingness to take more risk than absolutely needed.
I think this is right on in general. The typical answer Swedroe gives to the contradiction of having ability but no need is that less risk is the trump card. Part of the explanation is that the marginal utility of wealth is diminishing and that risk is typically underestimated. Willingness is a kind of tricky concept. I read Swedroe to interpret willingness as the psychological ability to accept risk and not do foolish things when it turns out one is not psychologically prepared. I am not sure willingness reads as an actual desire to take unneeded risk. While that could be a motivation for some people, it isn't what the concept is recommending.

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Re: Why not 100% Stocks?

Post by Yesterdaysnews » Mon Oct 20, 2014 2:49 pm

I decided to go 100% stock in my portfolio after I paid off my house. Seems like a no brainer to me. House is kinda like a big bond anyways.

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Re: Why not 100% Stocks?

Post by letsgobobby » Mon Oct 20, 2014 3:12 pm

Yesterdaysnews wrote:I decided to go 100% stock in my portfolio after I paid off my house. Seems like a no brainer to me. House is kinda like a big bond anyways.
Though in a true crisis/left tail event pretty hard to rebalance from.

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Re: Why not 100% Stocks?

Post by richard » Mon Oct 20, 2014 3:14 pm

letsgobobby wrote:
Yesterdaysnews wrote:I decided to go 100% stock in my portfolio after I paid off my house. Seems like a no brainer to me. House is kinda like a big bond anyways.
Though in a true crisis/left tail event pretty hard to rebalance from.
Hard to rebalance from in any event, especially if you want to remain debt free.

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Re: Why not 100% Stocks?

Post by technovelist » Mon Oct 20, 2014 3:26 pm

letsgobobby wrote:
Yesterdaysnews wrote:I decided to go 100% stock in my portfolio after I paid off my house. Seems like a no brainer to me. House is kinda like a big bond anyways.
Though in a true crisis/left tail event pretty hard to rebalance from.
I'm not sure real estate is really a good thing to have in a real crisis. It certainly wasn't that great in 2008/2009, was it?
Personally, I don't consider my house as an investment, but my equity isn't very much of my total net worth anyway, so it doesn't matter that much whether I do or not. However, my mortgage is a fairly significant negative bond, and I do consider that as a short position against the dollar...
In theory, theory and practice are identical. In practice, they often differ.

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Re: Why not 100% Stocks?

Post by JoMoney » Mon Oct 20, 2014 3:31 pm

letsgobobby wrote:
Yesterdaysnews wrote:I decided to go 100% stock in my portfolio after I paid off my house. Seems like a no brainer to me. House is kinda like a big bond anyways.
Though in a true crisis/left tail event pretty hard to rebalance from.
Are bonds only for "rebalancing" purposes? I think that raises the question of why someone owns bonds to begin with.
Do they own bonds because they see it as a trading strategy, and plan to use them to buy stocks if a downturn happens (i.e. sort of market-timing)?
Do they own bonds because they fear volatility of stocks and are able to mitigate that (at least in terms of the combined total portfolio) by owning bonds?
Do they own bonds because they want the fixed income/coupon payments?
Do they own the bonds as a match to liabilities / or an emergency stash of cash?

Depending on why it is you own the bonds, I think it might change how you use them. If you want high coupon payments, you probably are willing to have longer term bonds, but relative to stock dividend yields they really don't look attractive right now. If you own them because you don't like volatility, longer term bonds are probably not the way to go. If you own them for emergency cash / liability matching, I don't think you should ever be "rebalancing" that money into stocks.
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Re: Why not 100% Stocks?

Post by longinvest » Mon Oct 20, 2014 3:36 pm

dbr wrote:I think this is right on in general. The typical answer Swedroe gives to the contradiction of having ability but no need is that less risk is the trump card. Part of the explanation is that the marginal utility of wealth is diminishing and that risk is typically underestimated.
Agreed.
Willingness is a kind of tricky concept. I read Swedroe to interpret willingness as the psychological ability to accept risk and not do foolish things when it turns out one is not psychologically prepared. I am not sure willingness reads as an actual desire to take unneeded risk. While that could be a motivation for some people, it isn't what the concept is recommending.
You are most probably right on the proper meaning of Willingness in Swedroe's framework. Swedroe does discuss Willingness in the context of having to reduce expectations if one is not willing to take the risk needed to achieve expectations. Thanks for the clarification.
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Re: Why not 100% Stocks?

Post by Yesterdaysnews » Mon Oct 20, 2014 4:12 pm

I would not rebalance anyway. I would just buy more stocks as the market goes down and let it ride longterm. I don't want to ever sell any of my investments during my lifetime.

This is why I don't desire any bonds in my investments after I paid off my house. I also bought the smallestand least expensive home in a swanky gated neighborhood etc and it has gone up probably 30% in value since 2010 when I purchased it.

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Re: Why not 100% Stocks?

Post by countmein » Mon Oct 20, 2014 4:22 pm

JoMoney wrote:
letsgobobby wrote:
Yesterdaysnews wrote:I decided to go 100% stock in my portfolio after I paid off my house. Seems like a no brainer to me. House is kinda like a big bond anyways.
Though in a true crisis/left tail event pretty hard to rebalance from.
Are bonds only for "rebalancing" purposes? I think that raises the question of why someone owns bonds to begin with.
Do they own bonds because they see it as a trading strategy, and plan to use them to buy stocks if a downturn happens (i.e. sort of market-timing)?
Do they own bonds because they fear volatility of stocks and are able to mitigate that (at least in terms of the combined total portfolio) by owning bonds?
Do they own bonds because they want the fixed income/coupon payments?
Do they own the bonds as a match to liabilities / or an emergency stash of cash?
lower risk of capital loss (on all time horizons)

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Re: Why not 100% Stocks?

Post by Johno » Mon Oct 20, 2014 6:38 pm

StarbuxInvestor wrote:
Johno wrote:
StarbuxInvestor wrote:
Problem is your house doesn't generate income and can't be partially sold. Add to that everyone needs to live somewhere whether it is your house, an apartment or your parents basement. Home equity is more prepaid rent than an investable asset. The only function mine has in my investment plan is to help pay for LTC, i.e. Paying a different rent.
This may not be resolved as in everyone who is wrong agreeing so (the internet wouldn't any fun if that ever happened :D ) but an owned house is an asset, period, and none of the reasons you've given why it isn't stand any logical scrutiny.

The $500k house/$500k stock person plainly does not have the same risk profile as $1000k stock renter, so it's plainly not correct or else not very meaningful to say those two are both '100% stocks'. Or can anyone directly address that example?
No one is saying a house isn't an asset, so is your car, jewelry and collectibles. The question is whether you consider it an investable asset and part of your AA or not. When I calculate my net worth I include my house when I calculate my AA for investable assets I don't. Whether my house goes up or down in value I can still live in it and use it for shelter, its primary function. If my investable assets go down I might be able to buy things or pay expenses, which is their primary purpose. A change in the value off my house does little (property taxes change) to effect my ability to pay expenses one way or the other. But if someone else wants to approach it from a different POV that is most certainly their right.
If it's an asset and significant in size among total assets, it's meaningless to give a '%' allocation which doesn't include it, simple as that. I can understand your latest explanation, but like each of the last two it doesn't have any logic I can see toward why one would calculate an allocation not including a house, if it's a significant % of assets. If you have the house as shelter, that's less risk to an important part of a life style than if the money were in stocks. Hence again the $500k house/$500k stock person does not have the same asset allocation in terms of risk (what other reason is there to calculate an asset allocation than measure risk?) as the $1mil in stock renter. If they both say 'I'm 100% stock' we know they have the wrong definition. :D Or I'll ask one more time, in what meaningful sense do they have the same allocation? If you're saying we should calculate something called an allocation, but it needn't make any objective sense, I don't see the point of the whole exercise.

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Re: Why not 100% Stocks?

Post by TheTimeLord » Mon Oct 20, 2014 6:58 pm

Johno wrote:
StarbuxInvestor wrote:
Johno wrote:
StarbuxInvestor wrote:
Problem is your house doesn't generate income and can't be partially sold. Add to that everyone needs to live somewhere whether it is your house, an apartment or your parents basement. Home equity is more prepaid rent than an investable asset. The only function mine has in my investment plan is to help pay for LTC, i.e. Paying a different rent.
This may not be resolved as in everyone who is wrong agreeing so (the internet wouldn't any fun if that ever happened :D ) but an owned house is an asset, period, and none of the reasons you've given why it isn't stand any logical scrutiny.

The $500k house/$500k stock person plainly does not have the same risk profile as $1000k stock renter, so it's plainly not correct or else not very meaningful to say those two are both '100% stocks'. Or can anyone directly address that example?
No one is saying a house isn't an asset, so is your car, jewelry and collectibles. The question is whether you consider it an investable asset and part of your AA or not. When I calculate my net worth I include my house when I calculate my AA for investable assets I don't. Whether my house goes up or down in value I can still live in it and use it for shelter, its primary function. If my investable assets go down I might be able to buy things or pay expenses, which is their primary purpose. A change in the value off my house does little (property taxes change) to effect my ability to pay expenses one way or the other. But if someone else wants to approach it from a different POV that is most certainly their right.
If it's an asset and significant in size among total assets, it's meaningless to give a '%' allocation which doesn't include it, simple as that. I can understand your latest explanation, but like each of the last two it doesn't have any logic I can see toward why one would calculate an allocation not including a house, if it's a significant % of assets. If you have the house as shelter, that's less risk to an important part of a life style than if the money were in stocks. Hence again the $500k house/$500k stock person does not have the same asset allocation in terms of risk (what other reason is there to calculate an asset allocation than measure risk?) as the $1mil in stock renter. If they both say 'I'm 100% stock' we know they have the wrong definition. :D Or I'll ask one more time, in what meaningful sense do they have the same allocation? If you're saying we should calculate something called an allocation, but it needn't make any objective sense, I don't see the point of the whole exercise.
Since I do my AA in relation to my investable assets and I do not consider my house an investable asset my AA whether 100% stock or whatever is determined off whatever the AA for my investable assets is. For me AA is the reflection of the risk in my investable portfolio not the entirety of my financial life because I look at it from the perspective of how much of that portfolio I am willing to lose or risk.
IMHO, Investing should be about living the life you want, not avoiding the life you fear. | Run, You Clever Boy! [9085]

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Re: Why not 100% Stocks?

Post by placeholder » Tue Oct 21, 2014 12:00 am

Johno wrote:If it's an asset and significant in size among total assets, it's meaningless to give a '%' allocation which doesn't include it, simple as that.
Depends on circumstances for instance mine is less than 10% of total assets but regardless it is not part of my investments it is shelter that I purchased.

El_Cid
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Re: Why not 100% Stocks?

Post by El_Cid » Wed Feb 10, 2016 8:52 am

MarSam wrote:I'll still be holding enough in cash to account for 10 years of expenses AND I still own a business that I will likely sell in 5-10 years
How is this 100% stocks then?
You do realize having CASH to cover TEN YEARS of expenses is probably more conservative than most bogleheads here. And a business - def the most conservative. :oops:

If you have a $1 mil house, $400k in cash to cover 10 years of expenses and a business that could be sold for $2 mil. And you have a $50k invested in VTI - you are NOT 100% in stocks. But it boggles my mind that there are some people in this thread who would disagree with this statement.

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Toons
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Re: Why not 100% Stocks?

Post by Toons » Wed Feb 10, 2016 8:54 am

100% equities?
A lot easier said than done.
Most investors can't "bear" they pain,,,,
during an extended bear market...
they bail. :happy
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee

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Re: Why not 100% Stocks?

Post by psystal » Wed Feb 10, 2016 9:04 am

At age 30, my wife and I remain invested in 100% equities. My IPS says to start gliding with bonds at age 40. We both have a long-term view of our investments, and have no need to access those investments until we retire. We haven't been investing for long due to job loss and student debt, but have been saving heavily for a little over 2 years. Needless to say, we're feeling the burn with this recent "correction."

That said, my wife also has a pension, which probably tempers any emotions that might otherwise take hold in a bear market. Some would even argue that the pension is equivalent, psychologically and/or financially, to a heavy allocation of bonds. I wouldn't disagree with them, but would still likely be 100% equities until age 35 even without the pension.

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Re: Why not 100% Stocks?

Post by Durzo » Wed Feb 10, 2016 9:23 am

Age: 23
Debt:$0
Asset Allocation: 100% Stocks
Stock Distribution: Tilted towards small cap, international and emerging markets
Return since inception: -10.25%
Emergency Fund: $0.00
Amount in checking account: $230
Credit card bill due this month: $357

So technically i'm leveraged into 100%+ stocks! :twisted:

Do I sleep well at night? Yes.
Can I stomach the downturns? I was on the fence the first month or so, but it has been a breeze ever since. The negative returns barely get a yawn out of me nowadays.

10% Drop? 20% drop? 50% drop? I'll be just fine. As usual YMMV.

-Joey

El_Cid
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Re: Why not 100% Stocks?

Post by El_Cid » Wed Feb 10, 2016 9:27 am

If person A has a $500k house and invests $500k in the stock market - he is not 100% in stocks. He has $1 mil in assets - he could sell the house and buy more stocks...

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Re: Why not 100% Stocks?

Post by breeks » Wed Feb 10, 2016 9:59 am

Durzo wrote:Age: 23

10% Drop? 20% drop? 50% drop? I'll be just fine. As usual YMMV.
Until you've been through a bear market like 2007-2009 with years of savings wiped out, it's hard to predict how you'll react.

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Re: Why not 100% Stocks?

Post by El_Cid » Wed Feb 10, 2016 11:04 am

Durzo wrote:Age: 23
Debt:$0
Credit card bill due this month: $357
I don't have a lot of experience with credit cards - but if you have to pay a bill for your credit card, isn't that... debt?

I'm 28 years old - I only started saving 3 years ago.
Stocks 89%, bonds 11%. My bonds allocation is increasing as I approach my FIRE date. When I see stocks going down I rejoice because I can buy more each month. BUT I know this is because I'm at the start of my accumulation phase. It would be foolish of me, I think, to expect the same emotional response to a bear market into the future as I approach my retirement in 10-15 years.

I highly recommend this book: The Ivy Portfolio. It talks about the asset allocation used by the highly successful Harvard and Yale endowments.

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Re: Why not 100% Stocks?

Post by rmelvey » Wed Feb 10, 2016 11:56 am

Ignoring the emergency fund makes this discussion like comparing apples and oranges.

When you fold in ALL of your assets the "100%" stock people are saying that they prefer having cash versus bonds. That's fine, but that doesn't mean you are 100% stocks. It just means that you are missing out on the term/credit premiums by keeping your FI duration short and with high credit quality... :oops:

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Re: Why not 100% Stocks?

Post by Day9 » Wed Feb 10, 2016 12:14 pm

A modestly leveraged diversified portfolio can have higher expected return with lower risk than an unlevered 100% stock portfolio.

Yet Mr Markowitz himself still recommends a very high stock allocation, perhaps 100%, to young investors in this recent interview.
I'm just a fan of the person I got my user name from

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Re: Why not 100% Stocks?

Post by dunscap » Wed Feb 10, 2016 2:55 pm

Yesterdaysnews wrote:I don't feel bullet proof but being replaced by 3rd world teleradiology is really low on my list of worries lol. As of now, Medicare will not reimburse a radiological interpretation unless it is performed on US soil, not to mention all the licensure and credential requirements etc. There are a LOT of barriers to that happening in my lifetime. Now, continued reimbursement cuts is a real threat to income, but fortunately I haven't noticed any significant changes so far. But, that is certainly a on the radar, usually a slow process.
You are either counting on a short lifetime or underestimating the disruptive pressure.

Medicare does not have to be the driver here anyway. Private insurers and hospital groups will; Medicare will follow with political cost cutting pressure. What radiologists do is out of sight to patients. The relevant actors will get the necessary credentials for their foreign radiologists and sites and/or push to change the required credentials and regs.

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Re: Why not 100% Stocks?

Post by El_Cid » Thu Feb 11, 2016 8:56 am

Day9 wrote:A modestly leveraged diversified portfolio can have higher expected return with lower risk than an unlevered 100% stock portfolio.

Yet Mr Markowitz himself still recommends a very high stock allocation, perhaps 100%, to young investors in this recent interview.
Can you expand on your first point please?

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Re: Why not 100% Stocks?

Post by rmelvey » Thu Feb 11, 2016 12:42 pm

El_Cid wrote:
Day9 wrote:A modestly leveraged diversified portfolio can have higher expected return with lower risk than an unlevered 100% stock portfolio.

Yet Mr Markowitz himself still recommends a very high stock allocation, perhaps 100%, to young investors in this recent interview.
Can you expand on your first point please?
He is saying that something like 100% equities, 20% bonds, -20% cash (margin debt) theoretically has higher expected returns than stocks with less risk because you get to pick up the term premium which usually earns a positive return and is not correlated with equities (lowering the SD of your portfolio). This is what gets taught in most undergraduate finance courses, but of course this assumes that you can borrow at something very close to risk free rate.

You can get cheap leverage using the futures market but it is not very tax efficient for equities. If you wanted to go with this strategy than getting bond exposure/leverage through futures could make sense because you get to treat half of the income as LTCG. This obviously is more work than owning a mutual fund and requires a large portfolio because the notional value of one contract would give the average investor much more leverage than they could intelligently handle.

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Re: Why not 100% Stocks?

Post by Raiddinn » Thu Feb 11, 2016 2:15 pm

Some reasons

1) Staying the course is much eaiser. The ups and downs in a portfolio are a lot easier to handle with a portfolio that is 40% or more in conservative assets. A lot of people do stupid things when portfolio volatility happens. Adding conservative assets works to prevent you from doing stupid things that would destroy your portfolio (selling stocks low, buying bonds high, for instance).

2) Buying stocks with 1% of your income doesn't have to be compared to buying bonds with 1% of your income. I think a better comparison is buying stocks with 1% or buying bonds with 2%. Between those, the results of bonds look pretty attractive. Yes, this does mean you need to save more for retirement. The tradeoff is that you are much more likely to have a retirement. Instead of 10% in stocks, you might try 7% stocks and 6% bonds, for instance. This puts your retirement more in terms of what you save (you control this) instead of stock performance (you don't).

3) Rebalancing absolutely has been shown to boost returns. It's harder to rebalance between stocks and stocks. Going 50/50 lets you gain 1 - 2% on the predicted end results purely from the balancing. That helps close the expected performance gap by itself.

4) Bonds do a lot better than stocks when it comes to leaving a legacy much sooner. Imagine if you didn't have life insurance and you died right now. Your heirs would be better off if you had more bonds rather than less. This matters if you are one of the 99% of people that expect not to get a life insurance payout after their life ends.

5) The lowest risk portfolio is mathematically somewhere between 25-33s/66-75b. Investment companies often use this because reducing risk is important.

6) You can sell bonds more or less any time. The same is not true for stocks.

7) Risk is a lot more than just your end result. Having less money is a risk, so are lots of other things. Getting returns in the wrong order is another, having to sell at the wrong time is also, etc. Having more than one asset type mitigates a lot of the other important risks.

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Re: Why not 100% Stocks?

Post by lack_ey » Thu Feb 11, 2016 2:42 pm

rmelvey wrote:
El_Cid wrote:
Day9 wrote:A modestly leveraged diversified portfolio can have higher expected return with lower risk than an unlevered 100% stock portfolio.

Yet Mr Markowitz himself still recommends a very high stock allocation, perhaps 100%, to young investors in this recent interview.
Can you expand on your first point please?
He is saying that something like 100% equities, 20% bonds, -20% cash (margin debt) theoretically has higher expected returns than stocks with less risk because you get to pick up the term premium which usually earns a positive return and is not correlated with equities (lowering the SD of your portfolio). This is what gets taught in most undergraduate finance courses, but of course this assumes that you can borrow at something very close to risk free rate.

You can get cheap leverage using the futures market but it is not very tax efficient for equities. If you wanted to go with this strategy than getting bond exposure/leverage through futures could make sense because you get to treat half of the income as LTCG. This obviously is more work than owning a mutual fund and requires a large portfolio because the notional value of one contract would give the average investor much more leverage than they could intelligently handle.
I'm pretty sure the numbers are off for your example. 100/20/-20 is adding risk compared to 100/0/0 (stock/bond/cash), unless you assume sufficient negative correlation. You definitely don't get risk reduction from adding uncorrelated assets without taking something else away.

It's more like, um, 84/56/-40 compared to 100/0/0, or something thereabouts. I've done some backtests for returns over the last 90 years and it was something like that: very slightly higher return with slightly lower risk. That's assuming a cash rate slightly above LIBOR, like you'd get with futures these days, and annual rebalancing for simplicity although that might be slightly unrealistic.

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Re: Why not 100% Stocks?

Post by rmelvey » Thu Feb 11, 2016 3:20 pm

lack_ey wrote:
rmelvey wrote:
El_Cid wrote:
Day9 wrote:A modestly leveraged diversified portfolio can have higher expected return with lower risk than an unlevered 100% stock portfolio.

Yet Mr Markowitz himself still recommends a very high stock allocation, perhaps 100%, to young investors in this recent interview.
Can you expand on your first point please?
He is saying that something like 100% equities, 20% bonds, -20% cash (margin debt) theoretically has higher expected returns than stocks with less risk because you get to pick up the term premium which usually earns a positive return and is not correlated with equities (lowering the SD of your portfolio). This is what gets taught in most undergraduate finance courses, but of course this assumes that you can borrow at something very close to risk free rate.

You can get cheap leverage using the futures market but it is not very tax efficient for equities. If you wanted to go with this strategy than getting bond exposure/leverage through futures could make sense because you get to treat half of the income as LTCG. This obviously is more work than owning a mutual fund and requires a large portfolio because the notional value of one contract would give the average investor much more leverage than they could intelligently handle.
I'm pretty sure the numbers are off for your example. 100/20/-20 is adding risk compared to 100/0/0 (stock/bond/cash), unless you assume sufficient negative correlation. You definitely don't get risk reduction from adding uncorrelated assets without taking something else away.

It's more like, um, 84/56/-40 compared to 100/0/0, or something thereabouts. I've done some backtests for returns over the last 90 years and it was something like that: very slightly higher return with slightly lower risk. That's assuming a cash rate slightly above LIBOR, like you'd get with futures these days, and annual rebalancing for simplicity although that might be slightly unrealistic.
Yes, it does depend on the time-frame but I think if you look at recent history my statement holds. Although Treasury bond holders have been blessed with extreme negative correlations recently.

An easy way to check my statement is to go to ETF replay and compare a portfolio of 80% stocks 20% cash with a portfolio of 80% stock and 20% LTT. The one with the long term treasuries has lower SD even though in isolation the LTT has higher SD than cash.

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Go Blue 99
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Re: Why not 100% Stocks?

Post by Go Blue 99 » Fri Feb 12, 2016 3:59 pm

Here is an article from David Levine in NY Times today, arguing for 100% equity:

"How Much of Your Nest Egg to Put Into Stocks? All of It"

http://www.nytimes.com/2016/02/13/your- ... .html?_r=0

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Re: Why not 100% Stocks?

Post by rmelvey » Sat Feb 13, 2016 7:11 am

I disagree with the nyt article because he argues that the time horizon is always long. I see my death as the end of the time horizon, so it gets shorter every day. Stocks have a duration of close to 50, so i would feel uncomfortable feeling confident in even decade forecasts. I also will probably make random withdrawals before I retire so my (kids college, home purchase) time horizon is not strictly about retirement. I see my portfolio as one giant pot for many different purposes, and adding bonds over time is my way of making sure I get to make withdrawals when I need to.

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Re: Why not 100% Stocks?

Post by stemikger » Sat Feb 13, 2016 7:48 am

Choose Simplicity ~ Stay the Course!! ~ Press on Regardless!!!

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Re: Why not 100% Stocks?

Post by TJSI » Sat Feb 13, 2016 12:57 pm

Go Blue 99

I read Mr. Levine's NYT article this morning (How Much of Your Nest Egg To Put Into Stocks? All of it) and found it interesting but not that useful.

He used Warren Buffet's allocation of stocks for his wife (90%) as part of his argument to go heavy on stocks as you get older.
And I think he has a point. So when I get to over one billion in net worth, I am going really heavy into stocks. Maybe even tilt to EM!

I have a ways to go. I am ever hopeful but getting less confident as that final time horizon creeps ever closer.

TJSI

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