90% / 10% too high?

[obgyn65]

Interestingly, there is a thread about CDs going on this week on Bogleheads : Bogleheads • View topic - Allan Roth says CD's

As one might expect, there are many diverse views there also.

 

[obgyn65]

Where my father's parents used to live, no house was left standing in 1944-1945. So even having real estate would not have saved you.

My grandmother's parents' business was wiped out. Twice.

So my families on both sides had to relocate, try to survive, and hide. For years.

This is without counting those in my extended family who lost their lives both in 1914-18 and 1939-45.

Agreed, there is a cultural aspect to investing.

I do get that. My European parents and grandparents are/were very risk averse. Their wealth is/was held in cash and real estate, with virtually zero exposure to stocks and that's how I learned how to invest my money too. So there is definitely a cultural dimension to this.

 

[clifp]

Where my father's parents used to live, no house was left standing in 1944-1945. So even having real estate would not have saved you.

My grandmother's parents' business was wiped out. Twice.

So my families on both sides had to relocate, try to survive, and hide. For years.

This is without counting those in my extended family who lost their lives both in 1914-18 and 1939-45.

Agreed, there is a cultural aspect to investing.

I have heard this similar story repeated by Japanese families, Vietnamese along with some Europeans and on the forum several people who've born/lived in South America have lost of lost money to inflation and/or government confiscation.

I guess I don't see have all your money in bank CDs protects one.
Pretty much all of these crisis were proceeded by the closing of banks and currency restrictions. Look at the situations in Cyprus, Iceland, and Greece, currency restriction or outright confiscation in the case of Cyprus.

I can see keeping a nice stash of diamonds would be useful for bribes and such. But I bet the Europeans who had money in US stocks or Swiss stocks probably came out the best after the war. Now that wasn't so easy in the 1st half of the 20th century but in the 21st century not difficult at all.

 

[Dawg52]

Still, after spending a lot of time reading about investment theory, I have chosen to own some equities. I think that the long term benefits of a small equity allocation far outweigh the short term risks.

That's my belief as well. Small as in the 25-30% range. Which is a whole lot more than my parents ever owned.

 

[Brett_Cameron]

This is a great thread! Thanks OP for starting the discussion.

I appreciate all of the well reasoned, passionate, civil arguments for the various paths to success that exist.

 

[Ed_The_Gypsy]

Wow! A lot of traffic on this thread!

I speak only for myself. I am over 65, still working. I/we are almost 100% equities (50/50 US/non-US) except for some cash for more buying. We don't have enough saved to live off it alone. We will depend on SS for a lot of our retirement income. I consider SS our 'bonds', which gives me some courage to invest so strongly in equities.

I have been fully invested since about 1982, through all the great crashes. There have been three times since that the S&P has dropped 50% or so. I have not made any contributions to our nest egg for about 13 years (we have been eliminating debt instead) but even so, we are ahead of even the peak in 2008 even though I had to take some our prematurely a few years ago. It takes a strong stomach and I did not start out very brave at all.

The quote about bonds presenting "return-free risk" was funny, but right now, pretty accurate. They don't pay much today and when interest rates do go up, their value will drop like the S&P in 2009. The only way to not lose is to own individual bonds and hold them to maturity. I would suggest that a young investor avoid bonds or bond funds until interest rates go back up. Become debt-free first. That has a guaranteed return.

No-one can read the future. We may be in for some every dark days in my lifetime. Our family already has made it through some rough patches and we are even better prepared today.

 

[Texas Proud]

I do get that. My European parents and grandparents are/were very risk averse. Their wealth is/was held in cash and real estate, with virtually zero exposure to stocks and that's how I learned how to invest my money too. So there is definitely a cultural dimension to this. Still, after spending a lot of time reading about investment theory, I have chosen to own some equities. I think that the long term benefits of a small equity allocation far outweigh the short term risks.

The problem is that when it comes to a war, there is usually very little that you can invest in that would protect you.... if you are on the losing side almost everything you own can be taken or destroyed.... if you are on the losing side at the end, you might not ever get it back...

Now, if you are on the winning side, it might not be any better... gmvt can take things by force... we do not worry about that much here anymore, but it has happened all over the world...

 

[MichaelB]

I appreciate all of the well reasoned, passionate, civil arguments for the various paths to success that exist.

+1

This is a difficult subject. We all want basically the same thing - to provide for ourselves and pay our own way, while avoiding the hazards that await us. Some of those we read about while others are lessons learned the hard way by previous generations. The real question here is which are more likely to affect us later in life and how do we prepare?

No easy answers, and our civil discussion is appreciated, and very helpful.

 

[Ed_The_Gypsy]

Good arguments for international diversification.

... gmvt can take things by force... we do not worry about that much here anymore, but it has happened all over the world...

Maybe you don't worry about that in Texas--but you should.

 

[Ed_The_Gypsy]

Maybe a little off-topic, but I was musing about the lessons from Japan and international diversification. As I recall, the Japanese are basically forbidden from investing in stocks outside of Japan. If that had been an option, perhaps the average Japanese would be in better shape today. I don't think their stock market would be any better, though. All those mama-sans (the primary investment managers in the family) have been putting everything into savings accounts, not the market, for a long time. I certainly avoid Japanese equities.

 

[Gatordoc50]

I have read your post several times over the last few days. I guess I am in the camp of those who prefer to live below their means and take the risk of losing purchasing power slowly over time rather than risking a sharp loss of equity.

I am encouraged by the fact that a couple of posts recently in other threads seem to indicate that other forum participants seem to be as conservative as I am.

I consider myself pretty conservative even though my AA is about 70/30. My equity to Net Worth ratio is only about 20%, however. I haven't heard too much about others approaching their AA in this way, ( as a percentage of NW). So, it's hard to compare risk tolerance just by looking at someone's AA.

 

[nash031]

I would not recommend a very conservative approach for everyone, as some with a smaller nest egg and no pension for example will need to take more risks to make their FIRE plan work. However, some here like me seem to be able to FIRE while taking much less risk.

Good luck to us all.

I think I'd recommend the opposite. If you have a pension, you can take more risk, since it acts like a bond. If you don't have a large nest egg, you can and should incur more risk early, but taking on more risk late, you risk never retiring. Just my opinions here...

Example: if I stick around for my full 20 years in the military, I start gathering a healthy COLAed pension at age 42. In that regard, once I'm locked into a pension, I plan on adjusting my portfolio back to 90/10 (currently 75/25), in hopes of being able to fully retire (and/or raise my standard of living in retirement) no later than age 50. After retirement, there's a good chance I'll reduce the allocation again, but I don't see ever become heavily bond invested (assuming I have the pension). In theory, either I'll be able to retire earlier, raise my standard of living, or leave the kids I don't have yet a nice starter fund. In theory...

Not everyone has a sweet pension/medical deal like that, but if they do, I think they can tolerate somewhat more risk than someone who's relying solely on investment returns with a smaller nest egg, particularly as retirement approaches. Of course, the right answer is to FIREcalc different scenarios and see which gives the best chance for success.

Just my opinions.

Good luck to us all, indeed.

 

[nash031]

Our portfolio is 90% equity and 10% bond. This is for 401k and roth IRA so will be withdrawing in 26 years when we're 60. Back in 09, our porfolio dropped 40% and we were ok. Bought more into the market.

Assuming we will keep it in there until we're 60, does it make sense to increase bond allocation? It seems that the main reason for equity/bond is to decrease risk but, if we're ok with fluctuation in porfolio, doesn't it make sense to keep more in equity for higher overall return?

I'm about the same age, and was 100/0 following the market crash in 08 until I got married two years ago (at age 34). Now, we're 75/25 (without selling anything), but I may increase that back to 90/10 if I lock in a pension via military service in a few years. 90/10 may be right for you if you aren't going to need that money in the short term. The real answer here is that only you know what's too high for you. Doing something based solely on a book probalby isn't the right answer. The book provides you thoughts and ideas, but ultimately you are the best judge of your personal situation.

 

[RunningBum]

I think I'd recommend the opposite. If you have a pension, you can take more risk, since it acts like a bond. If you don't have a large nest egg, you can and should incur more risk early, but taking on more risk late, you risk never retiring. Just my opinions here...

Example: if I stick around for my full 20 years in the military, I start gathering a healthy COLAed pension at age 42. In that regard, once I'm locked into a pension, I plan on adjusting my portfolio back to 90/10 (currently 75/25), in hopes of being able to fully retire (and/or raise my standard of living in retirement) no later than age 50. After retirement, there's a good chance I'll reduce the allocation again, but I don't see ever become heavily bond invested (assuming I have the pension). In theory, either I'll be able to retire earlier, raise my standard of living, or leave the kids I don't have yet a nice starter fund. In theory...

Not everyone has a sweet pension/medical deal like that, but if they do, I think they can tolerate somewhat more risk than someone who's relying solely on investment returns with a smaller nest egg, particularly as retirement approaches. Of course, the right answer is to FIREcalc different scenarios and see which gives the best chance for success.

Just my opinions.

Good luck to us all, indeed.

You could consider the present value of both your pension and social security in the non-equity portion of your AA. I reduce the social security value by 25% in anticipation of future cuts, and I further reduce both by estimated taxes because I do all of my net worth and AA calculations on after tax values. I've actually been pretty conservative and further reduced them by half but I'm reconsidering this.

Why use after tax values? Because if I have 100K in equities in an after tax account at 100K basis, and 100K in bonds in a tIRA, I don't have a true 50/50 AA. The stocks are truly worth 100K, but the tIRA is worth less because it will be taxed when I withdraw or convert, so I reduce it by estimated taxes.

I would also take issue with the post you quoted that someone investing in equities is taking more risk to make their plan work. They are just taking a different risk, and probably a lesser one. Inflation WILL happen. A war that wipes out your stocks is considerably less likely in the US, and if it does, other savings are certainly at risk as well. Diversification is a great way to reduce risk, and it doesn't just mean have less than 100% stocks, it also means do more than 0% stocks, as well as spreading out investments internationally rather than all in your home country.

 

[FIREd]

I guess I don't see have all your money in bank CDs protects one.

My grandparents and people of their generation did not keep a lot of their money in banks. I worked in a bank when I lived in Europe and when the treasury updated the banknotes, older people would come to the bank with -literally- trash bags full of bills to be exchanged.

 

[haha]

Because of my grand parents' histories in Europe (financially ruined on both sides twice because of two wars) I tend to be very risk averse and hide my wealth. Also working in a very litigious environment makes me very cautious in general. I guess I also hate the idea of losing money. I already know I will cringe at the idea of taking even 1% of my capital after FIRE.

Your GPs would hardly have been better off with cash, unless it was USD or CHF. In fact, taking a real 1-2 punch Germans went through the ruinous Weimar inflation, then unconditionally surrendered after years of a costly losing war. If a German or Austrian could not get money to America or Switzerland, they would have been much better served by investing in equities than in bonds or cash. Better yet rare stamps or rubies or who knows what all. Much of German industry was eventually destroyed, but never was it worth less than hoarded Reichsmarks.

To you second point of hiding money, pretty much impossible for a law abiding resident of any large advanced nation. Unless you have underworld connections, If your wife wants to find your money, she will- and the government is a lot better at this than most wives.

Short term, cash best, short duration high class notes 2nd- but over the long term, in our modern world, for most people owning productive, efficient, well managed assets will always dominate.

Ha

 

[clifp]

My grandparents and people of their generation did not keep a lot of their money in banks. I worked in a bank when I lived in Europe and when the treasury updated the banknotes, older people would come to the bank with -literally- trash bags full of bills to be exchanged.

One can hardly blame them. Cyprus was at least paying decent interest (which in hind sight should have been a huge red flag.) With 0 percent interest rates i don't see any reason to have money in banks above the FDIC/Eurozone limits. Among the many proposal that was kicked around during the Cyprus crisis was to limit insurance to 100,000 Euro/person total regardless of the number of banks the person had accounts in.

Now the chances of this happening in the US are very very remote, but if you are only getting .01% on your money in an interest checking account so are the rewards.

 

[photoguy]

Obgyn65 -- Thanks for the detailed response.

I guess I also hate the idea of losing money. I already know I will cringe at the idea of taking even 1% of my capital after FIRE. If given the marshmallow test when I was a kid, I would never have eaten mine. I would have waited for the second marshmallow. And then a third one, fourth, etc.

I tend not to think of my portfolio as just the mark-to-market value so a drop in equities doesn't really bother me. For one thing, if the market drops in price then PE10 becomes much more attractive meaning that you are more likely to see higher gains in the future.

I think I am less emotional about investing than most, but one article that I found useful was John Montgomery's (of Bridgeway funds) article on "How to Survive and Succeed Through a Bear Market"

http://bridgeway_web.s3.amazonaws.c...c780f37bb/Surviving_a_Bear_Market_2009.02.pdf

 

[Ed_The_Gypsy]

Great article, photoguy!

Can we put this link in a permanent place?

 

[pb4uski]

I think I'd recommend the opposite. If you have a pension, you can take more risk, since it acts like a bond. If you don't have a large nest egg, you can and should incur more risk early, but taking on more risk late, you risk never retiring. Just my opinions here.......

That is the paradox - if you are eligible for a good COLAd pension then you can take more risk because an investment loss would not affect your lifestyle as much, but on the other hand, you could be more conservative because you don't need to take more risk to have your income keep up with inflation.

Same thing occurs if you have a very low withdrawal rate.

To me, at that point it becomes a matter of personal preference (and my preference would be more risk).

 

[Alan]

That is the paradox - if you are eligible for a good COLAd pension then you can take more risk because an investment loss would not affect your lifestyle as much, but on the other hand, you could be more conservative because you don't need to take more risk to have your income keep up with inflation.

Same thing occurs if you have a very low withdrawal rate.

To me, at that point it becomes a matter of personal preference (and my preference would be more risk).

+1

I have pensions (non-COLA) and SS due from both UK and US. This means a nice low WR from savings so I don't feel we need a lot of risk so keep the mix at ~40/50/10 and over the last 4 years have found that the dividends have been sufficient so far.

Long may it continue.

 

[pb4uski]

and may the Force be with you.

 

[obgyn65]

I apologize as I did not mean that I am hiding money. What I meant was that I hide from others - except from this website - the fact that I am wealthy, whatever "wealthy" means. I drive a Subaru, own a small condo, always wear cheap clothes, etc. I do not want to attract attention. However, all my income here and in the EU is declared to the IRS.

To you second point of hiding money, pretty much impossible for a law abiding resident of any large advanced nation. Unless you have underworld connections, If your wife wants to find your money, she will- and the government is a lot better at this than most wives.

Ha

 

[Alan]

I apologize as I did not mean that I am hiding money. What I meant was that I hide from others - except from this website - the fact that I am wealthy, whatever "wealthy" means. I drive a Subaru, own a small condo, always wear cheap clothes, etc. I do not want to attract attention. However, all my income here and in the EU is declared to the IRS.

Too late, the black helicopters are already on their way

 

[Running_Man]

Your GPs would hardly have been better off with cash, unless it was USD or CHF. In fact, taking a real 1-2 punch Germans went through the ruinous Weimar inflation, then unconditionally surrendered after years of a costly losing war. If a German or Austrian could not get money to America or Switzerland, they would have been much better served by investing in equities than in bonds or cash. Better yet rare stamps or rubies or who knows what all. Much of German industry was eventually destroyed, but never was it worth less than hoarded Reichsmarks.

To you second point of hiding money, pretty much impossible for a law abiding resident of any large advanced nation. Unless you have underworld connections, If your wife wants to find your money, she will- and the government is a lot better at this than most wives.

Short term, cash best, short duration high class notes 2nd- but over the long term, in our modern world, for most people owning productive, efficient, well managed assets will always dominate.

Ha

I think there is a misconception that one could have done well holding on to equity from WWI in Germany even through to WWII and been better off. In 1948 virtually every company in Germany was dismantled and the stock market fell to 0.76 pts, down 98% as the United States implemented the policy to close all large industry in Germany to prevent any rebuild of war works.
If you were born in 1890 in Germany and survived your 20's by singing Christmas carols to the Brithish across the trenches and made it to 1948 somehow by to that point at age 58 you would have seen 2 occasions where all stock value was literally wiped out. To take money you earned from that point forward and put it into the new companies formed after WWII was very hard for most Germans who as a country are now very risk adverse. Anyone who would have had 20 years of salary saved in the stock market would have a couple months worth of salary in 1948 when the German economic recovery began. If you lived in East Germany, the Soviet Union took possession of all equity so you were wiped out on there as well. Gold and bonds denominated in goldmark repayments were the only instruments that made it through that period with any value. So I do not think there are many actual succesful German stock investors holding stocks from 1914 to 1948 in Germany.

Incidentally, you can open a gold depository account in several institutions in Australia and there is no need for reporting to the United States government or anyone else for that matter so long as the gold remains on deposit as there is no income earned on that holding. Nothing illegal about that at all.