90% / 10% too high?

[obgyn65]

A few people have emailed me in the past advising not to answer a specific individual. The main reason ? They don't want to get into arguments with him (or her). However, I believe I still have the right to express my opinion also without this same individual calling my conservative, low risk views as 'misleading' or 'dangerous' while millions of people have been financially devastated in the last few years by taking so-called 'risks'.

Like holiday meals and family get togethers, we can learn to disagree without being disagreeable, and we should challenge each other in a way that is respectful, on topic, and appropriately impersonal.

 

[cardude]

So let's put some actual numbers to this - here are four FIRECALC runs. Two show a $100 portfolio, 26 years, zero spending to show portfolio growth during the accumulation phase that the OP is asking about. Two more show an inflation adjusted 5% contribution (typical of someone in the accumulation phase).

Worst case scenarios w/o contributions:

Zero equities does not even keep up with inflation over 26 years. OP would lose buying power w/o equities.

90/10 EQ/Fixed mix would ~ DOUBLE in buying power - worst case.

In what world is a worst case scenario of doubling your buying power, 'more risky' than losing buying power?

And the zero equities AA maxed out at about double, while the 90% EQ AA had lots of results moving into the $700 range.

Worst case scenarios with contributions:

Zero equities with 5% contributions only 'grows' to ~ $170 - which a loss in buying power from the starting portfolio plus contributions ($100 + $5*26 = $230), using a simple calc assuming no inflation on the contributions.

Worst case 90/10 EQ/Fixed mix with contributions would provide ~ DOUBLE the buying power of the zero equities portfolio.

And the more typical outcomes also favor the 90/10 mix by ~ 2x.

Now, what evidence do you have that a 90/10 mix is 'too much risk' for someone in the accumulation phase?

I will be blunt - most of us are here to try to share/learn from good information with/from others on this forum. [mod edit]

If you personally are 'afraid' of equities, so be it, act as you see fit. But what use is that to others? And why tell others that they are 'too risky'?

[mod edit]

Here's the first two charts (can only add 3/post, two to follow), Zero no contribs, 90/10 no contribs:

-ERD50

+2. This is good info. You are young and making decent money I assume. You SHOULD be mostly equities. Many of us here are OLD and making no money, so we have to hedge our bets somewhat.

 

[MichaelB]

Directing our advice to the OP, keeping it impersonal and using the ignore function is a good way to keep the thread relevant, assertive and useful.

 

[obgyn65]

It is fair to say that views are quite widespread. I am in the minority in this forum for being over conservative. I also recognize that many here have had to take more risks to become financially independent - and they have my respect for this.

 

[tdv2]

For me, it's all about having a plan and sticking with it. I'm 62% equities with my target at 60%.....sure I wish I had more equities now that the market is running strong. I can also tell you that I wish I was more conservative back in 2009. I do my best to avoid making decisions based on short term market conditions, this isn't easy, I know....I do believe that any decision based on the current conditions is a recipe for disaster. Slow and steady wins the race when you have a long horizon ahead.

 

[target2019]

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?

Based on the books I've read, 90%/10% seems too high so that's why I'm having this dilemma.

Some recommend your age in bonds or fixed income. Keep in mind that the range around the target percentage can be wide. For example, an adviser may write that 10% is a target, but 0-20% could be worth considering. This pdf has a reasonable graphic that explains the risk, and also how a "normal" investor's attitude might change over time.

 

[george76]

The next two (Note that all these have different scales due to the FIRECALC formatting):

-ERD50

ERD50,

Hope it is OK to respond to your previous posting eventhough it apparently got deleted.

I understand what you are saying regarding 90/10 in the accumulation phase. What is your take once you are retired (or early retired)? I know there is no right answer, ie we are all different in terms of risk etc. But I respect your take on this issue. So, I am curious, would you stick with 90% once accumulation is done and retirement is starting or would you at that point change it to something else 80/20, 75/25 or whatever?

My current plan is to have 80/20 when retired but I am not 100% sure. It lowers risk (compared to 90/10), but it also lowers return. It seems like it lowers risk more than it lowers return and thus 80/20 might be a good compromise for me.

What's your view?

George

 

[REWahoo]

George76, if you don't have a pension, annuity or another 'bulletproof' source of income and can stomach an 80/20 or higher allocation in retirement, you've got a huge set of huevos. FIRECalc (see chart below) shows once you get to an AA of 40% equities there is little "upside" for going higher, and the volatility a larger slug of equities can make for a very bumpy ride.

 

[Bestwifeever]

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?

Based on the books I've read, 90%/10% seems too high so that's why I'm having this dilemma.

Thanks

First, you are a mere 34? Kudos for your focus on the future!

I am certainly afraid to give you my opinion on your question but I wonder if you have other investments outside the IRA and 401k and what the breakdown would be for your total stash? That might change the perception of risk.

I am pretty sure that at your age we had 100 percent of our nest egg in one stock--company stock at that. Wonder if that was a good idea (as soon as the plan opened up to other options we moved it out).

 

[MichaelB]

George76, if you don't have a pension, annuity or another 'bulletproof' source of income and can stomach an 80/20 or higher allocation in retirement, you've got a huge set of huevos. FIRECalc (see chart below) shows once you get to an AA of 40% equities there is little "upside" for going higher, and the volatility a larger slug of equities can make for a very bumpy ride.

Nice chart. I thought there was a bit more improvement between 40% and 70%, but apparently it is less than I remembered.

 

[keegs]

With a 26 year investment horizon I like a high equity percentage (maybe 80%). But remember, if the market tanks you don't sell! Also, consider always having a cash position - you have to have money at the bottom to buy at the bottom. Consider a 10% cash position.

+1

 

[Moemg]

George76, if you don't have a pension, annuity or another 'bulletproof' source of income and can stomach an 80/20 or higher allocation in retirement, you've got a huge set of huevos. FIRECalc (see chart below) shows once you get to an AA of 40% equities there is little "upside" for going higher, and the volatility a larger slug of equities can make for a very bumpy ride.

I have to agree with Rewahoo . I went into retirement in 2008 with 72/28 and got severely burnt . Luckily I had a pension and SS survivor annuity to keep me sane. I am at 60/30/10 now and I sleep fine.

 

[Animorph]

As long as you can get through the dips without selling, and with rebalancing into stocks at the least, you should be fine with 90% equities.

In addition to the 26 years you have until 60, you have hopefully a 30+ year retirement. You won't be selling all your equities at 60. Most likely your portfolio will be growing throughout retirement. Although the SWR doesn't increase significantly towards 100% stocks, the average final balance does. So there is a benefit to be had, either in the ability to increase spending later in retirement or to leave an estate.

I'm retired (DW will be I hope at the end of this year). I'm nominally 100% equities, though I raise cash when the portfolio is running ahead of retirement planning expectations. I'm currently about 85% equities/15% cash and bonds. If the market keeps going up I'll have even more cash. The cash will be reinvested in a bear market, or used for expenses if there is no bear. I'll only need to sell equities once the cash runs out and I'm back to 100% equities.

 

[Felix Mulier]

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. Based on the books I've read, 90%/10% seems too high so that's why I'm having this dilemma.

ETR - don't know what books you've read, but I'm reading William Bernstein's The Four Pillars of Investing and highly recommend it. Since you're so young I think you'll get an education from the author's analyses of historical "Bubbles and Busts". Best of luck to you on the ride!

 

[martyb]

At the moment, I'm 100% equities. However, I have 2 pensions cooking (55, not retired yet). Also, I'm pretty sure I'm about to change that equity position soon...

 

[Enjoy the Ride]

Interesting take on thinking about cash/bond as the same bucket. We currently have 20k in cash and 50k in bonds (10% allocation) so 70k can last us about 1.5 yrs if I get laid off + market downturn. If I can collect unemployment, then the money will last 4 yrs. I'm pretty sure I can find something in less than 6 months if I get laid off... maybe not at the same salary but definitely enough to pay the bills.

Maybe 90% equities is ok then. I'm pretty sure I can hold on during the downturn. In 09, I sold but heavily reinvested in financial stocks. Plus, from taxable acct, I transferred to 529 to get tax free gain when the market goes up. Based on past experience, I think I can stomach the downturn.

When the bull market happens, I'll switch to 70% / 30%. When market tanks, switch to 90% / 10%.

 

[Felix Mulier]

At the moment, I'm 100% equities. ... I'm pretty sure I'm about to change that equity position soon...

Been there, done that, got the T-shirt. If you have to move taxable accounts, watch your headroom for capital gains taxes and then hope you don't get hit at year-end with a whopping distribution. The best laid plans..

 

[truenorth418]

Two thoughts.

Most "efficient frontier" models I have seen have shown portfolios generally are less volatile AND ALSO deliver higher long term returns with about 75/25 allocation vs 100% stock.

Benjamin Graham, in "The Intelligent Investor", recommended that one should never have less than 25% allocation to stocks or more than 75%.

 

[truenorth418]

Also, run your numbers through Firecalc. I wouldn't be surprised of your results are better with a little more on the bond side than you have now.

 

[HighRoller]

I also recognize that many here have had to take more risks to become financially independent -

I've often wondered if that might be true for some folks...

 

[Midpack]

It is fair to say that views are quite widespread. I am in the minority in this forum for being over conservative. I also recognize that many here have had to take more risks to become financially independent - and they have my respect for this.

It's ironic that you're "over conservative" and yet you're taking more risk long term with (essentially) no equity exposure in your AA versus an investor with 20-30% equity based on all historic US returns. May seem counterintuitive, which makes me wonder if newer readers realize zero equity has not been the most conservative approach...

 

[Original Wally]

hmmm... Age 59, retired, good db plan, ss (disability), assets $550 (excl house) zero debt (no mtg either), wd rate 2 1/2%. Right now I am 87.5% EQ 12 1/2% bonds.
I have ALWAYS been aggressive, and have suffered big time when things went in the pooper. But I have stayed the course and not veered from my plan.
When I retired I switched to one of the modified "couch potato" portfolios and have even been lazy about re-balancing. Off having too much fun. But it has been doing fine.

BUT you guys have gotten me thinking ... perhaps I should go a tad more conservative. Perhaps. I think I will wait for bonds to cheapen up. Yields are just too low.

I do have thoughts of going to all cash, but that just goes against my natural tendency. If It do anything major, that is the move I will make. Cash - until **THE** correction comes that everyone expects.

 

[MooreBonds]

Why do you have 10% bonds? As Buffet says they are return free risk.

Now I am 1/2 joking. But given your age, your behavior in the last melt down, your reason for not holding them, "they are too expensive". I see no reason for somebody your age to hold any bonds. But if makes you sleep night feel free.

Right now the yield on the total stock market VTI is 1.97% on Total Bond Market 1.56% as long as the yield on stock market is higher than the bond market. Why hold bonds?

My fixed income allocation (14%, after deducting out savings bonds earmarked for finishing paying off my mortgage) is a comfortable allocation currently, because it's not simply assigned to a meager total market index with a return-free risk yield. 1/3 is in higher yielding I-bonds from 2000/2001, about 1/6 is in bond CEFs (mostly foreign), and 1/2 is in individual preferred stocks that have a current yield of about 7%-8%. I realize there is certain risk in the preferreds, but I'm willing to take it given the yield they offer and the fundamentals of the underlying companies.

Will I still hold this relatively large preferred stock allocation when risk-free rates (i.e. long-term treasuries) rise to 6%? I'm hoping that will be at least 10+ years out, which will allow me to plow additional new cash flow in the meantime into foreign equities, and naturally ratcheting down my preferred stock allocation to just a few % - enough to not worry too much about them, as long as the companies are solvent and still paying out.

 

[Marc]

Until my 50th birthday, I was 100% in stocks all in tax deferred accounts. Since then, I have been slowly lowering my equity exposure so I am now at 72/24/4 at 55. I have done this by changing new contributions to primarily bonds and also switching over a lump sum every time i have reached a new 100K portfolio milestone; I now switch 30K at each milestone. My goal is to get down to 60% equities by the time I turn 60. As I am extremely overweighted in small cap and mid cap, I am considering selling Fidelity Small Cap Growth and buying TGMNX; lowering my equities by 3% and upping bond by 3% while lowering my small cap exposure at same time as shortening duration of my bond portfolio. However, with small caps on a tear this month I haven't been able to pull the trigger.

Marc

 

[obgyn65]

Thank you for your constructive comment. As discussed in other threads, this lack of equity exposure is the main reason why 1) I bought some deferred annuities last year 2) I bought some Wellesley also.

My main concern with equities : what if the Dow drops to 7,500 in next 6 months and stays at that level for the next 10 years? Like the Nikkei in Japan which has never regained its loss? What do you do then ? Any comments are kindly accepted as long as they are respectful of everyone's views

http://en.wikipedia.org/wiki/File:Nikkei_225(1970-).svg

It's ironic that you're "over conservative" and yet you're taking more risk long term with (essentially) no equity exposure in your AA versus an investor with 20-30% equity based on all historic US returns. May seem counterintuitive, which makes me wonder if newer readers realize zero equity has not been the most conservative approach...