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90% / 10% too high?
Old 05-07-2013, 12:02 PM   #1
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90% / 10% too high?

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
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Old 05-07-2013, 12:05 PM   #2
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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.
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Old 05-07-2013, 12:48 PM   #3
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Originally Posted by Enjoy the Ride View Post
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

IMHO, I would go 70/30 given your age. I tend to be on the conservative side even when I was your age (many moons ago).
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Old 05-07-2013, 02:15 PM   #4
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As I recall , my AA was about 80/20 (Equities/Bonds) until I was in my late 40's then it started to flip around in my 50s until it was to 20/80 by the time I was 60. Now it's more like 10/90.
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Old 05-07-2013, 02:28 PM   #5
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Vanguard's Target Retirement 2040 fund has a current stock/bond/cash allocation of 90.05/9.94/0.01 So if you're being too aggressive, you're sharing that fault with the countless thousands of families with a similar projected retirement date who have decided to invest their retirement funds in VFORX. As long as you weathered the severe bear market of 2007-2009 without panic selling, I would say you've got a reasonable asset allocation that is not too volatile for your risk tolerance.

https://personal.vanguard.com/us/fun...tExt=INT#tab=2
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Old 05-07-2013, 02:33 PM   #6
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I don't think I held any bonds until mid-fifties, and have discouraged son from doing so at 36. Of course, this assumes you don't bail when it drops. I'm having a hard time reducing the equity portion and high yield bond funds these days, but with a 2-2.5% WR and the fact that we're playing with a lot of house money these days makes it tempting to let it ride as the fun times continue. And yes, I know what can happen.
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Old 05-07-2013, 03:10 PM   #7
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Used to be that the rule of thumb was 100-your age is your % of stocks. Now it tends to be 110 or 120. I personally use 115, with the disclaimer that when I was your age I was 100% stocks (and wouldn't do that with what I know now).

Somewhere I saw something from Vanguard that showed that based on the past, returns weren't much better with greater than 80% equities, but volatility was higher. So you aren't getting much better return for greater risk by going higher than 80%.
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Old 05-07-2013, 05:05 PM   #8
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Also, the longer you save and you then experience a stock market swoon like we did twice in the 2000s, the more it hurts. I read somewhere that you should be able to stomach losing 50% of your stock value in any one year. So in your case, with 90% stock, you can handle a 45% loss without selling your stock. Maybe one can handle this in their 30s, but highly doubtful once one is in their 40s and beyond.

Your miles may vary.
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Old 05-07-2013, 05:55 PM   #9
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Thanks for the replies.

I would feel more comfortable with 80/20 or 70/30 but I think the bonds are too expensive and equity is undervalued. When I see one of those .com bull markets in the next 26 yrs, then I'll switch it down.
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Old 05-07-2013, 06:09 PM   #10
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90% seems legit to me. Just be prepared to lose your assets in a big way if the market takes a big dive. But you have decades to recover. No biggie. I'm ~100% equities at age 32.
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Old 05-07-2013, 06:34 PM   #11
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90% in equities is far too high for me. I just could not do this. It's too much risk.
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Old 05-07-2013, 07:43 PM   #12
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90% in equities is far too high for me. I just could not do this. It's too much risk.
And what makes it 'too much risk' for a 34 YO looking to retire @ 60?

I wish I had been more aggressive during that 90's bull market. Wsa mostly 50-50, except (thankfully) for a big chunk of AAPL.

-ERD50
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Old 05-07-2013, 08:01 PM   #13
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Thanks for the replies.

I would feel more comfortable with 80/20 or 70/30 but I think the bonds are too expensive and equity is undervalued. When I see one of those .com bull markets in the next 26 yrs, then I'll switch it down.
Sounds about right for your age. Eventually bonds will be cheaper and you can adjust then. Another comforting thought as far as equities are concerned, Buffet is still bullish on stocks for the long term. Just be prepared to ride out the downturns which is easier said than done.
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Old 05-07-2013, 08:45 PM   #14
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Originally Posted by Enjoy the Ride View Post
Thanks for the replies.

I would feel more comfortable with 80/20 or 70/30 but I think the bonds are too expensive and equity is undervalued. When I see one of those .com bull markets in the next 26 yrs, then I'll switch it down.
I hear there is going to be a big run-up in the tulip bulb market. It's undervalued so you might want to jump in big-time.
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Old 05-07-2013, 09:07 PM   #15
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If you've got 26 years, I could make an argument for 100% equity. Consider the amount you will spend in your first year of retirement. Put a portion of your current assets in a fund earmarked to spend in just that year (for all I know, this might be your entire current retirement balance). A lot of people would say that with 26 years remaining on that chunk you can safely do 100% equities.

Now, consider the second year of retirement. Maybe you'll fund it by earmarking this year's retirement contributions to spend in just that year. Again, a long time, you can go with 100%

Now, the third year of retirement. Maybe you'll fund it by earmarking next year's contributions. Again, that's a 26 year horizon, so 100% works.

But, the same argument holds for the fourth, fifth, .... years of retirement. You have 26 years from your contribution date to your spending date in every case. Each of them could be 100%.


(Full disclosure, if I had tried this at your age my wife would have made my life miserable. Sometimes, maximizing the dollars isn't worth it.)
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Old 05-07-2013, 09:37 PM   #16
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Originally Posted by ERD50 View Post
Quote:
Originally Posted by obgyn65 View Post
90% in equities is far too high for me. I just could not do this. It's too much risk.
And what makes it 'too much risk' for a 34 YO looking to retire @ 60?

I wish I had been more aggressive during that 90's bull market. Was mostly 50-50, except (thankfully) for a big chunk of AAPL.

-ERD50
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
Attached Images
File Type: png Zero EQ 26 years $100.png (46.8 KB, 6 views)
File Type: png 90-10 26 years $100.png (70.5 KB, 7 views)
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Old 05-07-2013, 09:38 PM   #17
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The next two (Note that all these have different scales due to the FIRECALC formatting):

-ERD50
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Old 05-07-2013, 09:54 PM   #18
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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?

I am almost 54, retired, I have some bonds I bought back in in 2009 maturing next week. I am considering more stocks or cash, but under no circumstance would buy bonds at these levels.
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Old 05-07-2013, 09:54 PM   #19
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Originally Posted by ERD50 View Post
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
+1 With 26 years to retirement, the worst advice is to dump everything into money market or bond funds. Equities have a proven record over 20+ year periods vs about any other investment.
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Old 05-08-2013, 05:41 AM   #20
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Though mainstream guides seem to (prudently) limit equity exposure to 80:20, 90:10 isn't unheard of at your age, I never owned any bonds until I was almost 50 (not a recommendation). With today's current low yields on bonds (IMO the bond fund NAV hit is years away) and cash, at your age I can fully understand why you'd focus on equities. As long as the volatility doesn't keep you up at night it's fine. Corrections will try your mettle, but I've lost (on paper) six figures in a month, never sold anything, and slept fine. Once you've studied market history/behavior, you know to be patient, it's all about the long run. Carry on...
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