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Re: Anyone comfortable with 100% stock?
Old 04-10-2004, 08:32 AM   #21
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Re: Anyone comfortable with 100% stock?

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. . . My increasingly ellusive point is this: people seem to be under the mistaken impression that there's a 100% chance of a good outcome the longer you play the game. *That simply isn't so. * The 100% stock portfolio game isn't just a matter of enduring mind-numbing volatility, it's also accepting the very real possibility of a bad long-term outcome.
I don't disagree with your point. Because of the downside potential, a 100% stock portfolio approach clearly requires more funds to insure a high probability of success. For me, it makes sense to do other things with some of those funds.

For example, if you could live with 2% withdrawal rate, why not at least take 5 or 10 years worth of living expenses and put them in a short term bond ladder or CD ladder and provide some safety from the volatility? You would still have an 80% to 90% stock portfolio and that would provide a lot of the advantages offered by more stock while buying a significant amount of safety.



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Re:  The effects of correlated cash & pensions?
Old 04-10-2004, 08:35 AM   #22
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Re:  The effects of correlated cash & pensions?

Wab,

I don't know about cash reducing both volatility and returns. It sure did reduce volatility during 2000-2003, but it also helped to RAISE returns for a lot of people. Long-term, it probably does reduce returns. I sure hope long-term is at least 10 years. I know that I couldn't turn my back on any investment for that long, even if Bernstein claims it's the thing to do.

What kind of analysis do I want? The kind of job that Bernstein et al do on bonds, only acknowledging today's record-low interest rates and the effect of rising rates on bond portfolios. No one wants to invest in anything that's overdue for a loss, even if we don't have a schedule and the loss would be short-term. We claim that bonds will eventually raise a stock portfolio's gains because that's what they've done in the past. But how many times in the past have we simultaneously experienced today's interest rates and economic pump-priming?

I'm not sure about cash's zero correlation, either, but that's probably confusion over definitions. Sure, if it's buried in the back yard then it's not correlated, but to many investors the word "cash" includes money markets & CDs. I believe their interest rates are correlated to the bond market. Even if they're long-term, many people are laddering to reduce the effective duration. Not too many would have bought a 30-year Treasury at 13% in the early 1980s, but it looks like a pretty savvy move now. Same logic on five-year CDs-- great returns today, but no one wants to be holding the bag in 2007.

I agree that your point on investing returns is elusive-- no one wants to focus on the reality of the occupied chamber, just the plausible opportunities proffered by the five empty ones around it. I just hope that we're playing the game with a revolver and not a pistol!

SG,

Very good points about other pensions & SS. When you can reduce your SWR below 3% because you have "guaranteed" income from another source (hopefully not correlated!) then you feel capable of assuming a lot more risk. Whether or not that's merited by the statistics math, again it's the cognitive dissonance that most investors feel. Tweedy, Browne's "private investments" literature raises the example of a woman whose pension satisfied all her expenses, and uses that as justification for putting her retirement portfolio in 100% international small-cap value stocks. Their validation of that justification is the result that her net worth grew to over $200M. As Wab would point out, I'd like to see how often that happened in a statistically-significant sample size.

But without rehashing that old debate about including your pension in your retirement-portfolio allocation, I'd say that a significant pension should cause investors to shift their retirement portfolios to favor stocks. Not that Bernstein or others have examined that in detail yet, either.

But we're pulling down a govt pension and our 100% stock portfolio realistically only needs to bridge the gap between my pension and my spouse's. 17 years and counting.

As for spending all of that imagined return, that's another post.
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Re: Anyone comfortable with 100% stock?
Old 04-10-2004, 09:10 AM   #23
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Re: Anyone comfortable with 100% stock?

Nords, cash is considered risk-free (i.e., zero volatility), thus zero correlation with other non-risk-free assets.

The analysis done by Bernstein and clones is pretty simplistic. The numbers they plug into their mean-variance optimizers come from historical correlations, including periods of rising interest rates (like 1964-1984 or so).

So, once again it comes down to the extent to which you believe the future will play out like the past.
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Re: Anyone comfortable with 100% stock?
Old 04-10-2004, 09:56 AM   #24
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Re: Anyone comfortable with 100% stock?

I am (at the moment). Our investment portfolio is 100% equity indexes, 50/50 US/Intn'l.

A bit of background: We're both still working at pretty decent salaries and saving about 30% of our gross. We've got another $300K+ tied up in our home & belongings, and expect 1 non-indexed pension and 2 decent SSI entitlements 12-14 years after RE. The "time horizon' for our portfolio is 40-50 years.

My guess is we'll retire within the next 3 years and will likely reallocate ~20-30% to FI at that time.

I'm comfortable with my ability to hold 100% equities through a downturn (just did, adding all the while) and figure we can stand the volatility for the next few years because WE'LL pick the retirement date. Our projected RE budgets are a bit fat (though my wife disagrees) so I figure we've got a bit of cushion anyway.

Cb
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Re: *Cognitive dissonance.
Old 04-10-2004, 03:40 PM   #25
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Re: *Cognitive dissonance.

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* * but what if it turns out that the next seven decades are dominated by bonds & real estate? *What if your stock holdings are metaphorically the equivalent of a 100% gold bullion portfolio-- and it's 1982 all over again?

* *
Then, you are saying "it's different this time." *Sure, anything can happen. *Tomorrow, the U.S. can turn into a communist dictatorship and nationalizes all companies and makes all stocks (and bonds, including TIPS for that matter) worthless. *But, history, if anything, has repeatedly invalidated those who have suggested it's different this time.




Quote:
For example, if you could live with 2% withdrawal rate, why not at least take 5 or 10 years worth of living expenses and put them in a short term bond ladder or CD ladder and provide some safety from the volatility? *You would still have an 80% to 90% stock portfolio and that would provide a lot of the advantages offered by more stock while buying a significant amount of safety.
SG, I agree with you. *That's what I'd probably do for myself. *I'm somewhat playing the devil's advocate so I can learn from you folks. *Thanks,

amt
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Re: Anyone comfortable with 100% stock?
Old 04-10-2004, 04:53 PM   #26
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Re: Anyone comfortable with 100% stock?

Yeah sure. You're just trying to see if you can get another 15 page post out of us.

Its not a matter of it being "different this time", its been plenty different enough already!

Some bondage is not necessarily bad; for example in the 3 year down period we just experienced, bonds did very well. They also outperformed stocks for a 3 year period from 1939-1941. In individual years, from 1900-1980, bonds outperformed stocks in 3 out of 10 years.

In periods of high P/E ratio's (like now), generally bonds subsequently outperformed stocks...at some point...although usually not too many years away.

Theres also the TYPE of bonds you might consider for portfolio diversification...convertibles, high yield, gnma's, and TIPS each have some characteristics that can diversify a stock portfolio, reduce volatility, and still provide a fairly pleasing rate of return. I wouldnt buy a lot of them NOW with interest rates where they are and with a mind for where they're going to go, but once the interest rate tomfoolery is over, they would be good buys.

A 5 year cash cushion in front of your all stock portfolio might buffer it out for you. I just think about having 150-200k of my money barely staying ahead of inflation to act as a safety net.

Reminds me of folks who drive their sports cars at mach 12 up the Pacific Coast Highway...about 500 feet down the cliff to the ocean and no guard rail...with the presumption that the odds of a blowout being in their favor.

Lots of fun, plenty of adrenaline surges here and there, and the odds are certainly in your favor. And at least you have plenty of time to contemplate things between the time you leave the road and the time you hit the water...

But again, if you arent withdrawing or withdrawing very little, then I wouldnt worry...but as has already been pointed out, if you dont need much, why are you shooting for such a high return on your investments? Pre-ER, I can see it, post-ER I'm not so sure.
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Re: Anyone comfortable with 100% stock?
Old 04-10-2004, 05:07 PM   #27
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Re: Anyone comfortable with 100% stock?

John C Bogle explains why individual stocks are better than index or even tax managed index funds toward the end of: 'Mutual Funds: Parallaxes and Taxes' September 16, 1997 - found in the achives section of Bogle Financial Markets Research Center. Of course he uses fund examples. Buy 30 blue chips, don't rebalance, collect the dividends and go fishing for 60 years. Of course balanced index is easier - even if less productive and the difference isn't that big.
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Re: Anyone comfortable with 100% stock?
Old 04-10-2004, 06:09 PM   #28
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Re: Anyone comfortable with 100% stock?

Unclemick, I kind of like Buffett's idea about picking stocks like you only had 20 picks you could make in a lifetime. * The last time I really felt good about individual stocks was when I bought MSFT and INTC in the late 80's. * Do you have a couple of stocks you really love, preferably with monopoly positions in growth industries?
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Re: Anyone comfortable with 100% stock?
Old 04-10-2004, 07:54 PM   #29
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Re: Anyone comfortable with 100% stock?

Wabmester

Nope - the percent of individual stocks vs balanced index in my overall portfolio is roughly the same as 1993 - soo in spite of some winners like Lilly, PSC(now-Aqua America, WTR), New Plan Reality back at 12% yield and Aetna at it's low - I have enough less than stellar picks to keep me in line vs the balanced index. I have no barnburners to jump up and down over at todays prices.

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Re: Anyone comfortable with 100% stock?
Old 04-10-2004, 08:32 PM   #30
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Re: Anyone comfortable with 100% stock?

One stock I've been loading up on for the last year is Toyota (TM). * It's almost doubled since I started buying, but I think they're so far ahead of the competition in Hybrid technology that they'll own the market for the next few years (I believe they recently licensed the technology to Ford).

Other than that, it's been slim pickings for me too.
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Re: *Cognitive dissonance.
Old 04-10-2004, 11:03 PM   #31
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Re: *Cognitive dissonance.

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. . . SG, I agree with you. *That's what I'd probably do for myself. *I'm somewhat playing the devil's advocate so I can learn from you folks.
Another question that can stir this kind of discussion goes like this.

Assume that you have enough money invested (say $y) with what you believe is the perfect allocation (equities/fixed/real estate/ . . .) so that you can retire with what you believe is the ultimate safe withdrawal rate (say x%). Now, you are suddenly awarded the Dory FIRE personality of the year award which amounts to another $y so that your portfolio is instantly doubled. After you thank Dory, your parents and members of the FIRE community for the award, what do you do with the windfall?

a) invest it with the same allocation breakdown of your original nest egg (ie stay the course)

b) invest it in high risk, high yield opportunities since poor performance will have little downside effect on you while realizing a big upside potential could dramatically change your life.

c) invest it in more conservative opportunities since this extra money provides you with the chance to live with almost no volatility risk. You don't need more money, but you would really like the idea of lower risk.

d) have a giant party, fly in all your friends from the Early Retirement Forum, buy them all a lifetime supply of dryer sheets, and spend the rest of the cash on the party.
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Re: Anyone comfortable with 100% stock?
Old 04-10-2004, 11:23 PM   #32
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Re: Anyone comfortable with 100% stock?

A little bit of each. If you really have more than you can conceivably need, it can change your mindset a bit. Having been there (on a small scale), I'll tell you that I:

1) invested in a couple of risky ventures founded by the smartest people I knew (one went BK, one is still flying (under the radar))

2) established a charitable trust

3) bought a couple of middle-age toys

4) socked most of it away in ultraconservative tax-free bonds
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Re: Anyone comfortable with 100% stock?
Old 04-11-2004, 05:04 AM   #33
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Re: Anyone comfortable with 100% stock?

A windfall - as in sudden victory in a good stock/stocks - would probably bring out all my bad tendancies:

1. A foundation/trust (in my name of course).

2. I would totally forget Warren Buffett's caution about the 215 orangutans and engage in more risky investment ventures - along with being a pain in the butt - lectures, possibly a ghost written book.

3. Spending discipline would wane - adult toys and all that 'stuff'.

In the 60's (still working) became a legend in my own mind briefly in the market - new sports car, penthouse, switched from dirty blondes to light blondes(Pacific NW joke). Mr Market did not repeat in the 70's so went back to frugal - DCA mutual funds.

Have been in the comfort zone for ten years now: 20 - 30k presently even though we could double that Firecalc wise and SS is coming in 1-2 yrs - for us inflation and slow drift up spending is the best course.

In sum - victory in stocks would be bragging rights. Hopefully we would continue to recycle our generic dryer sheets as reminder of humble beginings.
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Re: Anyone comfortable with 100% stock?
Old 04-11-2004, 06:45 AM   #34
 
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Re: Anyone comfortable with 100% stock?

Hi unclemick! Once again struck by how similar our
stories are. Why, I've even stuck with blondes myself
(both kinds) The nearness of SS and the
"steady drift up in spending" fit here also. Of course,
I have no "hobby stocks", nor do I want any. As
far as a windfall, I'm uncertain what that would do to us.
I might go totally nuts and revert to my big spender
lifestyle, especially since most of my life is well behind me now. On the other hand, I recall a couple of times
when a big chunk of cash fell out of the blue and I was
quite determined to hold onto it. Soooooooooo,
not sure. Wish I had the problem though.

John Galt
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Re: Anyone comfortable with 100% stock?
Old 04-11-2004, 07:53 PM   #35
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Re: Anyone comfortable with 100% stock?

"Would any of you be comfortable with well diversified 100% stocks/stock funds? "

Yes, very comfortable.

Cheers,

Chris
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Re: Anyone comfortable with 100% stock?
Old 04-11-2004, 09:43 PM   #36
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Re: Anyone comfortable with 100% stock?

OK, I'm not advocating this, but since some of us are comfortable with a 100% diversified stock portfolio, how about 110%? What are the feelings there?

My after tax portfolio used to be 130%, but I have moved back to ~90%. My 72t funds were and are in a laddered bond structure for the next 7 years. My non-72t funds are diversified stock.

Wayne
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Re: Anyone comfortable with 100% stock?
Old 04-12-2004, 05:24 AM   #37
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Re: Anyone comfortable with 100% stock?

130% stocks. !970's at the the suggestion of my broker - mortgage REIT/margin interest arbitrage play - worked for a while and then it didn't - may have came out slighly ahead - but the risk cured me. I saw what would have happened had I not sold when I did. Gun shy with leverage ever since - although never say never. My interest would be STRIPs, if interest rates got wild again - not stocks.
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Re: Anyone comfortable with 100% stock?
Old 04-14-2004, 09:29 AM   #38
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Re: Anyone comfortable with 100% stock?

In answer to the original question, I was comfortable with 100% stock (funds) until recently. I am many years away from retirement and had in mind 100% stocks for a while, then gradually add in bonds to start an 80/20 mix in retirement.

Now I am moving more toward the opinion that my current day allocation should be much as it is during retirement, partially because I may want or need to make an unplanned withdrawal before retirement, and in my brief experience this tends to happen at the worst possible time for withrdrawals so a lower risk factor is warranted.

Also I am becoming more conservative. On one hand I'd like the higher anticipated returns from stocks, but I am more comfortable that a 70/30 or 60/40 mix of stock and bond funds will provide sufficient returns while minimizing the chances of losing principal for a significant period of time.

It's occuring to me that I can't outsmart everyone else in the financial markets, but I can control my my expenses to great effect. And I have a decently paying job and career that I more or less enjoy, so I should be able to control expenses, invest somewhat conservatively and still make it to ER, national catasrophes aside.
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Re: Anyone comfortable with 100% stock?
Old 04-14-2004, 01:40 PM   #39
 
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Re: Anyone comfortable with 100% stock?

BigMoney,

Most of the books I have read on this topic say that the first thing you do *is decide the Stock/Bond Allocation percentage.

Usually the recommendation is based on how much money are you willing to lose without 'Choking'. A 60/40 Stock/Bond split usually has a 25% downside potential. A 70/30 Stock Bond Split has a 30% DP - a 80/20 has a 35% etc. etc. etc.

So the question Berstein asks - Is how much are you willing to lose in an extended Bear Market?

Age also factors in this. Since Stocks get risker with time, you may wish to pare down your allocation quite a bit when you hit 80. When and if I hit 80 or 85 and I could see where an all TIPS portfoilo will give me plenty of breathing room, I may abandon stocks alltogether. There is not a lot of time to recover from bear markets at that age.
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Re: Anyone comfortable with 100% stock?
Old 04-14-2004, 04:17 PM   #40
 
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Re: Anyone comfortable with 100% stock?

I am not quite 60. I am not willing to accept ANY
decline in my base, unless it is NAV of my bonds which
I will hold to maturity. I can take a market value
slide as long as those interest checks keep coming.

John Galt
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