Anyone comfortable with 100% stock?

A

amt

Recycles dryer sheets
Joined
Jul 20, 2003
Messages
71
Hi

I hope my question this time wouldn't stir up to produce 16 pages of discussion. My question is this:

Would any of you be comfortable with well diversified 100% stocks/stock funds? If your initial reaction is NO, what if you can withdraw at less than 2%? Say, 1.5% or 1.2%? I think I would like 100% stock if I can live with about 2% annual draw. The reason is that by having 100% stock, the likelihood of your ability to increase the real withdrawal in the future is enhanced since the growth potential is higher. To quote intercst,

"TIPS allow a retiree to enjoy a smoother ride at some cost to the terminal value of the portfolio. Retirees in need of a 4% withdrawal (or more) may find this attractive. Retirees who can live comfortably on much less than a 4% withdrawal rate (say 1% to 3% of assets) may want to play the odds and stick with a mostly stock portfolio to maximize its value over time. These flush retirees already enjoy protection against stock market volatility completely depleting their retirement portfolios by virtue of a lower withdrawal rate."

http://www.retireearlyhomepage.com/novtips.html

The other reason I like it is its simplicity. You don't have to rebalance.

Regards,
amt
 
Well, you'd have to like volatility, there are some periods of history where stocks just did horribly for a VERY long time, and at 75% and higher you're buying a lot more risk than you are return.

But if you arent withdrawing or are withdrawing at a very low rate, can stand seeing 30-70% of your money disappear over a 1-3 year period, and will take that level of churning for an extra percent or two of total return, yes you can get to leave $6-8M to charities after you're dead rather than just a couple of mil.
 
Hello amt! Good post.

I won't pontificate on this as you have all heard it before. Personally, at my age and situation,
I would not own any stocks
no matter what withdrawal rate I could live with.
Not unless I had a crystal ball that is :)

John Galt
 
Would any of you be comfortable with well diversified 100% stocks/stock funds?  If your initial reaction is NO, what if you can withdraw at less than 2%?  Say, 1.5% or 1.2%?  I think I would like 100% stock if I can live with about 2% annual draw.
Click to expand...

If you could really live just fine with a 2% withdrawal then why not retire when you had approximately half the portfolio with a "standard" 4% withdrawal?

The other reason I like it is its simplicity.  You don't have to rebalance.
Click to expand...

Sure you would. At least if you wanted to maintain that "well diversifed" portfolio.
 
!00% stocks - absolutely. I'm slogging thru my DRIP stocks - getting ready for the tax account at 11 am tomorrow. Ballpark 4.69% yield mainly because of such barnburners as con ed, Gabelli conv. closed end, new plan reality. The exxon mobils, sbc, eli lilly, aetna, and others drag down the yield a bit. Have 44 of those suckers picked up over the last 13 years as a hobby. Basically did not outperform my balanced index. Plan to whittle them down to 15 -20 stocks and maybe go back to fishing. Yes it can be done and if you enjoy - go for it. Marked to market about 16% of 'my' portfolio.
 
There is a good chance that stocks will not
outperform bonds in the future. Why put all
your eggs in one basket? If you want simplicity,
put your money in one of Vanguard's balanced
funds and live off of the dividends.

Cheers,

Charlie (aka Chuck-Lyn)
 
Hi

I hope my question this time wouldn't stir up to produce 16 pages of discussion.  My question is this:

Would any of you be comfortable with well diversified 100% stocks/stock funds?  If your initial reaction is NO, what if you can withdraw at less than 2%?  Say, 1.5% or 1.2%?  . . .
Click to expand...

I'm not inclined to go that far myself, but we discussed this over on the MSN boards a few months ago. I think it could make sense for some people. I think a lot of people who use FIRECALC and intrcst's Safe Withdrawal Calculator tend to become too focused on SWR and pay too little attention to terminal value. Higher stock allocations increase the probability of achieving higher terminal values. Now . . . you don't really want higher terminal values, but this is an indicator of your 1) probability to safely increase your withdraw rates in the future, 2) protection against soaring inflation, and 3) protection against outliving your portfolio.

More information and plots
Posts:
http://groups.msn.com/REHPDiscussio..._Message=335&LastModified=4675445829492649920

http://groups.msn.com/REHPDiscussio..._Message=627&LastModified=4675457253341200823

SWR plot:
http://groups.msn.com/REHPDiscussionBoard/3040yearswrtermvalues.msnw?action=ShowPhoto&PhotoID=7

Terminal Value plot:
http://groups.msn.com/REHPDiscussionBoard/3040yearswrtermvalues.msnw?action=ShowPhoto&PhotoID=8
 
OK, everybody knows that if you put a dollar in the stock market 100 years ago, you'd be a zillionaire today.   Of course, the future may be different, and what you really want to know is what your outcome probability distribution looks like.   This is where monte carlo is more appropriate than looking at historical sequences.

You should be asking yourself: self, what is the probability that I would do piss-poor with a long-term all-stock portfolio?

Here are some simulated results that tell you what you need to know (namely, that there's about a 33% chance of doing only so-so, and about a 16% chance of doing poorly):

risk-and-time.gif


From:
http://homepage.mac.com/j.norstad/finance/risk-and-time.html
 
If you could really live just fine with a 2% withdrawal then why not retire when you had approximately half the portfolio with a "standard" 4% withdrawal?


Sure you would.  At least if you wanted to maintain that "well diversifed" portfolio.
Click to expand...

Why not 4%? We may be looking at 50+ yrs of horizon.

"well diversified" 100% stock funds, sure; you can still diversify among the stocks without adding bonds.
 
 If you want simplicity,
put your money in one of Vanguard's balanced
funds and live off of the dividends.

Cheers,

Charlie (aka Chuck-Lyn)
Click to expand...

The VFINX will give one a dividend of about 1.5% to 2%. So, if one can live off that much/little withdrawal, then the capital should be preserved for ever (or at least til WW3).
 
The VFINX will give one a dividend of about 1.5% to 2%.  So, if one can live off that much/little withdrawal, then the capital should be preserved for ever (or at least til WW3).
Click to expand...
You must know something about the timeline for WW3 that I don't know :)

If the dividend yield continues to decline at the rate it has been, it'll be about 0.375% in 20 years.

Of course, the 50-year average dividend yield in real terms is less than zero, which makes capital preservation hard to do even in historical terms.
 
Re:  Cognitive dissonance.

Amt,

I don't have any more data to add beyond SG's thorough job, but let's try some thought experiments & gut checks.

If a 4% SWR supports your lifestyle, you probably don't need more. If a 2% SWR supports your lifestyle, you definitely don't "need" more. If we're greedy enough to want more, why not go back to work for a sure-fire salary and earn our way to richness? Does being INTJ left-handed engineers makes us want to go to the economic equivalent of Las Vegas?

With a 100% stock portfolio, it sounds like you're saying that (1) you wouldn't mind re-living the last four years all over again with 100% stocks and (2) you don't think the last four years will happen all over again anytime soon.

Both Bernstein & Armstrong show the yield/risk (volatility) curve is pretty flat past 70% stock. It's a lot more volatility for not a lot more yield. And that's based on the last seventy years or more, 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?

You should still rebalance. If nothing else, you'll need to rebalance the small value against the large value. If a particular fund catches fire, you'll want to sell its profits and buy more of your portfolio's laggards. And if, heaven forbid, those laggards turn into losers then you'll want to sell them for better funds in your diversification categories. It might be "buy & hold" but it's certainly not "buy & forget". I prefer "buy to hold".

I interpret John Greaney's "mostly stocks" post to mean "more than 50%". I don't think the endorsement carries beyond 70%, and again "playing the odds" to "maximize the value" is anticipating that past will represent future. He's not predicting anything of the sort. Greaney's strategy recommendation is designed to minimize the risk of volatility depleting the portfolio-- not to maximize the "opportunity" for that same volatility symmetry to make us all as rich as Warren Buffett. But hey, ask John yourself. Buy a ticket to Omaha and ask Warren too.

Speaking of Buffett, it speaks volumes that five years ago Berkshire Hathaway was mostly stocks and today it's mostly companies. He's also sold much of his stock & bond holdings and is sitting on a truly legendary pile of cash. He's even questioned his wisdom in holding on to Coke! Some of the stocks that he does hold are 70-90% unrealized cap gains. By that I mean that his original investment has increased by a factor of at least two and as much as 10... hardly a risk of losing his principle. Contrarian investing has shown time & again that he does this with a reason. If you're sitting on a pile of unrealized capital gains then I wouldn't necessarily sell down stocks either, but I wouldn't rush out to acquire a 100% stock portfolio.

FWIW, I'm not sold on bonds either, especially with today's interest rates. I'd like to see an analysis of holding stocks & cash with no bonds. In our case, we're holding two years' expenses in cash and we're gradually building up a few more portfolio percent in five-year CDs. (We don't see any stocks or ETFs worth buying.) If stocks lead the market, we'll be skimming those profits to replenish the cash stash. If stocks lag, then we'll have at least a few years' cushion to hope for a recovery. (And "hope" is the only sensible word for holding 100% stocks in that environment.) Although 30% of our portfolio is Berkshire Hathaway and another 30% is Tweedy, Browne Global Value, we keep a separate rental home (not part of the retirement portfolio) and we're waiting for an opportunity to expand our real estate holdings. At this point it looks like we may be waiting for another decade, but we're not going to rush in.
 
Re:  Cognitive dissonance.

I'd like to see an analysis of holding stocks & cash with no bonds.
Click to expand...
What kind of analysis would you like, Nords? The whole idea of asset allocation is to exploit negative correlation to reduce volatility without reducing returns. Cash has zero correlation with everything else, so all it does is dampen returns and volatility equally.
 
. . .You should be asking yourself: self, what is the probability that I would do piss-poor with a long-term all-stock portfolio?

Here are some simulated results that tell you what you need to know (namely, that there's about a 33% chance of doing only so-so, and about a 16% chance of doing poorly):
Click to expand...
You definately need to ask that question too. Although I don't think that FIRECALC gives you the terminal value distribution easily, intrcst's Safe Withdrawal Calculator shows the the decile breakdown for the terminal value.

But the SWR that is predicted for a 100% stock allocation and 30 years is almost 3.9%, so even the poorest performance historically isn't that poor. Monte carlo is a poor choice to look at worst case because it does not include important correlations and those omissions will tend to produce results that are more pessimistic than reality.

The original question assumed a 2% withdrawal rate was satifactory, so playing the odds to build a bigger nest egg may be worth it to some. In addition, many people who have significant social security and pension benefits may have even more reasons to move toward 100% stock allocations.

I'm not reccommending it to everyone, and I'm not planning on doing this myself (even though my initial withdrawal rate is well below the 4% level). But there are reasons why some people might find this strategy reasonable.
 
Re:  Cognitive dissonance.

. . .
    If a 4% SWR supports your lifestyle, you probably don't need more.  If a 2% SWR supports your lifestyle, you definitely don't "need" more.  If we're greedy enough to want more, why not go back to work for a sure-fire salary and earn our way to richness?  Does being INTJ left-handed engineers makes us want to go to the economic equivalent of Las Vegas?
. . .
Click to expand...

A lot of ER's seem to feel this way. They only need $XX,XXX per year so why seek more. There's certainly nothing wrong with that. It certainly doesn't make sense for those people to take on any additional risk to achieve upside potential beyond their plans.

But if I had 10 times more money than I have now, I would have no problem finding ways to spend it that would add enjoyment to my life.

Why don't I go back to work and earn it? Because I would hate working for that much longer more than I would enjoy the extra money. I will enjoy my retirement at the income level I am planning on. But just because I would rather be retired at this income level than to work another day, doesn't mean I wouldn't find ways to add to my enjoyment if I happened to get a windfall from stock investments.
 
Err, well, I don't want to rehash a certain recent *long* debate, but perhaps we can agree on this:

The original poster mentions a 50-year horizon. That means that the historical data of FIREcalc and friends contains 2 statistically independent sequences out of a million-billion "possible" sequences. Granted, that million-billion set of sequences gets reduced if you put more realistic constraints on the simulation. But the point is that you'd want *many* more than 2 sequences to give you a useful probability distribution of terminal values. Even if you believe that statistical independence doesn't matter (HA!), you'd still want more than 100 overlapping sequences to get a good end-point distribution.

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.
 
Lies, dam lies, and statistics per Mark Twain. Didn't the killer app start with vis calc around 1981? My background is goo and stick(chemistry) - heat shields and adhesives and a lot of make em and break em (test articles) so I view stat/predictions with a grain of salt.

Bernstein's buddy - Angus Maddison makes charts of countries GDP, etc - so I infer much bigger problems than stocks/bonds will show up first - remember the history of the Argentine, Egyptian stock markets?

If you go 100% stocks - I think picking one company at a time makes sense (no mutual funds). I choke on Charlie Munger's thought that one good stock could fund a company's retirement plan.

Chickenheart that I am, 70-80% balanced index(modern version of the 1929 Wellington idea in my mind) and putzing on with my dividend oriented DRIP stocks - it's a hobby and a 'male thing'.

Bernstein's - 15 Stock Diversification Myth- is there to remind me 1 in 6 odds of beating Mr Market. Hope springs eternal - it only takes one good stock.

In 100% stock land - one should read Buffett to pan diversification, rebalancing, market value, even dividends and all that modern junk.
 
. . . 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.
Click to expand...
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.
 
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.
 
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.
 
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
 
Re:  Cognitive dissonance.

    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?

   
Click to expand...

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.




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.
Click to expand...

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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