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Old 03-03-2012, 02:24 PM   #41
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Depends on goals and ratio of assets to goals.

Suppose I've got $30k from social security,
I want to spend $60k per year,
I'd like to maximize the amount I will ultimately leave to charity,
and I've got $2 million of liquid assets.

In that case, 100% equities looks just fine.
If I assume that you are using a 4% WR then in a year with a market crash losing 50% of its value you may start with $750,000, then during the year sell off $30k and also lose value with the crash. At the start of the next year you may be left with $345,000, and still want to draw down $30k.

Going into retirement with 100% equities and a 4% WR to meet your needs can be disastrous if you retire into a stock market crash. Otar has some good examples of this using historical data in his book.
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Old 03-03-2012, 02:39 PM   #42
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Anyone else 100% in stocks and retired?

If the market starts falling what will you do? Go to cash then? That's the big question to me.
You need to be able to withstand volatility. The equity markets will always fall and rise, and we do not know how much or when they turn. An allocation of 100% means you can both afford and tolerate that. If you need to do something when the market falls, you will lose for sure.
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Old 03-03-2012, 03:11 PM   #43
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If I assume that you are using a 4% WR then in a year with a market crash losing 50% of its value you may start with $750,000, then during the year sell off $30k and also lose value with the crash. At the start of the next year you may be left with $345,000, and still want to draw down $30k.

Going into retirement with 100% equities and a 4% WR to meet your needs can be disastrous if you retire into a stock market crash. Otar has some good examples of this using historical data in his book.
I'm not sure where you're getting the 4% and $750k.

In my example, the individual had $2 million in assets and needed $30k per year from assets to hit his $60k total income goal. That's a first year withdrawal rate of 1.5%.
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Old 03-03-2012, 03:23 PM   #44
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For further clarification and full disclosure - How many of you 100% in equities have a pension?
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Old 03-03-2012, 03:24 PM   #45
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All this discussion, and I didn't see anything about non-us denominated investments? US stocks and bonds seem to have dropped together last time, didn't they? I don't think you can have a complete discussion about asset allocation without saying how much you have outside the US. Unfortunately, the default non-US holding would contain a lot of euro, and that's subject to debit driven implosion. So I've got a lot down under, mate!
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Old 03-03-2012, 03:29 PM   #46
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For further clarification and full disclosure - How many of you 100% in equities have a pension?
No pension, SS 8.4 years away, no inheritances on the horizon.
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Old 03-03-2012, 03:29 PM   #47
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You need to be able to withstand volatility. The equity markets will always fall and rise, and we do not know how much or when they turn. An allocation of 100% means you can both afford and tolerate that. If you need to do something when the market falls, you will lose for sure.
This is an excellent summary of the important point. If you don't have to sell in a down market your AA can be high(perhaps even 100%) equities. So why wouldn't one have have to sell in a down market? Dividends help as they are more steady than equity prices, other annuitized income really helps, low spending requirement reduces the need to sell, the right attitude (ie don't panic) can help, a large cash reserve would help. So pretty clear that one size does not fit all.
Incidently I am 100% equities, retired 61 years old. I feel comfortable with this allocation for the reasons listed.
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Old 03-03-2012, 03:37 PM   #48
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No pension, SS 8.4 years away, no inheritances on the horizon.
Thanks. I am interested in the time horizon and dedication of those individuals regarding equities. Being a belts and suspenders kind of guy I can only observe.
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Old 03-03-2012, 03:43 PM   #49
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I think Nords is right you do want 20% of your assets in class with a low correlation to equities, traditionally this has been bond, but it could be cash, gold, real estate, or beaver cheese futures.

One of the difficulties during 2008 was that (except for bonds) all the asset classes were crashing together. IIRC, the correlation between US and international stocks during the crash was >.9 and small cap large cap was ~.95. I correlation with real estate was lower but that is only because real estate was doing worse in many parts of the country.

At current valuation levels, my crystal ball says that bonds will continue to have a low correlation with stocks, but that is because I expect stocks to go up and bonds to go down.
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Old 03-03-2012, 04:12 PM   #50
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This is an excellent summary of the important point. If you don't have to sell in a down market your AA can be high(perhaps even 100%) equities. So why wouldn't one have have to sell in a down market? Dividends help as they are more steady than equity prices, other annuitized income really helps, low spending requirement reduces the need to sell, the right attitude (ie don't panic) can help, a large cash reserve would help. So pretty clear that one size does not fit all.
Incidently I am 100% equities, retired 61 years old. I feel comfortable with this allocation for the reasons listed.
Buffett has said that temperament is more important than intelligence when it comes and after 2008, I think he is right. 2008 is recent and painful enough that it is pretty good test for people's tolerance and temperament. If you sold most stocks at the end of 2008 and didn't get back in until late last year or this year, then you don't want to have a large equity allocation. Now if you sold in the summer of 2008 and bought back in the spring of 2009, yes I'd be interested in your newsletter.

If you did like much of the board and grimly held your mutual funds and reluctantly rebalanced then you are fine with a normal 40-60% allocation.

There were a fair number of us (it seemed to me especially those who buy individual stocks) who were preaching and posting that this was a good time buy stocks. For those of I think having a 75%+ allocation is good.

I agree with Danmar dividends help (a lot) I didn't feel any need to sell stocks cause my dividend income was secure. It wasn't until that banks and other companies like Pfizer started to cut dividends that I got scared.
The dividend cutting was unprecedented, but I now know that dividends just like house prices can in fact go down.

My key learning was that if I think stocks are bargain I'll spend every dollar I have and then some. So for this next bear market I have a two years expenses locked away in PenFed CDs. I figure that even if Dow hits 5,000 I'll think three times before redeeming the 5% 10 year CD.
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Old 03-03-2012, 04:23 PM   #51
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I'm not sure where you're getting the 4% and $750k.

In my example, the individual had $2 million in assets and needed $30k per year from assets to hit his $60k total income goal. That's a first year withdrawal rate of 1.5%.
My bad - didn't spot the $2 million in assets
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Old 03-03-2012, 05:02 PM   #52
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This is an interesting discussion. The bottom line to me is that one size doesn't fit all. If you have enough retirement income to support your life style, then why take on extra risk? The response to this question may have been different last August with all of the volatilty. After one of those days when the market fell 400 points it would be hard to suggest 100% equities. Personally I would not assume any more risk then I need too. You might not get a second chance to make it right now that your retired....but I'm conservative.
Two other points:
1. I wouldn't be comfortable moving large chucks of my nest egg into the stock market after the huge run up we just had....I would dollar cost average over a period of time.
2. Although bond rates are historically low and the theory is and has been for years that rates have no where to go but up and that will eat away principle.....I'm conflicted since the Fed is planning on keeping rates a zero until 2014......so bonds may not be as bad as gurus think just yet....but look out when the Fed stops easing.
I completely agree that one size doesn't fit all.
But right now I am more fearful of steady lose of wealth through inflation than the volatility of the market. My car is 8 years old when I first bought I filled up the tank for $25 now it is $50. Now gas prices have risen faster than most prices but even with modest inflation we've had recently it cost $1200 today to buy a $1,000 worth of goods from 2004.

I have no problem with buying bonds in fact right before retiring starting in 1998 and continuing through 2001 I bought a lot of them much more than I have today. Muni GNMAs, and iBonds for my taxable account, and TIPs for my IRAs. I did this for two reason in 99 and 2000 cause I thought stocks were over priced. Even more importantly because the bonds helped me achieve my goals of retiring. The 5-5.5% yields on California Muni and the 3.5-4% real yields on TIPs were more than sufficient to fund my retirement goals and the risk of holding these financial products was very low. (It turns higher than I thought for the California munis)

However currently bonds don't do that now. Right now I have 37x my living expense but not pensions other than SS. Right now if a constructed a 30 year bond ladder I'd be luck to get a 0% real yield. So that gives me 3 choices, die before I am 90, cut back on spending which maybe very difficult when I am older and need more help, or invest in equities.
It seems to me that investing in equities is the lower risk and the higher allocation I have in bonds the more return I need from my equities.
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Old 03-03-2012, 05:33 PM   #53
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But right now I am more fearful of steady lose of wealth through inflation than the volatility of the market.
+1

I agree with you clifp. Taking it a big further, my own opinion is that the biggest risk to our standard of living a decade or more out is a combination of skimpy investment performance coupled with escalating price levels, especially for energy and commodity based products.
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Old 03-03-2012, 06:22 PM   #54
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For further clarification and full disclosure - How many of you 100% in equities have a pension?
I think diversified dividend income counts, too. There are over 300 high-quality dividend-paying stocks who have consistently grown their dividends over the years, and only a few of those went down in flames during 2008-09. The rest of the group's stock prices may have sunk but they still paid out the same number of pennies per share.

I have a military pension now, my spouse will have a military pension in 10 years, and we'll both be able to start collecting Social Security in the 1-2 years after she starts her pension.

In the meantime, we can keep over 90% of our ER portfolio in equities (including a dividend ETF) and a couple years' expenses (8-10%) in cash.

Anyone expecting to dip into the college fund for emergencies may be sorely disappointed if it happens while the little darlings are actually in college.
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Old 03-03-2012, 08:47 PM   #55
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I'm retired with 100% equities, nominally. SS and small pension in 5 to 10 years I suppose. I'm actually about 12% cash and bonds right now I think. I sell equities for cash when my portfolio is above expectations (last year). I buy equities with cash when my portfolio/the market is down 20% or more (2009). Otherwise I sell equities as needed to meet expenses, hopefully during average markets. A fairly mechanical strategy with no need to guess what the market is going to do.

If a retirement is going to last 30-40 years, I see little sense in carrying a significant amount of generally lower performing bonds or cash for the entire period. Ideally I would capture all of the dynamic rebalancing into and out of cash or bonds but with a long term zero cash/bond balance. Worked quite nicely in 2009, and my portfolio hit new highs in 2010. My biggest concern in 2009 was how to buy more equities and if the market would dip to my next buy trigger level.

I've only been at it for a little over 4 years, and DW is still w*rking though we have a significant negative cash flow with DS still in college. We'll see how it ends up after 30 years or so.
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Old 03-03-2012, 09:19 PM   #56
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It's an uncomfortable topic, but how do folks feel about a black swan debit crisis affecting all of these plans? I just suffered through 'Endgame' by mauldin, and he makes it sound like the house of cards has got to fall one way or the other. If he's right (and I'm not convinced he is) then all of the rear view mirror stuff we take as the truth might be so much folly. The last time I brought up this book, the folks told me to buy a shotgun and a lot of ammo, hehe. But I don't think it will involve civil unrest, just that the way the points are tallied (ie currencies) might change. To those that don't have many points, it won't make a difference, but to those of us that do, well, could be a surprise.

--Dale--
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Old 03-03-2012, 11:19 PM   #57
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For further clarification and full disclosure - How many of you 100% in equities have a pension?
In about 6 months, I will start getting a grand total of $400/month in pensions, which was more than I ever expected.
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Old 03-03-2012, 11:32 PM   #58
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Maybe the actual number is 105.63...
That's funny! I actually use 105.
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Old 03-03-2012, 11:40 PM   #59
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All this discussion, and I didn't see anything about non-us denominated investments? US stocks and bonds seem to have dropped together last time, didn't they? I don't think you can have a complete discussion about asset allocation without saying how much you have outside the US. Unfortunately, the default non-US holding would contain a lot of euro, and that's subject to debit driven implosion. So I've got a lot down under, mate!
I try to have 50/50 US/non-US. Much of the non-US is in certain oil company stocks.

Jim Otar says adding foreign [index funds] equities doesn't do anything for you. I am not of the same opinion. It is said that in this global economy, it is all the same. Except when it isn't , which is why I try for 50/50, to catch the non-correlating times. Bernstein showed that the Efficient Frontier for US/non-US was always about 50/50, even if the ends swapped from time to time. Other sources that influenced me were Sound Investing and Les Antman.

After interest rates rise again, I will look at bond funds again, maybe 50/50 US/non-US, too. Maybe not. 60/40 equities/financial instruments sounds about right to me. I will count Social Security as a non-equity. A CD ladder would also work for me. I started one a few years ago, but I was out of work and had to cash out.

As always, you give yourself safety by not taking too much out. I know the word is that 4.5% or 5% is OK if you only do that in the early years, but 3% or 3.5% makes me more comfortable.
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Old 03-03-2012, 11:45 PM   #60
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I do not favor 100% US equities as RE portfolio, but it really depends on which equities, which alternatives you might consider, & your view of the future.
Diversification is good, but it's best to understand the economic conditions you are trying to hedge against. Bothers me when financial advisers throw around terms that are too broad to be truly useful.
"Equities" and "Bonds" are asset classes with HUGE internally variable volatilities over time. Given future prospect for medium-long term inflation & current artificially low interest rates, long bonds (inc. long bond mutual funds) are not "safe" but could get you hurt bad over next 5-10+yrs. Safer approach for "bond" portion of a portfolio might be laddering 1-2yr investment grade bonds (or CD's) & holding to maturity so if/when inflation hits that portion of your assets will be relatively stable with opportunity to increase income with inflation as ladder is updated. Similarly on equity side, certain 100% equity investments could be disaster. Imagine retiring on 100% investment in NASDAQ (QQQ) in early 2000 (down 40% after 12 yrs). Investing 100% in Dow (DIA) would have been MUCH more stable (up 14% plus 2-3% annual dividends). Dividends provide some income & (hopefully) dividends will rise with inflation (i.e. companies profit & pay-out in inflated $). If you think US world economic position may change, having a diversified position in solid international firms could be useful too. Gold has been great if you got in a few yrs ago, but to me price seems to have run up too far too fast lately. History shows you can get hurt badly buying gold at peaks. Gold spiked to $840/oz in 1980 then gradually leaked down to $260/oz in early 2001 without recovering to $840 again until late 2008 (i.e. under water 28yrs despite some intervening wars!).
Re "black swan" debt crisis- Most developed countries have debt issues. We can only hope US does RELATIVELY better than world at large.
There is no financial security- only trying to hedge your bets.
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