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Re: Earliest Retirement with 100% Equity Portfolio?
Old 12-01-2006, 02:28 PM   #21
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Re: Earliest Retirement with 100% Equity Portfolio?

Quote:
Originally Posted by terminator

The more you have above your goal, the more you can withstand potential losses.
I've considered this as a bit of a conundrum and never really resolved my thinking; say you have more than you need to where you could withstand, say, a 50% drop in your portfolio. Do you:

1. Rationalize that you can accept more risk and shoot for a higher return with more equities, or
2. Rationalize that you don't NEED a higher return and go for an extra-conservative portfolio that meets your needs

Maybe it's just good old American greed but I think I'd have a hard time picking option 2 if I were in that situation.

Then again maybe i'd pull an Oprah and have a million bucks stashed in my mattress just in case...

- John
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Re: Earliest Retirement with 100% Equity Portfolio?
Old 12-01-2006, 02:38 PM   #22
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Re: Earliest Retirement with 100% Equity Portfolio?

Quote:
Originally Posted by runchman
Do you:

1. Rationalize that you can accept more risk and shoot for a higher return with more equities, or
2. Rationalize that you don't NEED a higher return and go for an extra-conservative portfolio that meets your needs
I plan to approach this the same way I do accumulation. Would rather have a 90% chance of having more than I need or a 100% chance of having what I need and never more?

I pick Door #1! Of course, as you mention, this is easy with a gold plated retirement. If I am shooting to have a SWR of three times what I need to live a simple, comfortable life (which is in fact what I am shooting for), the reality is the 10% downside is not that bad. So I have to travel in a tear drop instead of a class A? That is actually what I would pick anyway if not for the DW. Etc. Etc.
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Re: Earliest Retirement with 100% Equity Portfolio?
Old 12-01-2006, 03:00 PM   #23
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Re: Earliest Retirement with 100% Equity Portfolio?

I reached FI in summer 2004 with 100% in equities, retired at 48 in Oct 2006 with 100%
in equities, and will continue in 100% equities in my retirement. I can easily live on the
dividends alone, with plenty to spare. No kids, a natural LBYM attitude, and good
luck riding the REIT boom were the biggest factors.

My "reduction in risk" in retirement is that I no longer have as concentrated a portfolio
as before. While accumulating I usually owned 5-12 stocks, often all REITs. I am now
in the middle of reducing my holdings in any one stock, and of diversifying into more
industries.
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Re: Pension?
Old 12-01-2006, 03:16 PM   #24
 
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Re: Pension?

Quote:
Originally Posted by Dogcliff
No intention of hijacking this thread, BUT, while you're on the subject, how does one value pension income as a % of portfolio? With a fair % of required retirement income realized through a pension (or two), a 100% equity position with your nest egg would in fact be less than 100%. Yes?
I would value a pension income with cola as 25 times the amount. So if your Pension was $30K per year, it would be like having an extra $750K. - If you had a stash of $1 Million in addition to the pension and it was all invested in equities your equiv. portfoilo would be about 57% stocks 43% Bonds. Which would be a very rational thing to do!
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Re: Earliest Retirement with 100% Equity Portfolio?
Old 12-01-2006, 04:05 PM   #25
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Re: Earliest Retirement with 100% Equity Portfolio?

I'm 34 and am pretty much 100% equities.

Not all equities are neccessarily the same though. I have always liked dividend producing stocks, so my portfolio is slanted towards large dividend paying stocks and REITs. While the ride hasn't been smooth, the downswings haven't been enough to interest me in bonds at the rates available.

My initial plan was to be in a position to FIRE at 45. I'm pretty much on track to do that for me alone, but I've added a wife and hopefully a couple of children to the plan. That will probably delay FIRE for awhile

New gameplan is hoping for FIRE at 55

I don't have any interest in bonds. Once I get closer to FIRE, I will probably put some (say 2-3 years worth of expenses) money into CDs. We'll see. The swings may get to be too much to handle when there is another zero on the end.
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Re: Earliest Retirement with 100% Equity Portfolio?
Old 12-01-2006, 05:19 PM   #26
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Re: Earliest Retirement with 100% Equity Portfolio?

I agree with an 70% to 80% equity during the accumulation phase. I am currently there down from 100% 2 years ago. Hope to ER in 3 years. I will then move to the preservation phase of 60% equities-40% bonds possibly with a one fund scenario
(Wellington or Fidelity Balanced).
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Re: Earliest Retirement with 100% Equity Portfolio?
Old 12-01-2006, 05:42 PM   #27
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Re: Earliest Retirement with 100% Equity Portfolio?

Quote:
how does one value pension income
John Bogle says 14 x annual pension income. I believe the assumption is you'll be around 14 years to collect. Collect at 65 ... croak at 79.

Quote:

I would value a pension income with cola as 25 times the amount.
Seems optomistic to me ... croak at 90?
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Re: Earliest Retirement with 100% Equity Portfolio?
Old 12-01-2006, 06:07 PM   #28
 
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Re: Earliest Retirement with 100% Equity Portfolio?

Quote:
Originally Posted by tryan
John Bogle says 14 x annual pension income. I believe the assumption is you'll be around 14 years to collect. Collect at 65 ... croak at 79.

Seems optomistic to me ... croak at 90?
Here is my reasoning. - An SWR of 4% - which is 25 times the Pension. Who cares how much you collect? - It's all about what you get to spend! - And having a Cola Pension allows you to spend it all every year whether you live to 79 or 90! - So, If you had $750K at age 65, how much would you withdraw safely? - I'd say $30K.

14 times the $30K would be - $420K - Or only a $16.8K SWR.

Are you sure that Bogle was talking about a COLA Pension? - Maybe he was talking about a fixed non-cola Pension? - Then I might agree with that.
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Re: Earliest Retirement with 100% Equity Portfolio?
Old 12-01-2006, 06:27 PM   #29
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Re: Earliest Retirement with 100% Equity Portfolio?

Quote:
No intention of hijacking this thread, BUT, while you're on the subject, how does one value pension income as a % of portfolio? With a fair % of required retirement income realized through a pension (or two), a 100% equity position with your nest egg would in fact be less than 100%. Yes?
At the point of when you are to collect your pension check various Single Premium Immediate Annuities to find the amount of money you would need to invest to earn the same income stream. For a inflation indexed Cola at age 65 Vanguard is paying $5,170 for $100,000. Most of the web sites will let you enter the amount you want to receive and calculate your investment needed. That is the value of the pension.

As far as for calculating the % of a portfolio's stock investment I would include both a pension and any social security via this method to determine my personal investment mix.

As the value of a stream of payments is variable with interest rates, it will act as a very long term bond in practice as far as your portfolio value is concerned. As interest rates rise the value will decrease, as interest rates fall the value increases.
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Re: Pension?
Old 12-01-2006, 06:49 PM   #30
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Re: Pension?

Quote:
Originally Posted by Cut-Throat
I would value a pension income with cola as 25 times the amount. So if your Pension was $30K per year, it would be like having an extra $750K. - If you had a stash of $1 Million in addition to the pension and it was all invested in equities your equiv. portfoilo would be about 57% stocks 43% Bonds. Which would be a very rational thing to do!
25 times anticipated benefit for individual and 100% to survivor annuity is in line with our state COLA'ed pension values. If I take anticipated monthly for the 100% survivor option x 12 to get
annual x 25 I get number that is very close to what the state calls the value of my account. I have compared that value in the past to what it would it would cost to purchase a similar annuity from
private sources and it's usually pretty close. So 25 times seems a reasonable valuation for asset allocation purposes. Not sure whether and how ages of participant and survivor factor in - seems they should have some effect.
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Re: Earliest Retirement with 100% Equity Portfolio?
Old 12-01-2006, 07:32 PM   #31
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Re: Earliest Retirement with 100% Equity Portfolio?

Quote:
Originally Posted by runchman
I've considered this as a bit of a conundrum and never really resolved my thinking; say you have more than you need to where you could withstand, say, a 50% drop in your portfolio. Do you:

1. Rationalize that you can accept more risk and shoot for a higher return with more equities, or
2. Rationalize that you don't NEED a higher return and go for an extra-conservative portfolio that meets your needs

Maybe it's just good old American greed but I think I'd have a hard time picking option 2 if I were in that situation.
I believe that many people who have "more than enough" choose option 2.

It's really hard to build a nest egg and easy to loose it. I remember people losing way more than 50% in the dot-com bust because they were trying to maximize return and taking outsized risks.

"pigs get slaughtered" as they say.

Audrey
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Re: Earliest Retirement with 100% Equity Portfolio?
Old 12-01-2006, 07:50 PM   #32
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Re: Earliest Retirement with 100% Equity Portfolio?

Quote:
Are you sure that Bogle was talking about a COLA Pension? - Maybe he was talking about a fixed non-cola Pension? - Then I might agree with that.
Don't recall a reference to COLA'd pension but do recall he said SS counts the same way ... which implies COLA .

Tried Googling for the reference ... too many hits ... stay tuned.
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Re: Earliest Retirement with 100% Equity Portfolio?
Old 12-01-2006, 08:14 PM   #33
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Re: Earliest Retirement with 100% Equity Portfolio?

I think a case can be made for bonds in any portfolio regardless of age. Taylor Larimore at the Diehards forum has a post (copied here) that addresses the issue very well.
Quote:
You ask:
"I have 20 years to go until retirement and I am wondering why I should have some money invested in bonds.

I am a sailboat racer. I have learned that the best way to be a winner, is to carefully observe what winning skippers are doing and follow their example.

Becoming a winning investor is similar. When I have a question about investing that I am not sure about, I follow the advice of investment authorities:

The American Association of Individual Investors featured "A Consensus View Among the Experts". They tabulated the recommendations of; The Vanguard Retirement Investing Guide; The T.R.Price Retirement Planning Kit; The Wall Street Journal Guide to Planning Your Financial Future; and Random Walk Down Wall Street. Not a single one of these recognized authorities recommended less than 15% bonds in any portfolio--even "High-risk and young investors".

Benjamin Graham, said that no portfolio should have less than 25% in bonds or more than 75% in stocks.

Jack Bogle recommends, as a starting point, that bonds should about equal our age.

Bill Bernstein: "Most investors are simply not capable of withstanding the vicissitudes of an all-stock investment strategy."

Evenson Asset Management: "We had a thirty-eight year period when bonds outperformed stocks (1802-1839)."

Jane Bryant Quinn: The 47 year average return of a 100% stock portfolio was 12.8% with a worse annual loss of 26.5%. Adding 20% bonds reduced return 0.2% and reduced loss 23.0%--an excellent trade-off.

Peter Bernstein: "In real world experience, investors with smaller allocations to stocks, and with some (bond) anchors to windward, have been the one's most likely to be the winners over the long-haul."

Many mutual fund companies, after careful analysis and sophisticated computer simulations, have introduced life-cycle funds. To my knowledge, every recommended life-cycle portfolio includes bonds.

Jason Zweig, senior write for MONEY magazine,
is a personal friend of mine and well known to many diehards. This is what he wrote in answer to your question:

Jason Zweig--"Why buy bonds?"

Mr. Zweig wrote that article in December 1999. As usual, he was right:

YEAR...US STOCKS...U.S.BONDS...DIFFERENCE
2000.........-10.57%..........+11.39%..........21.96%
2001.........-10.97%...........+8.43%...........19.40%
2002.........-20.96%...........+8.26%...........29.22%

Why do investment authorities recommend bonds when we all know that over long periods of time stocks have had higher returns than bonds? Here are the reasons I think bonds belong in most portfolios:

1. Is it prudent to ignore investment experts when they are in such unanimous agreement? "No"

2. Stocks have not always outperformed. From 1928-1937 a $10,000 investment in stocks returned $8,298; in bonds, $21,744.

3. It is conceivable that in the future (many think stocks are extremely overvalued) bonds could outperform stocks. Do you want all your eggs in one basket?

4. DFA tracked the returns of various asset classes from 1970-1997. International Small Company stocks had the best average annual return (17.5%). Would you put all your savings in this asset class just because it performed best in the past?

5. From 1968-1984 The S&P 500 had a 225% cumulative return. Gold returned 776%. Past performance does not guarantee future performance.

6. Nearly everyone agrees that as we age, bonds should be added to one's portfolio. Bonds are very difficult to understand. It is very helpful to learn about bonds early.

7. Bonds let you sleep better.

Best wishes.
Taylor
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Re: Earliest Retirement with 100% Equity Portfolio?
Old 12-01-2006, 09:49 PM   #34
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Re: Earliest Retirement with 100% Equity Portfolio?

Quote:
Originally Posted by runchman
I've considered this as a bit of a conundrum and never really resolved my thinking; say you have more than you need to where you could withstand, say, a 50% drop in your portfolio. Do you:

1. Rationalize that you can accept more risk and shoot for a higher return with more equities, or
2. Rationalize that you don't NEED a higher return and go for an extra-conservative portfolio that meets your needs
Itís all about risk management. What youíre looking for is to lowers you overall risk.

For example: If you select (2) consider,
1. What if I need more money then I budgeted for?
2. What if my life style with X dollars is unsatisfactory?
3. What if I live a lot longer than I estimated?
4. What if a close family member needs financial help?

If you choose (1) you lower the probability of any of the above occurring.
However (1) has a chance of failing and ending up with less money that (2), which will of course increase the probability that one or more of the above will occur.

Assign probabilities to all the variables and this becomes a math problem.
For me I choose (1). It's counter intuitive, but I think it lowers your overall risk.



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Re: Earliest Retirement with 100% Equity Portfolio?
Old 12-01-2006, 11:46 PM   #35
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Re: Earliest Retirement with 100% Equity Portfolio?

One problem with bonds is that most of them can be called. So, what's the point?

Les Antman
http://www.simplyrich.com/board.htm
claims that a 50/50 US/international equity portfolio has never been underwater than 5 years at a time. Later it worked out to about 5.5 years, but close. He plans to stay fully invested, take 5% of the pot every year and accept the ups and downs. His international data doesn't go as far back as the depression as I recall.

Bill Shultheis of the Coffehouse Investor
http://www.coffeehouseinvestor.com/
has a graph in his first book shows that the S&P has only been underwater for only three 10 year periods (from 1929, 1930 and 1931 plus ten years, if memory serves).

The question then becomes, can you stand a ten-year droop?

I am 50/50 US/international equities now in acquisition mode. It has worked out pretty good so far.

I can stand a 5 year droop a lot better.

Even if we don't get all of our social security, it will help smooth out the bumps.

I like Galeno's CD ladder for distribution. I blow hot and cold on it, but I have qualms about 100% equities in retirement. We'll see how I feel when the time comes.

Ed
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Re: Earliest Retirement with 100% Equity Portfolio?
Old 12-02-2006, 01:01 PM   #36
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Re: Earliest Retirement with 100% Equity Portfolio?

It seems to me that the level of comfort with portfolio mix is very much related to experience with living off of savings. If that is a true impression, then people actually living off savings would have the best credibility in assessing their risk tolerance. (During my career, much of my earnings was performance-based and I always had to count on savings.)

For my own case. I was 70% equities when I retired four years ago and I am 55% equities now. Most of this decline has been profit-taking (asset allocation) in the last year. I think I would be OK with 60% and I am awaiting a correction before readjusting.

I realize this is market timing but I have become more confident with some of that in the last four years.
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Re: Earliest Retirement with 100% Equity Portfolio?
Old 12-02-2006, 03:26 PM   #37
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Re: Earliest Retirement with 100% Equity Portfolio?

Quote:
Originally Posted by Ed_The_Gypsy

http://www.coffeehouseinvestor.com/
has a graph in his first book shows that the S&P has only been underwater for only three 10 year periods (from 1929, 1930 and 1931 plus ten years, if memory serves).

but in that same 10 year period that the S&P was flat or minus, bonds would have made gains--so the real question is not how long the S&P was underwater but how long until it caught up to a bond portfolio. Also, I don't think the S&P went anywhere from about 1970 to 1980. The early 70s were tough on equities.
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Re: Earliest Retirement with 100% Equity Portfolio?
Old 12-02-2006, 04:37 PM   #38
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Re: Earliest Retirement with 100% Equity Portfolio?

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Originally Posted by bosco
Also, I don't think the S&P went anywhere from about 1970 to 1980. The early 70s were tough on equities.
The 70's were a terrible decade for financial assets, primarily because inflation averaged nearly 7%

From year-end 1969 until year-end 1979 - compound annual returns:

Nominal

S&P 500 5.9%
LT GOVTS 5.5%
T-BILLS 6.3%

Inflation-adjusted

S&P 500 -1.4%
LT GOVTS -1.7%
T-BILLS -1.0%

These are total returns with dividends and interest reinvested
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Re: Earliest Retirement with 100% Equity Portfolio?
Old 12-02-2006, 04:38 PM   #39
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Re: Earliest Retirement with 100% Equity Portfolio?

if real estate and gold were in the mix the results were okay
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Re: Earliest Retirement with 100% Equity Portfolio?
Old 12-02-2006, 04:47 PM   #40
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Re: Earliest Retirement with 100% Equity Portfolio?

Quote:
Originally Posted by mathjak107
if real estate and gold were in the mix the results were okay
They definitely would have helped. However, REITs in those days were pretty much all mortgage REITs, and they went belly-up in the 70's, due to high short-term interest rates combined with loan defaults on commercial properties.
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