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Earliest Retirement with 100% Equity Portfolio?
Old 12-01-2006, 10:16 AM   #1
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Earliest Retirement with 100% Equity Portfolio?

If one's goal is to retire early, does it not make sense to invest in a 100% equity portfolio? This is my logic.

1) Historically, over the long tem, equities have performed better than cash.
2) Traditionally, 100% equity investors must worry that a down market will occur as they reach (effectively mandatory) retirement, thus forcing them to eat dog food. Thus, they must keep cash to ensure their portfolio will not crater in the period leading up to retirement.
3) If I am retiring early (especially if it will be very early), I have to option to delay retirement and continue working through a down market.
4) Thus, statistically speaking, on average retirement will occur earlier with a 100% equity investment. However, one must accept a relatively small potential for delayed retirement in order to obtain a larger chance of earlier retirement.
5) Just pulling numbers out of my rear, I look at it this way. Say a 30 year old traditional 60/40 investor has a 100% chance of retiring at 55 given their savings rate and expenses. With a 100/0 portfolio, they might have an 80% chance of retiring at 48 with a 20% chance of having to delay until 59. This decision is a no-brainer to me. (These numbers are demonstrative. I fully understand the math of probability distributions).
6) I have my money where my mouth is with a 95/5 portfolio for about 20 years (I need some emergency cash). My FA thinks I am crazy, and I did take a 25-30% hit in 2000-2002. OTOH, after about 20 years apiece in the market, he acknowledges that my net worth is much greater than his net worth, so I am doing something right.

Am I missing something? Who else uses this approach?

[Edit: Spelling]
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Re: Earliest Retirement with 100% Equity Portfolio?
Old 12-01-2006, 10:22 AM   #2
 
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Re: Earliest Retirement with 100% Equity Portfolio?

Actually, If you are working, you feel your job is secure, and have another 20 years left of work. - I think it is OK to invest 100% in stocks - Diversified of course. The closer you get to retirmement you should pare down the stock portion if you don't have a pension.

I did this throughout most of the 80's and 90's and it paid off for me.
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Re: Earliest Retirement with 100% Equity Portfolio?
Old 12-01-2006, 10:24 AM   #3
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Re: Earliest Retirement with 100% Equity Portfolio?

Quote:
Originally Posted by bbuzzard
If one's goal is to retire early, does it not make sense to invest in a 100% equity portfolio? This is my logic.

I seem to remember seeing efficient frontier graphs that show that small mixtures of fixed income (on the order of 15% or so) actually increase the return of an all-equity portfolio slightly, apart from lowering volatility.
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Re: Earliest Retirement with 100% Equity Portfolio?
Old 12-01-2006, 10:37 AM   #4
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Re: Earliest Retirement with 100% Equity Portfolio?

Quote:
does it not make sense to invest in a 100% equity portfolio?
Generally there does not seem to be a payoff when an investor has an equity position of over about 80%. With anything higher (100%) you will get possibly a higher return however, the additional risk of downside adventure does not appear to be worth the extra risk. Of course if you are 100% in stocks and the bull market continues indefinitely, you have a chance to make all of this just a bunch of BS.
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Re: Earliest Retirement with 100% Equity Portfolio?
Old 12-01-2006, 10:51 AM   #5
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Re: Earliest Retirement with 100% Equity Portfolio?

I always thought simple is good, so just DCA for a 30+ year career into a tax deferred target retirement account and upon retiring start withdrawing 4% (inflation adjusted) or some other amount throughout retirement. But I have come to understand that the best strategy for accumulation may not be the best for withdrawals. From another board I found something I think worth looking at ( http://bobsfiles.home.att.net/reverseDCA2.html ). Its just that a market decline while working may not hurt and may even help accumulation. Even 100% equities with 20+ years to go may be OK. But in withdrawal phase an early steep market decline could have damaging impact if the individual cannot adjust the withdrawal amounts. Now if still young a person could cut back on spending or work a little. But if dependent on a specific withdrawal rate there could be problems.
For the withdrawal phase I would want something like 20% in fixed income just to lower volatility.
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Re: Earliest Retirement with 100% Equity Portfolio?
Old 12-01-2006, 10:52 AM   #6
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Re: Earliest Retirement with 100% Equity Portfolio?

Quote:
Originally Posted by bbuzzard
If one's goal is to retire early, does it not make sense to invest in a 100% equity portfolio? This is my logic.
....

5) Just pulling numbers out of my rear, I look at it this way. Say a 30 year old traditional 60/40 investor has a 100% chance of retiring at 55 given their savings rate and expenses. With a 100/0 portfolio, they might have an 80% chance of retiring at 48 with a 20% chance of having to delay until 59. This decision is a no-brainer to me. (These numbers are demonstrative. I fully understand the math of probability distributions).
That is exactly my reasoning. I'm essentially 100% equities right now at 26. I expect to FIRE in 7-10 years (probably 75-80% chance of meeting that goal). I figure worst case, the markets tank and I end up working an extra 5 years (maybe 20% chance of that happening). But I'd rather plan on FIRE in 7-10 years and acknowledge that there's a slight chance it may take 15 years instead of getting much more conservative today and be fairly certain it would be (for example) 12-13 years till FIRE (with 90% confidence). It's all a numbers and probability game at this point. I'm planning for the best, but making sure the worst isn't too bad.

Even in retirement, where I'll (hopefully) have 5+ decades of living to do, I expect to keep around 80% in equities. I may shift a percent or two over to bonds each year up until FIRE. My biggest worry is inflation for this long time period.

This thinking jives with what little I know of portfolio theory. You can be more aggressive with investing if the investment time period can be set by you. In other words, you can wait out a period of poor market performance. Working and continuing to contribute to the FIRE pot further enhances our ability to be more aggressive (if we lose a bunch, we can always work more/longer to replace it).
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Re: Earliest Retirement with 100% Equity Portfolio?
Old 12-01-2006, 11:00 AM   #7
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Re: Earliest Retirement with 100% Equity Portfolio?

Many of us took extraordinary investment risks to maximize growth and achieve ER. But after ER become extremely conservative - no longer interested in maximizing growth, but rather preserving the nest egg.

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Re: Earliest Retirement with 100% Equity Portfolio?
Old 12-01-2006, 11:12 AM   #8
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Re: Earliest Retirement with 100% Equity Portfolio?

Quote:
Originally Posted by audreyh1
Many of us took extraordinary investment risks to maximize growth and achieve ER. But after ER become extremely conservative - no longer interested in maximizing growth, but rather preserving the nest egg.
Yep. In the accumulation phase, 70-80% equities. In the draw down phase, 40-50%.
Disclaimer: I am a not-so-early retiree (58). Those who punch out earlier, have pensions or have nerves of steel may want to keep more in equities.

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Re: Earliest Retirement with 100% Equity Portfolio?
Old 12-01-2006, 11:12 AM   #9
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Re: Earliest Retirement with 100% Equity Portfolio?

Seems like the sort of thing that a spreadsheet would help with.

My siple forecasting spreadsheet includes what I have now, how much I expect to save every year, a return assumtion andan inflation assumption. By playing with a sheet like this, I can see what rate of return I need to make it by a certain date, what effect different return levels will have on FIRE date, and what the effects of, say, a 25% decline would have at a specific oint in time.
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Re: Earliest Retirement with 100% Equity Portfolio?
Old 12-01-2006, 11:40 AM   #10
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Re: Earliest Retirement with 100% Equity Portfolio?

Once you do retire, I would never go with 100% equities.
For me, the main reason to have a couple years cash on hand is so that I don't have to sell stocks in a down market.

If you are forced to sell stocks in a down market to support yourself, your long term gain will suffer.
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Re: Earliest Retirement with 100% Equity Portfolio?
Old 12-01-2006, 11:46 AM   #11
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Re: Earliest Retirement with 100% Equity Portfolio?

Quote:
Originally Posted by brewer12345
Seems like the sort of thing that a spreadsheet would help with.

My siple forecasting spreadsheet includes what I have now, how much I expect to save every year, a return assumtion andan inflation assumption. By playing with a sheet like this, I can see what rate of return I need to make it by a certain date, what effect different return levels will have on FIRE date, and what the effects of, say, a 25% decline would have at a specific oint in time.
Have you / (would you) ever consider creating a worksheet template from your spreadsheet and posting it for others to use ? Sounds like a FIRECALC kind of useful tool.
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Re: Earliest Retirement with 100% Equity Portfolio?
Old 12-01-2006, 11:57 AM   #12
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Re: Earliest Retirement with 100% Equity Portfolio?

My approach will be slightly hedging my bets; so i'll probably be 80% stocks or so in the accumulation phase. I agree with one of the posters above than usually having a dash of diversity from other investment types doesnt really hurt the return much, might even make it better, and reduces volatility at the same time.

That being said, i hope stocks continue to be the top investment; and a 80% position in stocks certainly suggests i'm hoping for it.
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Re: Earliest Retirement with 100% Equity Portfolio?
Old 12-01-2006, 12:10 PM   #13
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Re: Earliest Retirement with 100% Equity Portfolio?

I'm using the same strategy, nearly 100% equities at 43 years old. Figure worst case I'll have to work a little longer if I have some big dips, best case I 'cash out early' and retire at 50.

at 60/40 I'm guaranteed having to work longer, so I figure it is worth the odds.

Of course my equities are all in one stock to maximize gains broadly diversified across many indexes.

- John
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Re: Earliest Retirement with 100% Equity Portfolio?
Old 12-01-2006, 12:44 PM   #14
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Re: Earliest Retirement with 100% Equity Portfolio?

Quote:
Originally Posted by Zathras
Once you do retire, I would never go with 100% equities.
For me, the main reason to have a couple years cash on hand is so that I don't have to sell stocks in a down market.

If you are forced to sell stocks in a down market to support yourself, your long term gain will suffer.
Clearly (IMHO) 100% equities are not appropriate for the distribution phase. I am purely referrring to the acculation phase.
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Re: Earliest Retirement with 100% Equity Portfolio?
Old 12-01-2006, 12:45 PM   #15
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Re: Earliest Retirement with 100% Equity Portfolio?

Quote:
Originally Posted by runchman
I'm using the same strategy, nearly 100% equities at 43 years old. Figure worst case I'll have to work a little longer if I have some big dips, best case I 'cash out early' and retire at 50.
Coincidentally, I am 42 and shooting for 48. My nest egg right now is about 55% of what I am shooting for.
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Re: Earliest Retirement with 100% Equity Portfolio?
Old 12-01-2006, 01:14 PM   #16
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Re: Earliest Retirement with 100% Equity Portfolio?

Quote:
Originally Posted by bosco
I seem to remember seeing efficient frontier graphs that show that small mixtures of fixed income (on the order of 15% or so) actually increase the return of an all-equity portfolio slightly, apart from lowering volatility.
I once read a piece by Jonathan Clements saying the same thing, but no longer believe it - though adding a small % of stocks to a very bond-heavy portfolio does what you claim:



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Re: Earliest Retirement with 100% Equity Portfolio?
Old 12-01-2006, 01:21 PM   #17
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Re: Earliest Retirement with 100% Equity Portfolio?

We were 100% equities until a year prior to my "retirement" this year (DW is still working for another year or two due to differences between us in job satisfaction and retirement budget desires).

My rationale was just as you mentioned - I figured the shortest distance between me and FIRE was probably 100% equities, and I figured I'd want to hold on to my job through a market dip anyway.

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Re: Earliest Retirement with 100% Equity Portfolio?
Old 12-01-2006, 01:56 PM   #18
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Re: Earliest Retirement with 100% Equity Portfolio?

Quote:
Originally Posted by justin
That is exactly my reasoning. I'm essentially 100% equities right now at 26. I expect to FIRE in 7-10 years (probably 75-80% chance of meeting that goal). I figure worst case, the markets tank and I end up working an extra 5 years (maybe 20% chance of that happening). But I'd rather plan on FIRE in 7-10 years and acknowledge that there's a slight chance it may take 15 years instead of getting much more conservative today and be fairly certain it would be (for example) 12-13 years till FIRE (with 90% confidence). It's all a numbers and probability game at this point. I'm planning for the best, but making sure the worst isn't too bad.

Even in retirement, where I'll (hopefully) have 5+ decades of living to do, I expect to keep around 80% in equities. I may shift a percent or two over to bonds each year up until FIRE. My biggest worry is inflation for this long time period.

This thinking jives with what little I know of portfolio theory. You can be more aggressive with investing if the investment time period can be set by you. In other words, you can wait out a period of poor market performance. Working and continuing to contribute to the FIRE pot further enhances our ability to be more aggressive (if we lose a bunch, we can always work more/longer to replace it).
I also did this. I kept basically 100% in stocks until I hit my goal. Now I keep 90% in stocks and about 10% in cash/treasuries. One part of this strategy that hasn't been mentioned are the dividends. Ignoring details like taxes, long-term inflation and rising dividends, let's use an example with some round numbers. Let's say your goal is to have $40k, so you need to save $1MM. Let's say when you get there you sell off 10% and hold $100k in cash. It's not hard to get a 2.5% yield on a reasonably safe portfolio, but let's say 2%. So, unless companies cut dividends (which is relatively low on the list of things likely to happen) you'll have $18k in income from the stocks and a few thousand from the cash stash. Let's call it $20k altogether. If the market isn't doing well, between your reasonably safe dividends and your cash stash you have five years expenses covered. That's a pretty long buffer against poor market performance. Even after that, you still have about half your expenses covered by the dividends. Inflation and taxes obviously play an important role that needs to be considered too (and we hope that dividends will increase faster than inflation), but the point is that this portfolio which is nearly all equities isn't as risky as it might first seem. Of course I realize that the dividends are part of the total return of the stocks, but they sure do act as a buffer in bad markets.

Also, a lot of this analysis depends on how much you have relative to your goal. The more you have above your goal, the more you can withstand potential losses. That is, in the above example if you had $2MM (twice what you need), the idea of being fully invested in equities seems less risky since you can afford a 50% loss and still be where you need to be -- notwithstanding that dividends alone might cover your living expenses and a 10% cash stash would cover you for many years.
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Re: Earliest Retirement with 100% Equity Portfolio?
Old 12-01-2006, 02:10 PM   #19
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Re: Earliest Retirement with 100% Equity Portfolio?

Everyone agrees to take more risk while in accumulation phase. Question becomes what is "more risk"?

For a CD holder "more risk" might mean buying AAA corporate bonds.

For us "more risk" was owning multi-families; less risk was selling the multi families and renting only single family residences.

And for stock holders "more" is higher percentage equities.

To each his own.
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Pension?
Old 12-01-2006, 02:11 PM   #20
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Pension?

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?
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