Earliest Retirement with 100% Equity Portfolio?

[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.

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]

 

[Cut-Throat]

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.

 

[bosco]

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.

 

[mickeyd]

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.

 

[yakers]

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.

 

[justin]

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).

 

[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.

Audrey

 

[REWahoo]

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.

 

[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.

 

[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.

 

[HelpMeRhonda]

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.

 

[azanon]

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.

 

[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.

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

 

[bbuzzard]

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.

 

[bbuzzard]

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.

 

[Cb]

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:

Cb

 

[Cb]

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.

Cb

 

[terminator]

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.

 

[tryan]

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.

 

[Dogcliff]

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?

 

[runchman]

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

 

[bbuzzard]

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.

 

[CyclingInvestor]

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.

 

[Cut-Throat]

Re: 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?

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!

 

[Hamlet]

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.