Extremely aggressive asset allocation to a target portfolio balance

[aerohokie]

I'm relatively new here so I apologize if this has been addressed before but I couldn't find it in my searches. Everything I've read about asset allocation strategies focus on a specific date (or age) for retirement. The intent is to reduce risk the closer you get to your retirement date. But for young dreamers who can afford the risk, why not identify a target account value instead and work to reach that target as aggressively as possible? Once the target is reached then reallocate assets to reduce risk.

For example, if we've decided $2.5 million would fund our retirement with a SWR, why not keep an extremely aggressive asset allocation (100% stocks) until we reach that target. It seems this strategy would get us to the target (retirement) fastest. Am I missing something?

-aerohokie

 

[pb4uski]

Yes. If you get to $2.0 million and are 80% of the way to your goal of $2.5 million would you prefer to at that point take a risk of a 25% market downturn takes you back to 60% of your goal or would you rather take less risk of moving backwards?

If you were 55 when you were 80% there and in all equities a market downturn could be a significant setback (compared to the same situation at 35 or 40).

Slow and steady wins the race. And the further away from retirement you are the more risk you can take because in the event of a downturn you have more time to makeup for the downturn.

 

[Animorph]

I think that makes a lot of sense if you are flexible in your retirement date. Instead of bonds/cash and a fixed retirement date you have all equities and the willingness to work a little longer if the market drops before reaching your target. Of course I'm retired and still sort of 100% equities, so take that for what it's worth.

I retired in 2007 and the economy was looking shaky to me, so I did shift quite a bit to cash and some bear market funds at that time. That was a great buffer and reinvestment opportunity for the next few years. Currently I build cash when the portfolio is above expectations and reinvest it in a bear market. No bonds except as a place to park cash.

 

[FIREd]

1) with a very aggressive asset allocation, you need be able to handle the volatility. Could you handle losing $1M in a few months - and not panic?

2) the more risk you take, the less precise your retirement date. If you invest in less risky investments with a known rate of return, then you can predict the date of your retirement pretty accurately based on your savings rate. With aggressive investments not so. You could get really close to your number when suddenly the market pulls the rug from under you. And just like that, your retirement date has been pushed back 5 years.

 

[easysurfer]

At a young age, you can start of mostly in equities, but I'd prefer to gradually decrease the amount in equities each year. That is, a slow and steady descent rather than risking a crash and burn landing.

 

[braumeister]

You're not missing anything.
You just need to make sure you only pick stocks that will always go up.

Those who choose less aggressive portfolios do so because they use diversification to hedge their ability to select such stocks.

It's really that simple.

 

[aerohokie]

@pb4ski - I think with the aggressive strategy we would get to $2.0 million faster than with a balanced asset allocation. And yes a 25% downturn would take us back to 60% of our goal but assuming we don't panic and change strategy we should recover from the downturn faster than a mixed portfolio. And I guess I should mention that this assumes a diversified portfolio of stocks (50% domestic, 50% international total market index funds). I would agree this would more risky if we were 55. Less than 10 years from 'normal' retirement age means there may not be enough time to recover from a big loss like that. But we're trying to retire early and this scenario playing out in our early 40s is realistic.

Thanks for the support Animorph. It seems we may have similar risk tolerances. We've been investing for 15+ years now and we truely don't bat an eye when the market tanks. My first reaction is that it's an opportunity for our retirement contributions to buy low. That may change as we get older but I think we'll have the discipline to not panic during a downturn and wait (however long) for an upturn to reallocate assets.

 

[clifp]

Aerohokie

You might want to get William Bernstein (of 4 Pillars of Investing fame) new Ebook, The ages of Investor. He suggest an approach very similar to what you are suggesting. Take a lot of risk early on (even using leverage if possible) until you reach your target. Then significantly changing your portfolio to reduce risk.

In some ways that is why I retired so early, once I accumulated a good size nest egg, I realized I didn't need to work which lead to the question if you don't need to work why are you?

 

[obgyn65]

This to me sounds like playing the lottery, however I am one of the most conservative investors in this forum with 0% stocks...

For example, if we've decided $2.5 million would fund our retirement with a SWR, why not keep an extremely aggressive asset allocation (100% stocks) until we reach that target.

 

[clifp]

This to me sounds like playing the lottery, however I am one of the most conservative investors in this forum with 0% stocks...

I think that is because you believe the stock market is basically a casino and investing in it is a gamble. It isn't; not on a long term basis.

Look at this way if you want to retire at age 60, with a income near your after tax level while you were working. One way it is to start save 30% of your salary at 25 and get 3.5% real return difficult in the past with bonds/CDs, and impossible now days. The other way is to save 20% and get a 6% real return (slightly below the historical average for the market.)

Now if you figure that say roughly 30% for high earners disappears because of taxes (including sales). The person saving 20% is living on ~1/2 his gross salary while the person saving 30% is living on only ~40% of his gross pay, that is a significant cut back.

 

[WestLake]

I am at over 90% stocks at age 54. But 60% of my net worth is in rental real estate so I guess you could say around 40% in the overall scheme of things. I have decided not to buy more real estate and have been aggressively buying stocks the last five-six years as I also feel they are on sale and that I need some diversification from real estate.

 

[RunningBum]

@pb4ski - I think with the aggressive strategy we would get to $2.0 million faster than with a balanced asset allocation.

Yes, I think a 100% allocation would in most cases give you the fastest path to $2M. But I think it also might leave you with a somewhat smaller chance of ever getting to $2M. I was looking at AA with Vanguard and they showed how an 80/20 mix had just barely a smaller return than 100/0, but much less volatility.

I was 100/0 in my 30s. I took a huge hit when the tech bubble burst, not only because I was 100/0, but also because I was primarily in tech stocks. Had I been better diversified among stocks I wouldn't have taken such a hit. At some point after that, I can't recall exactly when, I've gone with 115-age. I'm also at my goal nest egg and have retired, but it sounds like you would go away from 100/0 at that point too.

I don't see a real problem with your plan, but you might look at 90/10 or 80/20 to reduce the risk without taking much away from your return. The other factor in this is that if you need more cash than you have in your emergency fund (if you have one), you might find it helpful to take it from bonds if stocks are at a low.

 

[ERD50]

This to me sounds like playing the lottery, however I am one of the most conservative investors in this forum with 0% stocks...

IMO, a 0% stock, all fixed portfolio is more like gambling. [edit - actually, it isn't just my opinion, the facts attest to it - see the numbers below]

If I go into the casino, and consistently bet even/odd or red/green on roulette, I will slowly, but surely lose small amounts of money to 'the house'. It is a zero sum game. But I also don't risk losing a lot of money at once.

But investing in stocks is not a zero sum game. Some stocks will lose, but on average businesses grow. If you invest in a broad range of businesses, you have a very good chance of sharing in that growth over time. If you invest in fixed, you might not even keep up with inflation over time.

Have you actually run those 0% equity profiles in FIRECALC? I just can't see how such a dramatically low success rate can be looked at as not gambling with your future. . IMO, those who avoid stocks are the gamblers, they are the ones taking the real risk of running out of money.

Here you go:

A) A 3.6% WR over 30 years with 75% equities shows less than 1% failures.

B) A 3.6% WR over 30 years with 0% equities shows greater than 28% failures.

Which one of those is 'gambling' with your future?

NOTE: Of course you are free to do as you see fit for your situation. But I think you do a dis-service to anyone perusing these threads who see anyone here promoting 0% stocks as 'less risky', or compare long-term stock investing as a 'lottery'.

-ERD50

 

[obgyn65]

I don't particularly appreciate you passing judgement on my input as being a 'dis-service'. I am entitled to my opinion as much as you are, but I don't remember calling anyone's participation to this forum a "dis-service'. My investment skills are somewhat limited, which I try to remedy by reading and learning from this website, but it does not mean that my opinion is less worthy than yours. No more posting from me under this thread so there is no need to answer or FIFY my post. The sanctimonious tone of your answer to my post was uncalled for, ERD50.

NOTE: Of course you are free to do as you see fit for your situation. But I think you do a dis-service to anyone perusing these threads who see anyone here promoting 0% stocks as 'less risky', or compare long-term stock investing as a 'lottery'.

-ERD50

 

[Lsbcal]

...(snip)...
For example, if we've decided $2.5 million would fund our retirement with a SWR, why not keep an extremely aggressive asset allocation (100% stocks) until we reach that target. It seems this strategy would get us to the target (retirement) fastest. Am I missing something?
...

I'd think a risk reduction strategy is still a good idea.

For instance, go with 100% stocks until real rates on intermediate bonds are at historic norms. Then balance the stocks a bit with bonds. Maybe 80/20.

 

[ERD50]

I don't particularly appreciate you passing judgement on my input as being a 'dis-service'. I am entitled to my opinion as much as you are, but I don't remember calling anyone's participation to this forum a "dis-service'. ...

I'm sorry - I didn't mean to offend. However, I feel you are shooting the messenger here.

But I will stand by my opinion that when people post their opinions in such a way that they appear as they are stating a fact, that they are doing a disservice to onlookers. I feel the same about people who post saying that eliminating a mortgage is 'key to retirement'. It just isn't so, and the numbers back it up.

Zero % stocks are less volatile, but I don't think people should go around saying they are a 'risk' to a retirement. The data indicates the opposite.

My investment skills are somewhat limited, which I try to remedy by reading and learning from this website, but it does mean that my opinion is less worthy than yours.

That's fine, and I'm merely trying to help you in your education. I provided some data to back it up. Your or my opinion does not change what the data tells us. It isn't my 'opinion' that stocks have historically reduced risk for retirees, it is what the data shows us to be true, by a pretty significant margin.

To restate what I said - If 0% stocks is what you are comfortable with, then that is your choice, and maybe the best choice for you, considering. But it would be best for you to understand the real risk you are taking, and plan accordingly (with a suitably low WR).

-ERD50

 

[Bestwifeever]

I don't see where ObGyn told anyone his investment strategy was one to follow, he simply said what it is, and noted he is one of the most conservative investors here (I would even FIFY to delete the "one of", OG ). Is it a disservice to state what one holds?

 

[ERD50]

I don't see where ObGyn told anyone his investment strategy was one to follow, he simply said what it is, and noted he is one of the most conservative investors here (I would even FIFY to delete the "one of", OG ). Is it a disservice to state what one holds?

You are correct, I don't think he is suggesting others should follow him. But I still feel that if someone makes a statement that they believe/feel 'such and such', and that 'such and such' is contrary to what the data tells us, that it should be pointed out.

If it isn't challenged, I do think readers (and lurkers, and maybe the OP) might assume it must be true. I don't think that is a good thing.

And to be clear - I'm not advocating high % of equities for anyone either. It is their decision to make. But I would suggest that people run the numbers and understand what the effect of their decision could be. I also don't think it is coincidence that conservative retirement funds like the Vanguard Target funds, or the Wellington/Wellesley have a significant equity exposure. That's something to think about.

-ERD50

 

[Bestwifeever]

So is it a disservice to state one is conservative ?

 

[Animorph]

I'm fine with ObGyn's strategy if his withdrawal rate is very low and he doesn't care about leaving an inheritance. He may just not need market gains. That might change if we see hyper inflation, but he can always adjust later. He also may have worked longer than we would have before retiring.

 

[ERD50]

So is it a disservice to state one is conservative ?

Well, it is interesting. Is it really 'conservative' to invest in such a way that has historically resulted in more failures? Seems questionable to me.

I've discussed it before, but 'risk' is generally used by many on this forum as a proxy for 'volatility', but they really are not the same thing when we are discussing a 30-40 year retirement. And yes, I think it is best that we be clear about that.

I'm fine with ObGyn's strategy if his withdrawal rate is very low and he doesn't care about leaving an inheritance. He may just not need market gains.

Agreed. All I'm saying is one should be aware of those conditions. It's not clear to me that is the case here. In an earlier thread, this poster was using the dancing-feet emoticon because someone referenced a study confirming a 3.5% WR as 'safe', and IIRC, he said he was planning on ~ 3.5%. I pointed out that study was using a fairly high Eq% (don't recall the exact number, but I think ~ 60%), and that w/o equities, you probably need to go much lower. I'm not sure if that sunk in or not.

If that poster does not want to listen anymore, that is also their decision. I was only trying to be helpful, and will continue to do so if he ever wants to listen in the future. I don't hold grudges in regards to such things. But if I've worn out my welcome with him, so be it. I do hope his retirement is everything he hopes it to be, but I sure hope he is taking the right precautions.

-ERD50

 

[Lsbcal]

This Vanguard link shows various allocation models and their various average returns plus good/bad years: https://personal.vanguard.com/us/insights/saving-investing/model-portfolio-allocations

100% stocks: 9.9% return, -43% worst year (in 1931)

100% bonds: 5.6% return, -8% worst year (in 1969)

Of course, most of us are in between in AA. Those numbers are also shown on the link.

 

[Bestwifeever]

I'll take that as a no.

 

[ERD50]

I'll take that as a no.

I need to work on that 'concise' concept!

But let me elaborate ... It is questionable, and therefore worthy of discussion on this forum. IMO.

This Vanguard link shows various allocation models and their various average returns plus good/bad years: https://personal.vanguard.com/us/insights/saving-investing/model-portfolio-allocations

100% stocks: 9.9% return, -43% worst year (in 1931)

100% bonds: 5.6% return, -8% worst year (in 1969)

Of course, most of us are in between in AA. Those numbers are also shown on the link.

Thanks, interesting data, but I really think that FIRECALC provides a lot more useful information. The sequential returns and inflation are a huge components in historical success rates. Those average/best/worst numbers don't really encompass that.

-ERD50

 

[MichaelB]

Perhaps we can discuss this and also respect each other's view.