Help convince me to go more conservative

[biocruiser]

I am 56 with a comfortable portfolio of 4.5M and will be retiring soon. I've always been very risk tolerant, with 100% equity early in my saving career, shifting to 70/30 when I was in my mid-40's. I was at 70/30 when the 2008 crisis hit (ouch) but I kept investing and rode that out. Lately I've shifted some into bonds and I am currently at 55/45 Stock/Bonds. I use a lazy portfolio of low cost index funds covering total US stock market (25%), international (15%), small cap (15%) and total bond market (45%).

Being aggressive in my AA worked during accumulation phase, but given my age, my portfolio size and entry into retirement, I know I should be changing my AA to something like 40/60 or maybe even 30/70. But I can't seem to bring myself go that conservative. I don't know if I am being greedy or foolish (or both).

 

[LOL!]

Why go conservative? I just don't understand that. See Larry Swedroe's Guide to Right Financial Plan for insights in to going more conservative ... or not.

 

[ducky911]

You are already conservitive in my eye. I let it ride...maybe less small cap.

 

[frayne]

Hey Bio, welcome, I'm 60 and have about 60/40 split (equity vs fixed) and see no need to change, also have no problem sleeping at night either. Bottom line, we are all wired differently with various risk tolerances, go with your gut. Just my two cents.

 

[REWahoo]

You don't mention what your expenses are, but for many of us here a 4.5M portfolio would be large enough to allow you to stay aggressive. Even loss of 30 - 40% would leave you with a comfortable nest egg - once again, depending your spending.

 

[Rowdy]

I think you are right on. At 56, your portfolio is going to need to last many years. 55/45 equities/bonds does not seem at all too aggressive. I think at your age I'll be more like 65/35 or maybe 70/30; however, I have a pension that can be thought of as a bond investment.

$4.5M rocks; you are in good shape!

 

[Gumby]

You should tinker around with FIRECalc. Change the asset mix and see how that changes the success rate. I'll bet that you see better success rates with 70/30 than 30/70.

 

[biocruiser]

I've played with Firecalc and get 100% success with 55/45. Just tried 30/70 and you are right in that it drops to 96%.

I estimate my spending at 120K/yr (after tax) which translates to 160K before tax. Most of the portfolio is tax deferred savings. I would adjust spending downward for a few years in a bad bear market if needed.

Maybe I'll just stay the course for now. Seems to have worked for me so far!

This forum is great. I've learned a lot here.

 

[Dawg52]

You don't mention what your expenses are, but for many of us here a 4.5M portfolio would be large enough to allow you to stay aggressive. Even loss of 30 - 40% would leave you with a comfortable nest egg - once again, depending your spending.

Not me. The way I look at it.....with that large of a portfolio, why do you need to be aggressive? You have plenty. But it does depend on your expenses. My expenses are low compared to most here.

Edit: I missed the OP's last post. His expenses are enough to justify his AA.

 

[W2R]

If you feel comfortable with your present 55:45 (equities:fixed), far be it from me to persuade you to shift to a more conservative AA.

You lived through 2008-2009, so I'm sure you have a good idea of what your risk tolerance is. As long as you can go through another crash like that, should it happen, without selling low I think your AA is just fine.

 

[Ed_The_Gypsy]

I am way older than the OP and 100% in equities today. I wouldn't touch a bond right now. They can only go down from here.

Equities are the only thing that have any potential to keep me out of a paper box under the bridge. I was 100% in 1987 and almost 100% in 2008.

If he wants conservative, look for reliable dividend-paying equities.

 

[REWahoo]

I was 100% in 1987 and almost 100% in 2008.

Thrill seeker...

 

[biocruiser]

You lived through 2008-2009, so I'm sure you have a good idea of what your risk tolerance is. As long as you can go through another crash like that, should it happen, without selling low I think your AA is just fine.

Good advice. I can live through another crash without selling low by spending from my bonds. So you've all convinced me to stay with 55/45. In spite of the post heading, staying a bit heavier on stocks is what I wanted you to all say .

 

[clifp]

I am a bit younger, retired, with a smaller portfolio, but also smaller expenses. My AA is 80/10/10. Higher than 75%/25 at the beginning of 2008.

You seem to have a good instinct for investing. I certainly wouldn't be in hurry to buy more bonds especially at these yields. FIRECalc and such are useful but I think it is worth looking at various scenarios since we have an historic financial crisis and we have historically low interest rates. The one that would concern me if I had had more than 40% of my portfolio (even a large one like yours) is what would happen if we have a 5% increase in interest rates and 5-7% increase in inflation.

 

[pb4uski]

I am 56 with a comfortable portfolio of 4.5M and will be retiring soon. I've always been very risk tolerant, with 100% equity early in my saving career, shifting to 70/30 when I was in my mid-40's. I was at 70/30 when the 2008 crisis hit (ouch) but I kept investing and rode that out. Lately I've shifted some into bonds and I am currently at 55/45 Stock/Bonds. I use a lazy portfolio of low cost index funds covering total US stock market (25%), international (15%), small cap (15%) and total bond market (45%).

Being aggressive in my AA worked during accumulation phase, but given my age, my portfolio size and entry into retirement, I know I should be changing my AA to something like 40/60 or maybe even 30/70. But I can't seem to bring myself go that conservative. I don't know if I am being greedy or foolish (or both).

I'm 56 too and just retired. Similar to you was 100% equities early. While the 2008 crisis was nervewracking, I stayed the course am ahead today. I also use a lazy portfolio of 45% domestic equities, 15% international equities, 35% bonds and 5% cash. I sleep well at night in that I have seen the '87 crash, the early 2000s and 2008 declines and then recoveries each time.

I think 60/40 is fine, but if I were in your shoes I would not go any more conservative than 40/60.

 

[audreyh1]

I am 56 with a comfortable portfolio of 4.5M and will be retiring soon. I've always been very risk tolerant, with 100% equity early in my saving career, shifting to 70/30 when I was in my mid-40's. I was at 70/30 when the 2008 crisis hit (ouch) but I kept investing and rode that out. Lately I've shifted some into bonds and I am currently at 55/45 Stock/Bonds. I use a lazy portfolio of low cost index funds covering total US stock market (25%), international (15%), small cap (15%) and total bond market (45%).

Being aggressive in my AA worked during accumulation phase, but given my age, my portfolio size and entry into retirement, I know I should be changing my AA to something like 40/60 or maybe even 30/70. But I can't seem to bring myself go that conservative. I don't know if I am being greedy or foolish (or both).

I'm 52, retired for a while, living off my portfolio. I'm currently at 53% stocks. I plan to lower that 1% a year, so I don't plan on getting down to 40% stocks until I reach 65 years old. And maybe 30/70 when I reach 75. And even then I may re-evaluate going so low.

I also see no hurry to switch to a high % bond portfolio especially as bonds are likely to underperform over the next decade .

And, as far as I know long term portfolio survival starts dropping off when you
get below 40% stocks, so that level of "conservative" is best when you don't expect to have as many decades left to live.

Audrey

 

[Rambler]

I'm 50, heading to ESR or at least a slowdown at 52, probably completely done by 55 (but we'll see. My port is a bit larger, expected expenses at retirement a bit higher (but could easily lower them for a few years in a bad market), and I really can't see going to anything less than 55% equities until sometime past 65. I figure I need the growth that the equities provide. Right now we are at about 60/40, and no plan to deviate anytime soon.

R

 

[Midpack]

I am 56 with a comfortable portfolio of 4.5M and will be retiring soon. I've always been very risk tolerant, with 100% equity early in my saving career, shifting to 70/30 when I was in my mid-40's. I was at 70/30 when the 2008 crisis hit (ouch) but I kept investing and rode that out. Lately I've shifted some into bonds and I am currently at 55/45 Stock/Bonds. I use a lazy portfolio of low cost index funds covering total US stock market (25%), international (15%), small cap (15%) and total bond market (45%).

Being aggressive in my AA worked during accumulation phase, but given my age, my portfolio size and entry into retirement, I know I should be changing my AA to something like 40/60 or maybe even 30/70. But I can't seem to bring myself go that conservative. I don't know if I am being greedy or foolish (or both).

Is your primary goal avoiding failure, or building wealth and the chance of a larger residual $ end of plan?

The former does not require a large equity position (fig 2.3 attached), the latter does (fig 2.4 attached, and .2.2 indirectly). This shows that distinction, recently discussed in another thread here. Pensions, Retirement Planning, and Economics Blog: William Bengen's SAFEMAX.

Also, sequence of returns all comes out in the wash during accumulation. That's not the case during drawdown (distribution), where poor returns early in retirement can do damage you can't recover from without income. Asset allocation during distribution should be more conservative than during accumulation if history is any guide.

 

[audreyh1]

Is your primary goal avoiding failure, or building wealth and the chance of a larger residual $ end of plan?

The former does not require a large equity position (fig 2.3 attached), the latter does (fig 2.4 attached, and .2.2 indirectly). This shows that distinction, recently discussed in another thread here. Pensions, Retirement Planning, and Economics Blog: William Bengen's SAFEMAX.

Thanks for the blog link! I had seen some of the charts before, but not all put together the way Mr. Pfau did.

I hope he does a study for us fixed percenters! I'll continue to follow his blog - he looks like he has written several other useful articles recently.

For folks who want to look at how their portfolio is keeping up versus (official) inflation from when they started, I have been using this handy Cumulative Inflation Calculator: InflationData.com's Cumulative Inflation Calculator

Audrey

 

[Ed_The_Gypsy]

Thrill seeker...

Just cojones, amigo.

 

[73ss454]

Just cojones, amigo.

We will see how big they are once you retire.

 

[biocruiser]

Is your primary goal avoiding failure, or building wealth and the chance of a larger residual $ end of plan?

The former does not require a large equity position (fig 2.3 attached), the latter does (fig 2.4 attached, and .2.2 indirectly). This shows that distinction, recently discussed in another thread here. Pensions, Retirement Planning, and Economics Blog: William Bengen's SAFEMAX.

While my primary goal is avoiding failure, a close second is having some upside potential (during the plan) to help out some family members or go on a exotic vacation or two. The link you provided is very helpful in this regard and suggests that I can achieve enough safety with some upside potential if I stay at 55/45 or thereabouts.

If I understand this correctly, if I'm "lucky" with my sequence of returns I'll have extra to spend along the way, but even if I'm unlucky I should still be safe unless 2012 turns out to be a worse year to retire than every year since 1926.

 

[Nords]

I am way older than the OP and 100% in equities today. I wouldn't touch a bond right now. They can only go down from here.
Equities are the only thing that have any potential to keep me out of a paper box under the bridge. I was 100% in 1987 and almost 100% in 2008.
If he wants conservative, look for reliable dividend-paying equities.

Just cojones, amigo.

We will see how big they are once you retire.

I'm with Ed, but a couple years' expenses in a five-year CD ladder can sidestep an awful lot of market volatility...

 

[ziggy29]

If a market crash won't make or break your retirement *and* you have the stomach to ride out the bear markets, why do you need to significantly change what you are doing?

There is no one-size-fits-all AA for all people of any age. It depends on your goals, your risk tolerance and your *need* for your portfolio to provide you with income over your lifetime. Someone who will never need the money for retirement income and who is comfortable with market risk has no reason to go ultra-conservative.

It's like I say to people who have pensions with COLA kickers that exceed their annual spending -- you can be as risk-averse or as aggressive with your personal retirement savings as you are comfortable with, since a bad market or "quitting at the wrong time" won't sabotage your retirement plans.

 

[Midpack]

While my primary goal is avoiding failure, a close second is having some upside potential (during the plan) to help out some family members or go on a exotic vacation or two. The link you provided is very helpful in this regard and suggests that I can achieve enough safety with some upside potential if I stay at 55/45 or thereabouts.

If I understand this correctly, if I'm "lucky" with my sequence of returns I'll have extra to spend along the way, but even if I'm unlucky I should still be safe unless 2012 turns out to be a worse year to retire than every year since 1926.

I read it the same way you do. Once you have at least 40% equities, above that doesn't increase risk of failure much at all, and then only at about 80% equities. Higher equity positions will yield higher returns on average, but a much wilder ride. 55:45 looks like a good compromise to me [I'm targeting 50:50 ± 10 these days].