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Higher risk AA to reach ER earlier?
Old 07-27-2014, 03:22 PM   #1
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Higher risk AA to reach ER earlier?

Here is my situation and I am looking for advice.

I am 43 years old with a wife and three kids. Retirement portfolio $500k in 401k.
25% S&P 500
25% Russell 1000
20% US Small Cap
20% MSCI EAFE foreign large cap
10% Barclays US aggregate bond index fund.
Contributing $30k/year with a small pension $1000k/month in retirement. College funding is on track and we have very little personal debt. Will be debt free in less than 10 years. In general my tolerance to risk very high. (I don't panic with market fluctuations.). I would like to retire at 57 once the youngest child is out of college.
Option 1: Keep current AA. If it over performs retire at 55 if it under performs retire at 60.
Option 2: Increase bond allocation to reduce risk and also reduce potential reward.

Questioning how aggressive I should be with my AA.
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Old 07-27-2014, 03:35 PM   #2
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I am 100% equities and I was so upset during 2009 I did not log in and check my accounts for 6 months. But I did not sell

I think most of people will not go 90% equities. Can you take bear market where you end up with 250k? If so you can keep your AA.......

It probably will not outperform by much AA 60/40 equities/Bonds.
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Old 07-27-2014, 03:50 PM   #3
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Option 1: Keep current AA. If it over performs retire at 55 if it under performs retire at 60.
I don't have any advice on your AA, but wanted to say that the above is true irrespective of your AA, and it is great that you've (hopefully) already internalized it.

For most of my working career, I had an 80/20 equity/bond AA.
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Old 07-27-2014, 03:57 PM   #4
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Originally Posted by Yellowjacket View Post
Here is my situation and I am looking for advice.

I am 43 years old with a wife and three kids. Retirement portfolio $500k in 401k.
25% S&P 500
25% Russell 1000
20% US Small Cap
20% MSCI EAFE foreign large cap
10% Barclays US aggregate bond index fund.
Contributing $30k/year with a small pension $1000k/month in retirement. College funding is on track and we have very little personal debt. Will be debt free in less than 10 years. In general my tolerance to risk very high. (I don't panic with market fluctuations.). I would like to retire at 57 once the youngest child is out of college.
Option 1: Keep current AA. If it over performs retire at 55 if it under performs retire at 60.
Option 2: Increase bond allocation to reduce risk and also reduce potential reward.

Questioning how aggressive I should be with my AA.
In 2008 I met with a Fidelity account manager who questioned my 100% equity position. I told him that I needed a big run up in stocks if I was going to be able to retire at age 55 and that a safer allocation would not get me to my goal of early retirement at 55 and if the market didn't come through for me then I would have to continue w*rking. A safer 60/40 (or 70/30) allocation was highly unlikely to achieve what I wanted and the worst case scenario for 100% equities was the same as a best case scenario for 60/40. That is I would keep w*rking.

I got lucky and the market went up and I'm retiring next month. If I had gone to a safer allocation I would still be a couple of years away from retiring. However, I am now becoming slightly more conservative with the AA.

As eta2020 says, are you going to be able to hold the course if when a bear market strikes?
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Old 07-27-2014, 04:12 PM   #5
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I was 100% equity until I was 51. BUT all along I fully accepted that would mean I could reach FI quicker OR that I could have to work longer or spend less in retirement. OTOH there are (a few) pre-retirees here with ZERO equity, with portfolios/plans consisting of bonds, cash and/or annuities. I haven't seen many asset allocation books/articles that recommend more than 80% equity for any investor and any age. So the right answer is unique to each of us, only you can decide the right balance between risk and return...
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Target AA: 60% equity funds / 35% bond funds / 5% cash
Target WR: Approx 2.5% Approx 20% SI (secure income, SS only)
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Old 07-27-2014, 08:17 PM   #6
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Isn't the S&P500 completely contained within the Russell 1000? That is, the S&P500 is half of the Russell 1000?

I don't see anything wrong with 10% fixed income, but who can predict the future? It may turn out that there won't be much difference in performance of a 20% fixed income portfolio, but the risk would be a lot less.

I started increasing fixed income about 5 years before full retirement. It is at 36% now and probably won't go lower for me.

As for 2008, did you rebalance into equities then? Or wait until things recovered? "stay the course" is not sitting still, it is actually rebalancing even if equities drop a lot.
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Old 07-27-2014, 08:20 PM   #7
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I credit 100% equities allocation for getting me to FIRE asap. I didn't really care when I retired, just wanted to make as much as possible on my investments and could stand to lose a ton and keep working a little longer to make up the losses.

I'm still about 95% equities right now as an early retiree.

Our withdrawal rate from our portfolio is under 3%, which isn't much higher than our dividend yield. Add in a little side hustle income that covers around 25% of our low low $32,000 year expenses, and we are spending about what our portfolio yields in dividends (dividends = ~$24k this year).

I think a high equities allocation makes more sense for the 30- or 40-something early retiree than the 50- or 60-something retirees. The 30-something early retiree will face many decades of inflation.
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Higher risk AA to reach ER earlier?
Old 07-27-2014, 08:54 PM   #8
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Higher risk AA to reach ER earlier?

I focused on increasing my savings rate rather than increasing risk in order to reach my goal. I went from zero to FI between 2000 and 2010 and the market was not a great help during that time frame.
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Higher risk AA to reach ER earlier?
Old 07-27-2014, 09:20 PM   #9
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Higher risk AA to reach ER earlier?

The correlation between all your equity funds is high, bonds are only 10%, there is probably not a significant performance difference between your AA and 100% equities that would change your retirement date by more than a couple of months either way.

To make any difference you would need to get involved with market timing, individual stocks, margin, options - I.e. actively manage a portfolio and hope you get lucky.


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Old 07-27-2014, 09:39 PM   #10
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Originally Posted by FIREd View Post
I focused on increasing my savings rate rather than increasing risk in order to reach my goal. I went from zero to FI between 2000 and 2010 and the market was not a great help during that time frame.
I don't remember who said this, maybe Charlie Munger. Basically, the risk/return relationship is not an instrument where you can dial up the risk, and return will follow. Increased risk gives a better return only when you put it on wisely and at the right time. The right time is a low risk valuation, times which historically have been followed by high 10 year returns.

Taking on poorly timed risk only brings grief.

Ha
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Old 07-27-2014, 11:08 PM   #11
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If you take on higher risk via leverage it could get you to ER faster (or bankrupt you).

Someone with 250k in 2009 who went heavy margin probably has $1,000,000 today.
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Old 07-28-2014, 12:00 AM   #12
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We have a very low allocation to equities now in our fifties. I think if we had to do it over we would have just saved more, spent less and invested mostly TIPS and I-bonds, since those factors are all more controllable and predictable than the stock market. YMMV.
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Old 07-28-2014, 11:14 AM   #13
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Originally Posted by Yellowjacket View Post

Questioning how aggressive I should be with my AA.
Only you can answer that.

However, from what I've read, anything over 80% equities really doesn't make sense. Lots of extra risk for almost no additional return. I'd set that as my max.

If you haven't already, read this page: Bogleheads® investing start-up kit - Bogleheads
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Old 07-28-2014, 11:44 AM   #14
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25% S&P 500
25% Russell 1000
20% US Small Cap
20% MSCI EAFE foreign large cap
10% Barclays US aggregate bond index fund.
Any particular reason for both the Russell 1000 and S&P 500 holdings? The reason I ask is that according to Morningstar, the Russell 1000 index is 99.72% correlated to the S&P 500.

I would consider diversifying a little into slightly less correlated asset classes. Perhaps a bit in U.S mid-cap, emerging markets, foreign small, and even a little REIT.

BOB
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Old 07-28-2014, 11:53 AM   #15
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I went with 100% equities and still do in retirement. I have advocated it here for those who are willing to adjust their retirement date as needed. Sounds like it could be right for you.

Keep in mind of course that unless you are retiring at the 100% safe SWR (whatever that means), the early years of retirement are important to your portfolio. You want to be at that 100% safe SWR and not letting the WR trend higher and higher. You might want to be conservative for those initial few years. I held extra cash when I retired. Of course that might mean you reach 100% SWR a little more slowly.
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Old 07-28-2014, 06:02 PM   #16
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Thanks everyone for the feedback. There were some questions concerning my current allocation mix and my thought process of what I am trying to achieve:
50% US Large CAP (1/2 S&P 500 and 1/2 Russell 1000) index fund
20% US Small Cap mutual fund
20% MSCI EAFE foreign large cap index fund
10% Barclays US aggregate bond index fund.
Fees of my current AA are .23%
I am modeling this off of a target 2040 retirement fund - fees 1.06%.
My mix is not quite as diversified as the 2040 target fund, but the fees are a lot less. My desire is to keep it simple with low fees and auto rebalancing perfumed 2-4 times per year regardless of how the market performs to keep my AA constant. My snowball is picking up steam and I want to put it into a "Lazy Portfolio"…...
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