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How To Dial Down Risk
Old 12-20-2014, 07:46 AM   #1
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How To Dial Down Risk

I am 45. I got to thinking, I am a little over 90% in equities. My appetite for risk is average? I am not sure what the average risk appetite is. I do know by the time I am 50 that my equity portion I want around 75% to 80%. I am not sure how to go about decreasing my equity exposure. Should I just open a Bond fund and let it happen over time? How does everyone else feel about this subject?
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Old 12-20-2014, 08:03 AM   #2
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I have always tried to remain mindful of creating taxable events, especially while working.
  • So I always used new contributions to rebalance or change my AA. So in your case I'd open a bond fund and put all new contributions into it until you reach your new target AA.
  • In taxable accounts, if your dividends/STCG are taxable, you can divert all dividends to your bond fund (instead of reinvesting in equity funds). Or you can divert all dividends/STCG regardless of tax consequences.
  • If that's not fast enough, you'll have to exchange some equity holdings for bond funds.
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Old 12-20-2014, 08:06 AM   #3
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Thanks Midpack. You just confirmed that I had the right idea how to go about it. Sometime next year I am going to get started on it. It is so important to have a plan that makes sense.
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Old 12-20-2014, 08:13 AM   #4
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I have most (90%+) of my investable assets in the S&P. If you have individual stocks, you are probably not beating the S&P and need to be more diverse.

I also own rental properties which provide more than enough for me to live on. I consider that my bond allocation. If I sold, and put the RE equity in a 4% withdrawal fund, I would not have near as much income.

You are 45, how long do you want to work? Bonds provide income today, stocks provide future income. The longer your horizon, the more equities you should have.

You can diversify with pensions, SS, Annuities, real estate, and side gigs. You can buy retirement mutual funds that do it automatically. You can put more away in your 401K and HSA so that any taxable events do not affect you.
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Old 12-20-2014, 09:05 AM   #5
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Old 12-20-2014, 09:07 AM   #6
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the question is whether you meant risk or meant volatility. the two are not always the same.

buying an index fund with a long term view is not a risk but it is volatile.

as long as you got the time to wait the index fund may stop your heart at times from volatility but long term there is very little risk as far as at some point stocks will be higher.

on the other hand buying a bunch of small caps can be quite risky.

i am retiring this year and volatility is my concern. so i am about 38% equities right now. but i will increase equities by 1% a year over the next 15 years to about 50% taking kind of a rising glide path approach.

i have always used a dynamically changing allocation model that swaps out funds that better fit the trend and big picture.

as an example i am high grade bond fund heavy now. but if rates kick up i will move to other types of non equity investments with that part of the portfolio budget.
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Old 12-20-2014, 11:46 AM   #7
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Quote:
Originally Posted by Midpack View Post
I have always tried to remain mindful of creating taxable events, especially while working.
  • So I always used new contributions to rebalance or change my AA. So in your case I'd open a bond fund and put all new contributions into it until you reach your new target AA.
  • In taxable accounts, if your dividends/STCG are taxable, you can divert all dividends to your bond fund (instead of reinvesting in equity funds). Or you can divert all dividends/STCG regardless of tax consequences.
  • If that's not fast enough, you'll have to exchange some equity holdings for bond funds.
This is a good summary.

If you need to sell some equity holdings to buy bond funds, it may help your ability to sleep at night (though perhaps little else) if you use a DCA (Dollar Cost Averaging) or DVA (Dollar Value Averaging, a.k.a. Value Averaging) approach. Here are some links explaining both.

Choosing Between Dollar-Cost And Value Averaging
Value averaging - Bogleheads
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Old 12-21-2014, 02:11 AM   #8
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the question is whether you meant risk or meant volatility. the two are not always the same.

buying an index fund with a long term view is not a risk but it is volatile.

as long as you got the time to wait the index fund may stop your heart at times from volatility but long term there is very little risk as far as at some point stocks will be higher.

on the other hand buying a bunch of small caps can be quite risky.

i am retiring this year and volatility is my concern. so i am about 38% equities right now. but i will increase equities by 1% a year over the next 15 years to about 50% taking kind of a rising glide path approach.

i have always used a dynamically changing allocation model that swaps out funds that better fit the trend and big picture.

as an example i am high grade bond fund heavy now. but if rates kick up i will move to other types of non equity investments with that part of the portfolio budget.
The ups and downs of the stock market does not bother me much. I worry somewhat of a long bear market where it takes 15 years for the market to recover. Having said that I want my money with a very high percentage in stocks. I have just been thinking lately if I ratchet the stock exposure down maybe 10% between now and 5 years I think it will make me feel better. Will it make a difference? I do not know.
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Old 12-21-2014, 07:17 AM   #9
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I am 45. I got to thinking, I am a little over 90% in equities. My appetite for risk is average? I am not sure what the average risk appetite is.
How did you react in 2009? If you didn't sell any equities and was not nervous I think you have an above average ability to handle risk.

However another important question is how much risk do you need to take to meet your goals?

Quote:
I do know by the time I am 50 that my equity portion I want around 75% to 80%. I am not sure how to go about decreasing my equity exposure. Should I just open a Bond fund and let it happen over time? How does everyone else feel about this subject?

I was at 90% but over the course of a few years dropped it to the low 70s following the course outline by Midpack. Basically this meant almost all new cash was going into fixed income.

I also sold my house this year and the equity from that also went into fixed income as a lump.




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Old 12-21-2014, 07:43 AM   #10
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If you do get a 15 years bear market, what will this do to your retirement plans??


My asset allocation allows me to continue my plans regardless the market conditions up or down.
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Old 12-21-2014, 07:59 AM   #11
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If you do get a 15 years bear market, what will this do to your retirement plans??


My asset allocation allows me to continue my plans regardless the market conditions up or down.
I think it will just postpone my retirement plans. In other words no early retirement for me. It would hurt, but it would not be the end of the World. The big question in my mind is what percentage in equities do I need to meet my goals? I do not feel we will enter such an ugly stock market. I think just the possibility of it makes me think twice about a 90% equity allocation. To adjust for this I think an 80% equity allocation at age 50 is alot. I will still need lots of compounded returns and by age 55 my equity allocation I want maybe 70%.
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Old 12-21-2014, 08:06 AM   #12
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The idea that the stock market dictates my retirement plans is not acceptable to me. You only have life to live and it should be under your terms.
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Old 12-21-2014, 08:13 AM   #13
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The idea that the stock market dictates my retirement plans is not acceptable to me. You only have life to live and it should be under your terms.
Well , I could still retire at age 52. I would get a company pension, health benefits . But I do want a higher standard of living than the pension could provide. If I absolutely have to I am willing to work longer and ride the ups and downs of the stock market in order to achieve that higher standard of living.
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Old 12-21-2014, 11:40 PM   #14
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As my own FI is approached I am following investment stereotypes by thinking about finances in retirement more conservatively. Through age 56 I stayed mostly with equities. I road out the great recession with no adjustment of AA. Glad I did but never want to sweat like that during RE. Now at 58 my AA is 50/50. I plan to keep it there until SS kicks in. Then barring a terrible bear market I will allow my AA to include a gradual increase in equities. That plan could all change if we hit major inflation, huge cuts in entitlement programs etc.. Don't have a crystal ball so just trying to hold a steady course.
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Old 12-22-2014, 01:24 AM   #15
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The idea that the stock market dictates my retirement plans is not acceptable to me. You only have life to live and it should be under your terms.

If only life was that simple. Maybe you have a Pension with COLA ? Or you intend to entirely live off of SS ? Otherwise withdrawal rate is predicated on some average return, for purposes of argument generally 5% per year. You can't get there with CD's or even high quality bonds.


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Old 12-22-2014, 02:02 AM   #16
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If only life was that simple. Maybe you have a Pension with COLA ? Or you intend to entirely live off of SS ? Otherwise withdrawal rate is predicated on some average return, for purposes of argument generally 5% per year. You can't get there with CD's or even high quality bonds.
With even a zero real return, a draw down of 30 years would provide a SWR of 3.3%, wouldn't it? Aren't TIPS and I-bonds all at zero real or better? As a certified stock market coward these days, I have been reading Zvi Bodie's books post 2008 and a liability matching strategy seems to make sense for my household, especially at our ages:

Matching strategy - Bogleheads

We still have some stocks so when the market goes up we aren't left out, but when it goes down we don't lose enough to panic or feel bad or worry about the future.
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Old 12-22-2014, 04:50 AM   #17
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even zero stocks has sequence risk as negative real returns can burn up capital so it depends how far negative you are.

zero percent stocks at 3% has had about an 80% success rate using every rolling 30 year period since 1926..
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