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Increase stocks in AA?
Old 09-26-2018, 11:01 AM   #1
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Increase stocks in AA?

The thread on whether pension/SS is an reduction of the numerator or addition to the denominator got me to thinking about adjusting my AA.

My AA has been 60/40 for year and I intended to carry that forward forever.

However, if I put my situation into FIRECalc and solve for success rates at various AAs using the Investigate tab, it says 100% at any AA, even 100% stocks.... I can confirm by putting 100% stocks into the Your Portfolio tab.

For these purposes, I set spending at a number that is ~125% of what we actually spend (which is what I typically use in planning)... its actually a bit more than 125% because we currently have a mortgage so it includes our mortgage payment and they will end in 2027.

I'm thinking of migrating from 60/40 to a much higher equity allocation.... minimum of 80/20 but possibly as high as 100/0 once we have started SS. The higher risk return would somewhat mitigate that we don't have LTC insurance and provide a larger inheritance for the kids.

Thoughts? Am I crazy?
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Old 09-26-2018, 11:22 AM   #2
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I don't think you are crazy, I have researched my own situation using a RIP tool and found that 80/20 provides both the highest safety and the highest average ending balance. The only reason that we are at 60/40 is because I sleep better at night.

I have a good friend who has been retired for almost 30 years on a 100% equities portfolio. And my mother lived for 45 years on a 100% equities portfolio. So it absolutely can be done. It is really a question of comfort level you have with it.
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Old 09-26-2018, 11:33 AM   #3
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I don't think you are crazy either. My plan is to have 95% equities and 5% cash (short term interest savings account). That 5% is equivalent to 2 years expenses so I can ride out bear markets.
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Old 09-26-2018, 11:42 AM   #4
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If you're crazy, then others of us are crazy too.

We carried basically a 100% equity position through our earning years, just sitting and waiting through all the market gyrations. After retirement we switched to an allocation that eventually started looking like 60/40. But in the past year or two we realized (thanks to the long bull market) that if we went to 75/25, the 25 part is really all the money we will ever expect to need and the 75 part will end up in our estate, funding a couple of trusts to cushion our sons' retirement and funding some charitable gifts. So the time horizon on the 75 is quite long and we ended up putting it in all equities. VTWSX mostly.

I have never been too interested in black boxes that predict the future but I'm sure if I consulted the various black boxes they would give me 100% numbers just like you are getting.

I think AA depends primarily on the size of the portfolio and on one's comfort point with risk/reward. IMO these formulas based on age are silly at best and misleading at worst. The critical thing, again IMO, though is that the risk/reward tolerance should have been tested by fire, not come as the result of filling out some silly internet questionnaire. As Fred Schwed said, there are some things that cannot be explained to a virgin by words or pictures, and likewise there is no way to explain to someone what it feels like to lose a bunch of money that he once had. To me, though, "lose" is inaccurate because patience has historically won the day.
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Old 09-26-2018, 12:06 PM   #5
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I won't say anyone is crazy so long as they understand what they are doing and are comfortable with it. I may not agree with it, but that's what makes a market.

Let me ask - if you're getting 100% success at any AA, then why choose 100% stocks if you could choose 0% stocks or any number lower than 60?

As a long time member posted a short while ago, if you've won the game, why continue playing and risk injury?
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Old 09-26-2018, 12:07 PM   #6
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Quote:
Originally Posted by pb4uski View Post
The thread on whether pension/SS is an reduction of the numerator or addition to the denominator got me to thinking about adjusting my AA.

My AA has been 60/40 for year and I intended to carry that forward forever.

However, if I put my situation into FIRECalc and solve for success rates at various AAs using the Investigate tab, it says 100% at any AA, even 100% stocks.... I can confirm by putting 100% stocks into the Your Portfolio tab.

For these purposes, I set spending at a number that is ~125% of what we actually spend (which is what I typically use in planning)... its actually a bit more than 125% because we currently have a mortgage so it includes our mortgage payment and they will end in 2027.

I'm thinking of migrating from 60/40 to a much higher equity allocation.... minimum of 80/20 but possibly as high as 100/0 once we have started SS. The higher risk return would somewhat mitigate that we don't have LTC insurance and provide a larger inheritance for the kids.

Thoughts? Am I crazy?
It totally depends on your risk tolerance/comfort level.

Kitces has discussed many times a glide path allowing equities to increase while spending down fixed income.

I’ll probably stick with around 50/50 until I get tired of rebalancing.
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Old 09-26-2018, 12:18 PM   #7
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Depends on your reasons. If you're just looking for the best chance at the biggest return, it seems silly to take the risk of an unprecedented market drop with delayed recovery. Just because it hasn't happened in the hundred-some years that Firecalc represents doesn't mean it won't in your future.

OTOH, inheritance and possible LTC care seem like good reasons. Especially the latter. I kind of laugh at the people who say "if you've won the game" or "spend money while you're younger because you won't have any use for it when you're old". Until you're in the grave you just don't know what you're up against, and I'd rather have really good LTC than the cheapest I can find.

I use an age based AA (I've yet to hear a convincing argument why it's silly or misleading, and btw those target date mutual funds have nothing to do with what I do), but I may get to a point where I stop letting my equity position drop. I'm still open on this and like to listen in on threads like this to see what I can learn.

The real test is, if we do hit a big downturn, are you convinced enough to stay with it? Or will you lose your nerve, decide it was a bad idea, and bail out low and miss the recovery? For this reason, I definitely wouldn't go 100%, and probably couldn't be convinced to go to 80% anymore.

One more factor, bonds have been so flat recently that it's really tempting to just dump them. Good idea, or just a reaction to recent performance? Hard to say.
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Old 09-26-2018, 12:28 PM   #8
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I'm probably the crazy one as I'm just the opposite. I couldn't sleep well with a 60/40 AA.
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Old 09-26-2018, 12:43 PM   #9
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I was 100% equities until the last 10 or so years that I worked (45 onwards) and then just put new money and dividends to bonds... but I am very comfortable with equity risk. All my equities are index funds, principally Vanguard Total Stock and Total International Stock.

If I decide to go more equities, then the next question is when. I think I would be uncomfortable poping 20%+ of bonds into equities all at once... especially with equities at all time highs.
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Old 09-26-2018, 12:47 PM   #10
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Quote:
Originally Posted by njhowie View Post
.... Let me ask - if you're getting 100% success at any AA, then why choose 100% stocks if you could choose 0% stocks or any number lower than 60?

As a long time member posted a short while ago, if you've won the game, why continue playing and risk injury?
Good question. First, I'm an averages player and very comfortable with equities having been an equity investor since the early 1980s. Also, as mentioned, we self insure for LTC and 80-100% equitis results in more growth and higher balances at the age that we might need LTC... and it also puts DD and DS in a better position to retire early once we are departed.

I don't fear injury as the market heals quickly.
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Old 09-26-2018, 12:50 PM   #11
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What about your wife, would she panic and sell out if you are not around?
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Old 09-26-2018, 12:51 PM   #12
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Originally Posted by Dawg52 View Post
I'm probably the crazy one as I'm just the opposite. I couldn't sleep well with a 60/40 AA.

Right, i'm 100% but my DF/DFIL both have a massive trust waiting for me. pb4uski is Crazy...crazy smart. I picture his haircut similar to Einstein's after he wrapped up that whole theory of relativity science.


As fixed income comes online, I too agree, the equity allocation could increase as your fixed income is increasing your risk appetite and therefore one could simply decrease the bond allocation and re-allocate to equities in the same proportion to the new SS Income.


Sort of similar thinking as when working. If you are hedging your 100% growth potential of equities, against your stellar career, nothing wrong with that.



This isn't quite at the level of "pigs get slaughtered" that you might be worrying it is.
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Old 09-26-2018, 12:55 PM   #13
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.... The real test is, if we do hit a big downturn, are you convinced enough to stay with it? Or will you lose your nerve, decide it was a bad idea, and bail out low and miss the recovery? For this reason, I definitely wouldn't go 100%, and probably couldn't be convinced to go to 80% anymore.

One more factor, bonds have been so flat recently that it's really tempting to just dump them. Good idea, or just a reaction to recent performance? Hard to say.
Well, 2008/2009 was IMO in the category of a "real test".... I stood pat and held on while others were dumping stocks (in many cases never to return)... however I could not find the courage to buy more equities when my AA was literally screaming at me to do so.

No, not a reaction to bonds recent poor performance... I actually dumped a bunch of target maturity corporate bond ETFs in early June as they had had a good run but I wasn't optimistic for the future and the proceeds are in VMMXX at ~2.1%, so if I do act it is a convenient time to do so.
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Old 09-26-2018, 12:55 PM   #14
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It seems like you are in a fortunate position that will allow you to do anything you want. You could even do some market timing.

For instance, you can just bump along at 60/40, but if/when market drops 10% you can change to 70/30 and if it drops more, go with 80/20, and if it drops more .... You will look like even more of a genius than you already do.

After all, you kind of told us that it doesn't matter what you do.
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Old 09-26-2018, 12:56 PM   #15
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I don't fear injury as the market heals quickly.
After the Bear of 73/74 the market did not return to its previous level in real terms until 1993, 20 years after the Bear's paws took its first flesh out of the stock market.

I have wondered how an AA of 60/40 (total US market/total US bond) - with re-balancing once a year - would have fared during that time. When I have time I might find one of those sites that looks at past returns and see if I can find out.
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Old 09-26-2018, 12:57 PM   #16
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The only thing I am wondering is if your risk tolerance is still as high as when you were working. I know for me my risk tolerance dropped big time when I retired in 2016. It might be different for you since you seem to be in a great position. I am still at 56% stocks though and sleep well. Perhaps your risk tolerance still is very high and if so good for you.
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Old 09-26-2018, 01:01 PM   #17
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.... As fixed income comes online, I too agree, the equity allocation could increase as your fixed income is increasing your risk appetite and therefore one could simply decrease the bond allocation and re-allocate to equities in the same proportion to the new SS Income. ...
Interesting idea.... so if I started collecting $1k of SS and I ascribe a value of
$25k to that income using the 4% rule then I could shift $25k from bonds to equities for each $1k of SS that I am receiving.
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Old 09-26-2018, 01:06 PM   #18
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What about your wife, would she panic and sell out if you are not around?
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The only thing I am wondering is if your risk tolerance is still as high as when you were working. I know for me my risk tolerance dropped big time when I retired in 2016. It might be different for you since you seem to be in a great position. I am still at 56% stocks though and sleep well. Perhaps your risk tolerance still is very high and if so good for you.
My risk tolerance is pretty high. DW is disinterested, but definitely lower.... but she could always reposition without tax consequences since most of our nestegg is in tax-deferred and tax-free accounts.
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Old 09-26-2018, 01:33 PM   #19
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I don't know your numbers (what's your withdrawal rate after SS kicks in, as a % of portfolio assets), but I would go with 80-90% equities, 5-10% bonds, and 5-8% cash/money market/CDs....
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Old 09-26-2018, 01:38 PM   #20
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I donít think you are crazy. I would much rather own the company than lend money to it.
Currently at 75.7% Stocks, 18.5% Bonds, 5.8% Cash.

Only just before retirement added bonds to our portfolio since everyone around here seems to have them.

We do have a pension which covers most of our needs so portfolio is for fun and stuff like cars and roofs.
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