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Old 09-07-2017, 12:49 PM   #21
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The rule you always see for asset allocation is always "Subtract your age from 100, and invest that percentage in stocks, the rest in bonds". I understand the general reasoning behind that, but the rule seems so simplistic that I doubt there is much detailed logic behind it. Among other things, it ignores the role early retirement, expected withdrawal rate, expected longevity, etc. might play in determining the proper mix at any given point in time.

For example, it seems a better approach would be "Assume any major market downturn is unlikely to last more than 10 years. Therefore, keep 10 years worth of living expenses in non-volatile investments (bonds), and the rest in stocks".

Any flaws with this approach? Any approaches that make more sense than the Rule of 100?
The idea that bonds are a "non-volatile" investment is a myth. Just like stocks , bonds can be very volatile, near term of course. 2009 10 year treasuries were down almost 10%! Stocks are risker short term , but thats because they much much better long term returns. It's all about your time horizon...if you have a long one stocks are clearly the better investment
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Old 09-07-2017, 01:26 PM   #22
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Thanks for all the great replies! One consistent theme that I've heard, though, and don't understand, is something like "So if one can stomach a 30% loss in the portfolio, then don't have more than 60% equities". Why would I care, or be able to stomach, one percentage loss over another? If I have enough money in a stable-value fund to cover my expenses during a market downturn, why should I care whether the remainder (temporarily) drops 20, 30, 50, or 80%? I'm assuming I'm not going to sell from that portion until it recovers. ...
I'm not one that recommended that and I don't see the arithmetic, but I think I can answer your question: It depends on your emotional risk tolerance and you may not know that until after the fact. IOW life is like school except that first you get the test and then you get the lesson.

I've been through a few of these I know that I will react as you hypothesize that you will react, but you haven't said what your experience in big downturns has been. If you have the experience then great. If not, I'd suggest that you shouldn't be so confident in your prediction. Ref Your Money & Your Brain by Jason Zweig.

Those pointing out that a recovery is not guaranteed are right of course. But we live and die by inductive logic; using the past to predict the future. We have no choice, so we just have to keep remembering Taleb's turkey and keep looking over our shoulder. (Turkey Problem - Nassim Taleb)
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Old 09-07-2017, 01:50 PM   #23
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It's all about your time horizon...if you have a long one stocks are clearly the better investment
Unless you're planning on dying soon, shouldn't you always have a long term perspective? I'm 55, and may live to be 95, or 125? So clearly I have a long time to go. But I'm also retired, and withdrawing NOW, and don't want to have to draw down an asset that has fallen 50%. So (not surprisingly) I need to look at both the short term and long term. Rule of 100 says I should have 65/45 split... Some would say more in bonds, because I'm already retired. Others would say more in equities, since I'm potentially in this for another 40 years or so.
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Old 09-07-2017, 01:55 PM   #24
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I've been through a few of these I know that I will react as you hypothesize that you will react, but you haven't said what your experience in big downturns has been. If you have the experience then great. If not, I'd suggest that you shouldn't be so confident in your prediction.
I was ~100% in equities during the tech bubble burst and during the housing crash. I didn't flinch either time, because I've always been a long-term investor and didn't see retirement on the near horizon. I saw the drop in value as just a glitch, which didn't affect my investing strategy much at all. In fact, I was sitting on a lot of cash in 2009 and saw it as a great buying opportunity.

But it's different now; I'm retired and drawing down accounts, and a bad sequence of returns early on could put a serious damper on my plans.
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Old 09-07-2017, 02:20 PM   #25
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Unless you're planning on dying soon, shouldn't you always have a long term perspective? I'm 55, and may live to be 95, or 125? So clearly I have a long time to go. But I'm also retired, and withdrawing NOW, and don't want to have to draw down an asset that has fallen 50%. So (not surprisingly) I need to look at both the short term and long term. Rule of 100 says I should have 65/45 split... Some would say more in bonds, because I'm already retired. Others would say more in equities, since I'm potentially in this for another 40 years or so.
Well, if you NEEDED the money for something in maybe 5 years then that portion of money wouldn't be considered "long term"

I simply don't buy into this "rule" of any specific asset allocation...but yes if you're looking at a 40 year time horizon stocks are clearly the better investment...and by a landslide....even if you look at just 10 year time periods stocks have outperformed bonds 82% of the time, 15 year time periods 91% of the time...odds are woefully in your favor with stocks....source: global financial data, inc

also another caveat of bonds is inflation....people don't mention that but it can hurt as well...
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Old 09-07-2017, 02:35 PM   #26
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The "100-age in stocks" rule is simplistic and flawed, and most of us on this forum know enough to come up with something much better that is tailored to our specific circumstances. However it seems we often forget how sophisticated we are as investors relative to the average Joe, and for the average Joe, this rule is better than most common investment "strategies", which include not saving at all, panicking during every market downturn and selling low, taking advice from a salesman disguised as an advisor, etc.
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Old 09-07-2017, 04:47 PM   #27
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I was ~100% in equities during the tech bubble burst and during the housing crash. I didn't flinch either time, because I've always been a long-term investor and didn't see retirement on the near horizon. I saw the drop in value as just a glitch, which didn't affect my investing strategy much at all. In fact, I was sitting on a lot of cash in 2009 and saw it as a great buying opportunity.
Oh, OK. Then you know what you're doing and won't flinch.

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But it's different now; I'm retired and drawing down accounts, and a bad sequence of returns early on could put a serious damper on my plans.
Well, solving that seems easy. Equities are nice and high right now; Just dump enough equities tomorrow to fund a 3-5 year bucket of near-cash assets. Or a 10 year bucket if you like.

IMO the only time a bad sequence of returns can really hurt is if a person decided to fill a 3-5 year bucket after a big market correction before equities have recovered. But it's hard to see that someone sophisticated enough to think in terms of buckets would do that anyway.

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The "100-age in stocks" rule is simplistic and flawed, and most of us on this forum know enough to come up with something much better that is tailored to our specific circumstances. However it seems we often forget how sophisticated we are as investors relative to the average Joe, and for the average Joe, this rule is better than most common investment "strategies", which include not saving at all, panicking during every market downturn and selling low, taking advice from a salesman disguised as an advisor, etc.
Excellent points. +1
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Old 09-11-2017, 04:14 AM   #28
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the problem with the 100 less your age can be the reverse though . being on the 401k committee at work , we saw the youngins bailing in mass in 2008 because they were told to have very high equity allocations because of their age and had neither the pucker factor nor experience in down markets yet for that high of an allocation .
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