Not so young: Is 100% equities too dangerous?

[drboston]

First the background: My wife and I are hoping to retire in 10 years at age 55. We have approximately equal amounts of money in each of 3 accounts (his, hers, and ours) and contribute nearly equally each month to all accounts. His and Her accounts are all pretax though our work and the "ours" account uses after-tax dollars. We anticipate first drawing from the "ours" account after retirement.

Although the "ours" account contains both stocks and bonds (~75:25), the other 2 accounts have strictly stock mutual funds (albeit well diversified among large, mid, small, domestic, foreign, etc. funds). Our view has been that since stocks have beaten bonds over the long term, we preferred to stay with stocks. Given our time frame and the state of the market, should we be moving some money into bonds? Things have gone well the past few years, but I'm begining to wonder if the market is headed for a correction.

Thanks

 

[Cb]

A few thoughts/comments:

- I think you'd be better off holding any bonds in your 401K / IRA's rather than in the taxable account

- are either or both of you expecting much in the way of Social Security or pensions in retirement?

- how did last week's tumble affect you and your wife?

- were you holding an equity-heavy portfolio in the 2000-2002 downturn, and if so, how did you react?

I think it's reasonable to hold an high allocation to (broadly diversified) equities IF you've got no debt, decent pension/SS entitlements, flexibility in your spending patterns, AND the stomach for it. If you'll have any form of retiree health care so much the better.

Cb

 

[haha]

Given our time frame and the state of the market, should we be moving some money into bonds? Things have gone well the past few years, but I'm beginning to wonder if the market is headed for a correction.

This is really a matter of attitudes, not scientifically established fact. The fastest way to get rich is to keep betting back and keep winning. The fastest way to go broke is almost the same- keep betting back but lose somewhere along the way.

Are you and your wife the kind of people who would stash their survival gear and head for the summit fast and light? Or would you be more prudent and try to allow for things that might go wrong, even though it might prevent your reaching the top?

IMO, if you don't have pensions coming up, and you are not willing to cancel your ER plans if things go badly, I would definitely be sure that you have tried to imagine how you would feel in a big drop with a 100% stock position.

Ha

 

[drboston]

We both anticipate getting S.S. when we hit 62, but aren't really depending on it. Last weeks tumble didn't affect us too much, we just put it in perspective after 3 good years. But if our investments we to drop >10% from here, we would be real happy. We didn't really start thinking about FIRE until about 4 years ago and before that, our savings were rather modest. So although we did'nt do well on a % basis during 200-2002, the $ involved weren't great.

Our projections indicate that if we continue saving as we are doing and earn ~8%, FIRE should be easily doable in 10 years without significantly changing our standard of living (we currently live below our means, saving a bit more than 1/3 of our take-home).

 

[mickeyd]

Given our time frame and the state of the market, should we be moving some money into bonds? Things have gone well the past few years, but I'm beginning to wonder if the market is headed for a correction.

Hey drboston,


Every investor has their own unique situation. My time horizon, risk tolerance, personal financial situation, and asset allocation is not the same as yours. That said, a fixed income (bonds/money market) position of at least 20% of an entire portfolio is generally recommended. Bonds tend to smooth out the volatility that we have recently experienced in the stock market.

If you have not already done so, why not visit the Vanguard web site https://flagship.vanguard.com/VGApp/hnw/FundsInvQuestionnaire?cbdInitTransUrl=https%3A//flagship.vanguard.com/VGApp/hnw/planningeducation/general and obtain a better idea as to what asset allocation is best for your situation?

 

[firewhen]

drboston,

We are in a very similar situation in age and equity position. Before coming to this board, I was very proequity for the long run. Now I have seen the wisdom of having a chunk of money in bonds, like in the 20-25% range. I am still convinced that equities will do better, but if you ER at an inconvenient time, your portfolio could take an unrecoverable hit, forcing you back to w*rk or cutting expenses to the bone. If you think the risk is small, stay all in stocks, enjoy the stronger returns, and hope the bear does not come and stay the year after you retire. Otherwise, move partially out of stocks to buffer any major downturn.

I am not planning any shifts as long as I am still working, because I could ride out any drops with other income still coming in.

 

[Nords]

Although the "ours" account contains both stocks and bonds (~75:25), the other 2 accounts have strictly stock mutual funds (albeit well diversified among large, mid, small, domestic, foreign, etc. funds). Our view has been that since stocks have beaten bonds over the long term, we preferred to stay with stocks. Given our time frame and the state of the market, should we be moving some money into bonds? Things have gone well the past few years, but I'm begining to wonder if the market is headed for a correction.

Welcome to the board, Doc.

Spouse and I have an ER portfolio of 92-95% equities with two years' expenses in cash. We've been doing this since the 1980s and we've probably been handsomely rewarded for avoiding bondage. But I have a govt pension with a COLA and spouse will get one of her own in 15 years.

I think the biggest risk of a high-equity portfolio is lack of diversification, although Warren Buffett embraces it with aplomb. (OTOH we all know someone who was busted back to the beginning by the tech wreck-- or worse.) Volatility is usually quite upsetting to average investors, whoever they are, making them likely to abandon equities just as the equities are getting to be bargains. So a high-equity portfolio is not without its avoidable dangers.

If you read Dimson & Marsh's "Triumph of the Optimists" you'll probably convince yourself even more firmly that you want an all-equity portfolio. But it might be worth comparing your ER goal with one achieved through assets other than equities, presumably with lower returns but lower volatility. It may not make a difference to your timeline.

I do agree that bonds currently suck. But patient investors can make money even there through cap gains as well as dividend yields, and probably more easily than other non-equity assets like REITs or commodities.

However if you can hedge your all-equity portfolio with a couple year's expenses in cash, or a pension that's not tied to the stock market, then you'll probably have an exciting and ultimately more profitable ride. As long as you can sleep at night.

 

[wstu32]

what ever allows you to sleep at night !

 

[cute fuzzy bunny]

Nords and Haha speak sagely, although I'll point out that in Haha's "bat for the fences and miss" scenario, providing you dont sell at the low...you still have the ball and bat and can keep trying.

As long as you keep a cash buffer and are getting a fair qualified dividend yield, a high equities portfolio is workable if you can get by on the yield and buffer for at least 3-4 years through spending cuts, part time work, and obtaining other income streams.

It would probably not hurt your returns much to go to an 80/20, although that would dampen the volatility a bit more and give you a bit more income in the tough times.

When I was in this sort of investing 'mood', I was at about 80%/10%/10% equities/bonds/cash. I felt pretty good about the cash piece since I was making 5-6%+ on it. I might like the idea a lot less if the cash was generating 1-3%.

 

[firewhen]

Vanguard has on its web site 9 different historical portfolios ranging from 100% equities to 100% bonds and their historical returns over 80 years. By shifting from 100% equities to 80%, you would have lost about 0.7% per year. The number of losing years over 80 drops from 24 to 22. The volatility is slightly less but the return suffers. Over 30 years, that difference comes to over $3 million. It is the old fear and greed. How much do you fear bad times ahead versus the greed of investing in what has been the most lucrative asset.

Here is the web address. Sorry I do not know how to make it a URL.

https://flagship.vanguard.com/VGApp/hnw/planningeducation/general/PEdGPCreateTheRightMixContent.jsp