Percentage of stock in portfolio

[LXEX55]

I recently read an investment article by a gentleman named David Afraimi. I have read some of his previous posting and he seems like a level headed, smart guy. He recommends a person subtract their age from 100 to get the percentage of stock they should hold in their portfolio. In my case, at age 64, it would be 36%. By nature, I am very risk averse, do not have a good nervous system. I am sure there are a million formulas for this question, does anyone have any comments on Mr. Afraimi's suggestion?

 

[Big_Hitter]

I recently read an investment article by a gentleman named David Afraimi. I have read some of his previous posting and he seems like a level headed, smart guy. He recommends a person subtract their age from 100 to get the percentage of stock they should hold in their portfolio. In my case, at age 64, it would be 36%. By nature, I am very risk averse, do not have a good nervous system. I am sure there are a million formulas for this question, does anyone have any comments on Mr. Afraimi's suggestion?

very old rule of thumb, probably outdated. in for comments

 

[OldShooter]

One size fits none. AA depends on total assets, goals,age, demonstrated risk tolerance and other factors. Search here for many discussions on the subject.

 

[Dtail]

Some use 120-age or 110-age these days, but it is probably somewhat outdated.

 

[Bir48die]

I can’t see ever being under 60/40 ever

 

[Gallaher]

I can’t see ever being under 60/40 ever

+1

 

[pb4uski]

I recently did an interesting exercise. I calculated our annual gap to age 100 based on today's spending (which has a lot of discretionary spending in it) less my fixed pension and less SS ... in all cases except my fixed pension with 2% for inflation. I then took the present value of those gap amounts at 2.75% (assumes that I could find safe, fixed income instruments that replicate those cash flows that would earn 2.75%... 5-year brokered CDs currently yield about 2.75%).

Then I took the result... the fixed income equivalent to cover my gap and divided it by my total nestegg... the result was 44%... my target AA is 60/35/5 or 60/40. 40% vs 44%... close enough!

IOW, if I took a view that I wanted to invest totally in safe fixed income investments to cover our spending and that any excess could be invested more risky then I woud end up in about the same place as I am (not fretting about the 4% difference).

 

[audreyh1]

I used average historical annual return, volatility and portfolio survival metrics to choose my AA, never age or 100-age.

As I age, I will probably revisit my AA based on shortening time frame. But it won’t necessarily ever be exactly stocks=100-age.

 

[FREE866]

Awful advice.
Think about it. If you're 60 years old and in decent health there is a strong likelihood you have a 25-30 year investment horizon. Over that time frame stocks outperform bonds significantly historically. Like others noted, cash flow needs and your own comfort level play into the equation, but age in of itself shouldn't be the main factor.

 

[RobbieB]

I don't follow anyone's suggestions.

 

[VanWinkle]

I recently read an investment article by a gentleman named David Afraimi. I have read some of his previous posting and he seems like a level headed, smart guy. He recommends a person subtract their age from 100 to get the percentage of stock they should hold in their portfolio. In my case, at age 64, it would be 36%. By nature, I am very risk averse, do not have a good nervous system. I am sure there are a million formulas for this question, does anyone have any comments on Mr. Afraimi's suggestion?

If you have enough to live on (with an average return of about 5-6%), then 36/64 might work well for you. If you are risk adverse and can sleep at that amount of equities, it is a good fit. The 100 - age is a well known allocation method that worked well when the average age of death was 68. It still works today if you have enough saved to not need higher returns.

 

[copyright1997reloaded]

I don't follow anyone's suggestions.

I don't even follow my own suggestions to myself.

 

[RobbieB]

Ditto. That's why I have a financial adviser.

 

[friar1610]

I'm at 117 - age. This has nothing to do with any formula but because in putting together a liability-matched portfolio, I came out with 40-45% equities as being the right range. It's a bit comforting (but not essential) that this puts me in the range that a lot of people consider prudent.

 

[HadEnuff]

I'm sleeping well at 28%...
Actually, I sleep like $hit but it's because I have shoulder problems (see other thread) not because of my AA.

 

[SecondCor521]

My method:

1. I choose my planning horizon, which is equal to my life expectancy minus my current age. Currently I use 40 years, although the SSA calculator I just ran said 32.

2. I put my numbers into FIREcalc and solve for the spending amount that results in a 95% success rate. I chose 95% because I think the future will be slightly better than the past in that we won't have the stagflation of the 1970's.

3. I then put that spending amount back into FIREcalc and investigate how AA affects the results.

4. I then choose the highest stock AA that measurably increases success rate without measurably reducing stock AA. Visually one could imagine a "radar line" centered on the 100% stock AA point on the chart sweeping counterclockwise until it hits one of the lower stock AA points. That lower AA is what I use.

 

[FANOFJESUS]

What do you guys think about a five year cash bucket with the rest in stocks? Would it work?

 

[pb4uski]

It depends... what is your withdrawal rate? With a 2% withdrawal rate it definitely works... with 5%, probably not.

 

[Koolau]

What do you guys think about a five year cash bucket with the rest in stocks? Would it work?

Not for me. I recognize that stocks are for "growth." If you NEED growth, you add stocks - even if it makes you a bit queazy. If you DON'T need growth, why add the risk of extra stock in the port? I often say "If you've already won the game, you can stop playing." (Yes, I think everyone needs SOME stock in the port - but not all of us need a lot of stock in the port.)

My port throws off enough cash to hold at 30% stock (or less if I want to.) I could leave my kids more money (probably) by loading up on stock, but then I would probably die younger (from worry)

Nope, no "rules" for me. Just keep on doing what I'm doing and as always, YMMV.

 

[flintnational]

IMO the rule of thumb is near useless. Allocation depends on a lot of factors not captured by 100 - age.

Examples

88 YO sick widow in a nursing home with $300k in assets - all cash might make sense

88 YO couple with $5M - they will probably be fine with any allocation

88 YO Warren Buffet - $90B mostly in stock. The rule would put him at $18B.

58 YO flintnational - 70% stocks - Cash on hand, pensions and SS can cover our budget. Accordingly, we have decided to stay with a more aggressive stock allocation.

 

[COZICAN]

"If you've already won the game, you can stop playing." I like that!

 

[jkern]

I'm relatively conservative. My AA is 40/40/20 at age 61. Good enough risk reward for me.

 

[VanWinkle]

The good news is that a 50/50 portfolio is actually safer (100% success rate).
vs the 60/40 or 75/25

 

[street]

What do you guys think about a five year cash bucket with the rest in stocks? Would it work?

This is the plan that I took going into retirement. I have enough in CD ladder accounts to take me to my grave. My invested portfolio's in stock/bonds most likely will never be used by me. My plan was to make a bullet proof plan so if down markets I still would never have to sell. Lol So far my plan has worked very well with a 1.8% WR from those CD/cash accounts. With SS and those cash funds things are working very good.

My ratio is 73/27 equity/bonds with 3 different investment firms and my CD is 15% of my total portfolio. I'm pretty sure not many would approve of my plan but for me it looks like it will work and has for 3 years.

 

[FREE866]

The good news is that a 50/50 portfolio is actually safer (100% success rate).
vs the 60/40 or 75/25

Right, but a 50/50 portfolio over 20-30 years will most likely have a significantly lower ending balance than a 75 or 80% equity position.....if thats important to you of course....the volatility you experience over long time frames is the price you pay for substantially higher returns. That's the tradeoff.