Poll on Risk taking

[kcowan]

I guess I'm an adventurous soul. I'm about to move across the country to a new job and several people have said that I'm "very brave". I don't get it. If you don't take a certain amount of risk, you shrivel up and die.

Hey Meadbh
Where are you moving and why?

 

[nvestysly]

100% Stocks!

This is a no-brainer.... Bonds? Who needs bonds?

I don't see any reason to not go with stocks. There are many more stocks that act like bonds - relatively stable price, consistent income producers - than there are bonds that act like stocks - i.e. significant growth potential.

DW and I have been 100% stocks and fully invested for years. We are at a point of FI but we have not RE'd. Even when RE does occur we will be 100% stocks.

In my mind you can be 100% stocks and have a portion of you porfolio act like bonds if that floats your boat. Don't overlook the fact that bonds can have significant volatility and most are not guaranteed - just ask municipal bond holders of the past. Even today there are bonds that are in trouble. I guess you could go with all treasuries if you want a "guarantee" of the full faith of the government.

 

[Spanky]

No brainer for Miss Chicken Feathers ...Door number 1, all bonds according to these tight parameters.

In the real world, 40/60 AA.

Yup! capital preservation is more important than growth, albeit it is required to keep up with inflation. Our AA is similar.

 

[Rustic23]

Erd50,
It is because you got hung up on the choice part bonds or stocks when the OP was asking about weather you would put your retirement at risk or increased income in retirement.

" What is more important... stable income or chance to make more."

That was what he was after, not how you go about it.

 

[Meadbh]

Hey Meadbh
Where are you moving and why?

Keith

I have been trying to respond in a PM but it just won't work today despite my best efforts (see thread on Paging maintenance to Private Messages). I can PM everyone else with no problems. Could your mailbox be full?

 

[Martha]

Is this the fence post thread?

 

[REWahoo]

Is this the fence post thread?

I think we should ask the mods to merge the two...

 

[ERD50]

Is this the fence post thread?

I'm not sure, I might start a poll to see what people think. - ERD50

 

[Aeowyn]

I'm not content to coast with investments that I don't consider optimal. I think the risk vs. reward is much better with stocks then bonds. I don't mind the bumpy ride. Stocks all the way.

 

[Blackwoodt]

This is a made up scenario....

1) Invest all of it in Ultra-safe Bonds with a realistic chance of making a little over inflation.

2) Invest it all in the Stock Market. You could go broke... You could maintain your lifestyle There is chance you might impair lifestyle ... but! You could wind up rich....

What would you do?

Just for fun going by your statement, it would be #1. After I retire, I never want to have to work, ever again….. making just a little over inflation would be just fine with me.

 

[kcowan]

I think bonds will not keep up with inflation so i would go with stocks...

 

[Rustic23]

And another one misses the point.

 

[Orchidflower]

I voted stocks but frankly in real life I would never go all stocks . A lot heavier in stocks yes but not 100% . I learned my lesson in the last melt down.

Moemg said it just like I would, so +1.

 

[ERD50]

And another one misses the point.

Unless the point is, would you take a hypothetical, doesn't exist in real life, guaranteed safe, guaranteed to keep up with inflation investment (called Ultra-Safe bonds just to confuse things, which probably won't do that) over 100% stocks (described as possibly causing you to 'go broke')?


-ERD50

 

[Rustic23]

Erd, you finally got it! That was the choice. The choice was about risk pure and simple. The OP defined a hypothetical condition, or attempted to, one with out risk and one with risk and reward, and ask you to choose. Not argue about the hypothetical. He even said as much in a follow up.

 

[grasshopper]

Gee, do you Guys open every e-mail you get?

 

[clifp]

Erd, you finally got it! That was the choice. The choice was about risk pure and simple. The OP defined a hypothetical condition, or attempted to, one with out risk and one with risk and reward, and ask you to choose. Not argue about the hypothetical. He even said as much in a follow up.

Ok well in that case I change my answer.


I don't believe any mere government is capable of issuing Ultra-Safe bonds. The only way I'd believe in Ultra-Safe bonds is if God himself issued them.

This would require him to appear in person, make me 20 years younger, and 30 lbs lighter. Conjure up a lovely and devoted wife, and a sexy and fun mistress. Only after performing these miracles would I give up stocks to purchase UltraSafe bonds. If the wife ever found out about the mistress, I'd know that God and the bonds guarantee was a fraud and I'd immediately sell them

 

[traineeinvestor]

I don't believe any mere government is capable of issuing Ultra-Safe bonds. The only way I'd believe in Ultra-Safe bonds is if God himself issued them.

Ditto, but that is not the way I interpreted the OP - as I read it we were presented with a tradeoff between:

1. ultra safe bonds that would beat inlflation but without any expectation that they would do so by enough to maintain the real value of the investments after withdrawls; and

2. the risk reward tradeoff of equities.

In other words, the certainty of a steady decline in real value v an uncertain possibility of maintaining it, growing it or suffering a greater decline.

I'll take the equities thanks.

 

[Meadbh]

I have more faith in entrepreneurs who want to make a profit than in governments who want to spend money. Stocks for me.

 

[kyounge1956]

(snip)I don't believe any mere government is capable of issuing Ultra-Safe bonds. (snip)

I have more faith in entrepreneurs who want to make a profit than in governments who want to spend money.

Nowhere in the original post does it say they are government bonds. Interesting that even people with the above-expressed attitudes assume that "ultra-safe"=government issued.

 

[BTravlin]

Nowhere in the original post does it say they are government bonds. Interesting that even people with the above-expressed attitudes assume that "ultra-safe"=government issued.

Maybe they're Chinese issue?

 

[ERD50]

Nowhere in the original post does it say they are government bonds. Interesting that even people with the above-expressed attitudes assume that "ultra-safe"=government issued.

Because the govt (Feds anyway), have the power to print money, and tax. Other entities cannot do that.

-ERD50

 

[clifp]

Because the govt (Feds anyway), have the power to print money, and tax. Other entities cannot do that.

-ERD50

I think if we make Steve Job's immortal Apple maybe close to printing money, and Goldman Sach's isn't far behind.

 

[kyounge1956]

Ditto, but that is not the way I interpreted the OP - as I read it we were presented with a tradeoff between:

1. ultra safe bonds that would beat inlflation but without any expectation that they would do so by enough to maintain the real value of the investments after withdrawls; and

2. the risk reward tradeoff of equities.

In other words, the certainty of a steady decline in real value v an uncertain possibility of maintaining it, growing it or suffering a greater decline.

I'll take the equities thanks.

I don't quite see how it would be possible for a portfolio of bonds to be capable of supporting "your current lifestyle for the rest of your natural life", and at the same time steadily decline in real value. I think I'm assuming it produces sufficient income just from the interest payments, which I think would require that either one is not spending all of the interest, or that the principal is growing as fast as inflation (i.e. TIPS). Either way, the real value of the portfolio would have to be at least holding its own against inflation, or eventually the interest income would no longer support the same lifestyle it originally did. But maybe by assuming that only the income is spent I am reading more into chinaco's description than it really says.

Let's suppose for purposes of discussion that your view of the two choices is correct. Possibly the portfolio was a bond ladder and the principal of the bonds is also spent as they mature—then the portfolio would be shrinking in real terms I think. It occurred to me that possibly estate concerns are also affecting people's choice, in addition to the difference in risk. I'm single and childless, and all I consider it really necessary for my portfolio to do is keep me solvent for the rest of my life. If it does better than that, fantastic, but I'm not going to take chances of becoming insolvent in hope of leaving a bigger estate when I die. People with children may have very different goals about how much they want to leave to their heirs. So now I am curious, how many of those who chose stocks did so because they might improve their own lifestyle, and how many because of what it may make it possible to leave to your heirs? Of those who chose bonds, was your decision affected at all by estate considerations?

 

[traineeinvestor]

I don't quite see how it would be possible for a portfolio of bonds to be capable of supporting "your current lifestyle for the rest of your natural life", and at the same time steadily decline in real value. I think I'm assuming it produces sufficient income just from the interest payments, which I think would require that either one is not spending all of the interest, or that the principal is growing as fast as inflation (i.e. TIPS). Either way, the real value of the portfolio would have to be at least holding its own against inflation, or eventually the interest income would no longer support the same lifestyle it originally did. But maybe by assuming that only the income is spent I am reading more into chinaco's description than it really says.

My understanding (or assumption) was that the real rate of return would at least potentially be less than the level of withdrawls - the OP only states that there is "a realistic chance of making a little over inflation" which I took to mean that there is (i) no certainty that there will be an excess over inflation at all and (ii) even if there is, there is no certainty that the excess will be large enough to cover withdrawls. If my understanding is correct then the real value of the portfolio of bonds will decline over time.

If my understanding is not correct and the real rate of return is more than the level of withdrawls, the the real value of the portfolio of bonds will grow over time.

Another way of looking at it:

- I had understood the OP to be a question about which of two risks I would prefer to assume

- some of the other replies frame the question as a choice between a risk free investment with no upside and a risky investment with the possibility of both upside and downside.

These are two very different things.

I do agree that personal circumstances would also need to be taken into account. Expected years in retirement, needed withdrawl rate and entitlement to pensions etc would be highly relevant to the decision - regardless of which understanding is correct.

in my case, when I FIRE we will both still be young enough to go back to work if equity returns were too low in the critical early years, my spouse is younger than me and comes from a long lived family requiring the investments to last 50+ years and I am uncomfortable betting that our personal rate of inflation will not exceed CPI. I also have no SS, pension or similar to fall back on. In this situation chosing all stocks over all bonds becomes almost compulsory.