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Poll on Risk taking
Old 02-05-2011, 05:50 AM   #1
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Poll on Risk taking

This is a made up scenario.... but please take it seriously... as if it were a real life choice you were making.

Here is the scenario: You are going to FIRE... age does not matter... you have the assets to do it. You have enough PV assets to live your current lifestyle for the rest of your natural life. All you need to do is keep up with inflation.

You have two options that cannot be changed later (one time decision on the asset class):

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?
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Old 02-05-2011, 06:18 AM   #2
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No brainer for Miss Chicken Feathers ...Door number 1, all bonds according to these tight parameters.

In the real world, 40/60 AA.
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Old 02-05-2011, 06:32 AM   #3
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No brainer for Miss Chicken Feathers ...Door number 1, all bonds according to these tight parameters.
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Old 02-05-2011, 06:50 AM   #4
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#1

The reality of it is no matter what I do, everyone should do the opposite. If I'm in the market, get out. If I'm out, get in. <sigh>.

Last year I got tired of playing Russian Roulette with my 401K so I moved it over to a USAA IRA (2% bonus, 4% guaranteed interest). Now I can at least sleep at night.
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Old 02-05-2011, 07:37 AM   #5
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Old 02-05-2011, 08:21 AM   #6
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#1 It is too late in the game for above average risks. For stocks the turn around window use to be 5 years now they tell you to expect 10 years. Is the goal to enjoy life as worry free as possible or accumulate more money for someone else to enjoy.
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Old 02-05-2011, 08:30 AM   #7
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I expect that stocks will be a better hedge against inflation over time, also hope to leave some assets to the kids. DW & I have pensions but not much other assets so trying to maximize financial assets is part of our plan. But if our equities went to zero we should be able to survive on pensions. SO we have the ability and inclination to take risk even if we don't have the need (for just our own retirement expenses).
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Old 02-05-2011, 08:54 AM   #8
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I expect that stocks will be a better hedge against inflation over time, also hope to leave some assets to the kids. DW & I have pensions but not much other assets so trying to maximize financial assets is part of our plan. But if our equities went to zero we should be able to survive on pensions. SO we have the ability and inclination to take risk even if we don't have the need (for just our own retirement expenses).
Having other assets to mitigate the risk wasn't the point.

You have a pile of money (nothing else) you can invest in one asset class or the other... play it safe or take bigger risk in hopes of gaining more
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Old 02-05-2011, 09:00 AM   #9
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Easy choice for option #1. Maintaining my current lifestyle during ER with little or no risk is the goal and option # 1 fills the bill.
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Old 02-05-2011, 09:05 AM   #10
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This is a made up scenario.... but please take it seriously... as if it were a real life choice you were making.
Except it isn't a real world choice as we can choose to do a blend.

Further, we'd need to know more about this stash, age and all these other things you leave out to be be meaningful at all. For example, if the ER is age 40, and wants to plan for the possibility of age 100, then we could look at what kind of stash this hypothetical person has to have a reasonable chance of surviving in all bonds. Now, recall that FIRECALC shows that the WORST AA for a long term portfolio is 100% bonds (I wonder how many people realize that?). So that would imply that you are assuming this person has a large stash.

If they have a large stash, going to 100% stocks may not look so risky at all. IOW, I don't think the comments you add to the situation are accurate:

Quote:
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.
If Ultra-safe Bonds are going to carry me through, I doubt that a 100% investment in the stock market would lead to me going broke. You threw a bias right in the poll.

Do some FIRECALC runs and see.

-ERD50
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Old 02-05-2011, 09:09 AM   #11
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Except it isn't a real world choice as we can choose to do a blend. ...
ERD you would over analize anything. Yep that's right... I said anal!

It is a simple poll trying to understand forum member penchant for risk.
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Old 02-05-2011, 09:13 AM   #12
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Having other assets to mitigate the risk wasn't the point.

You have a pile of money (nothing else) you can invest in one asset class or the other... play it safe or take bigger risk in hopes of gaining more
"All you need to do is keep up with inflation. "

That is why I would go with stocks,for a long period there are a better inflation hedge unless you can get me some of those original ibonds which I missed stocking up on at the time.
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Old 02-05-2011, 09:18 AM   #13
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Here is the scenario: You are going to FIRE... age does not matter... you have the assets to do it. You have enough PV assets to live your current lifestyle for the rest of your natural life. All you need to do is keep up with inflation.
As ERD50 said, this really doesn't give enough information about the stash. If it were large enough that I could live off the 2% yield on an S&P 500 index fund, it would be a no-brainer - I'd put 100% in the S&P 500 index fund.
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Old 02-05-2011, 09:26 AM   #14
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I voted all bonds.

I suppose I'd rather die a slow death than a fast one .

Now, if there was a third option, "stick it all in an annuity"...I might have chose that since we are talking absolutes in the poll and the money selection is irrevocable
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Old 02-05-2011, 09:49 AM   #15
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ERD you would over analize anything. Yep that's right... I said anal!

It is a simple poll trying to understand forum member penchant for risk.
It isn't OVER analyzing at all. It is the proper amount of analysis for an important financial decision. You are under-analyzing it and adding some incorrect bias. What's the term for that?

It concerns me that people are saying this is a 'no-brainer'. No offense, but it is only a no-brainer if you choose not to engage your brain and understand what this scenario means.

I did some work for you and made some FIRECALC runs. I chose 5 year Treasuries as the 'ultra-safe' bonds (seemed like the closest offered). The picture looks UGLY for a 100% bond portfolio over 40 years (even 15 years).

To get to 100% safety in 5 year treasuries, you need to reduce spending to 1.85% WR (see, big stash required). And at year 40, one scenario had you at $13,000 in the portfolio - you wouldn't make it another year!

To get to 100% safety in 100% stocks, spending can go to 3.2% WR (and you end up with slightly more $, even for the worst case, and the averages and highs are about 5x what you get with 100% bonds, all the while spending 1.7x as much!.

Looking at it another way, if you took a 1.85% WR with 100% stocks, you would have a minimum of $1,000,000 at year 40 - still a healthy portfolio (and that is $1M in buying power, adjusted for inflation).

Still worried that stocks may perform poorly compared with historic bad periods (but somehow not worried about the historic return of bonds versus inflation)? OK - let's get a bit more conservative with that stock portfolio, and split the difference in spending. Let's take out 'only' 2.5% (midpoint of the 1.85 and 3.2 WR)as our WR. That throws in more safety, and you are still spending more than with the all bond approach.

So watch'a got to defend your " You could go broke... " statement? Shouldn't that be in the 100% Bond category?

-ERD50
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Old 02-05-2011, 09:54 AM   #16
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It is a simple poll trying to understand forum member penchant for risk.
Actually, it may be a simple poll that tells us something else - if a significant % choose 100% bonds, it may tell us that the forums members do not understand the risks associated with bonds versus stocks.

That is different from understanding how much risk they wish to take.

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Old 02-05-2011, 09:59 AM   #17
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I voted all bonds.

I suppose I'd rather die a slow death than a fast one .
What makes you think you would? - ERD50
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Old 02-05-2011, 10:07 AM   #18
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Maybe the poll is more like an inkblot test?

No correct answer, but the answer reveals our feelings of security/risk.

Especially, if your current allocation is about 50/50.

Of course, like most things in reality, it's not an either/or choice. But the answers are revealing and helpful.
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Old 02-05-2011, 10:08 AM   #19
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I think the parameters of the poll are too restrictive. Age does matter. Knowing what I know now I'd say all stocks if I was in my 20's or 30's. But since I no longer have time to recover from a financial disaster I'd pick door #1.
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Old 02-05-2011, 10:12 AM   #20
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What makes you think you would? - ERD50
All bonds ~ risk of money not lasting

All stocks ~ risk of crash and burn
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