What percentage of net worth allocated to stocks ?

[ERD50]

Conventional financial thinking is that you'll need a significant proportion of equities, forever, in your portfolio, Steven, if you expect to be retired a long time and wish to outrun inflation. So take heart.

Alas, I'm one of those contrarians who rejects the conventional model. I have zero in stocks.

I'm curious as well. What is your plan to outrun inflation? Real Estate (that seems to be one alternate plan that comes up from time to time)?

-ERD50

 

[haha]

Well, I'm not at all against equities. Up until 2004, when I bailed from the market, I was 100% in stocks - and had been for many years. I look forward to getting back to them somewhere down the road.

In the meantime, here's a thumbnail of what informs my thinking:

- Most financial pundits (and most investors) came of age during the long-running secular bull market from 1981-2000. They know nothing else.

- The secular bear market which began in 2000 has largely been held in abeyance by the infusion of liquidity and stimulus by central bankers around the world. At the cost of gargantuan and rapidly rising debt.

- Societal obligations (SS, Medicare, and their equivalents across the developed world) are not fundable in the long run via any cogent scenario I have ever seen presented. The math simply does not work.

- The politics are such that the hard, painful decisions that could be made, won't be. It will first have to devolve into crisis.

- Financial tools such as Firecalc, wonderful as they are, have embedded within them as their major assumption that the future in front of us will never be worse than the past. There will never be a financial dislocation, for instance, worse the 1930's.

I'm an optimist by nature. But I'm utterly convinced there will be a reckoning. The math impels it.

I believe the times speak to the preservation of what one has saved. Not return on investment.

And so I have a portfolio significantly exposed to gold. Treasuries and money market funds make up the rest.

I'm not a goldbug. I actually think gold is today overpriced on a historical basis. And I'm convinced gold as an "investment" will blow up one day. But if you worry about these things like I do, there aren't a lot of safe places to put your money.

I say all these things with not a little reticence. After lurking here for awhile it's clear that there are an awful lot of smart people around. The financial acumen on this site is incredibly high. Far be it for me, a relative newbie, to suggest that there might be a fly in the ointment.

[mod edit]

Thanks for a well thought out answer. I tend to think the same way, although I sold out of gold way too early some years ago.

I also hold more stocks, mostly because the taxes would be too high to get rid of them. I probably should not let that be so important, and 2013 is a new slate so I'll be looking. One thing that bothers me is when I make a move, pay taxes, and then the stocks go up or stand still rather than falling! It is an easy way to feel stupid.

Ha

 

[pletal]

Conventional financial thinking is that you'll need a significant proportion of equities, forever, in your portfolio, Steven, if you expect to be retired a long time and wish to outrun inflation. So take heart.

Alas, I'm one of those contrarians who rejects the conventional model. I have zero in stocks.

I also reject the conventional model. I have close to zero in stocks myself. I would rather spend more time working on my business then trying to figure out the market. My plan is to put enough back and plan on no more then a two percent return per year. When I can pull at least 160k per year for 35 years I'm done. If I don't spend it all that year it stays in the account. If interest rates go up, I can't lose.

 

[sheehs1]

I'm curious as well. What is your plan to outrun inflation? Real Estate (that seems to be one alternate plan that comes up from time to time)?

-ERD50

While not ideal and does not really ensure the buying power of liquid assets keeps up with inflation, it seems prudent to try to get or keep one's expenses at 50% or less of the income generated or one's safe withdrawal rate (i.e. a low debt to income ratio).

At least then one has some buffer, so to speak against inflation.
I call it, the inflation protection plan because quite honestly, our debt is the one thing we have some control over.

Keep debt ratio low while investing in safe assets on the other side to supplement the income that is generated, keep up with some percentage of inflation, or even continued savings.

Now, if I can just hold to that model and not do something stupid.

 

[sheehs1]

One thing that bothers me is when I make a move, pay taxes, and then the stocks go up or stand still rather than falling! It is an easy way to feel stupid.

Ha

+1

 

[samclem]

While not ideal and does not really ensure the buying power of liquid assets keeps up with inflation, it seems prudent to try to get or keep one's expenses at 50% or less of the income generated or one's safe withdrawal rate (i.e. a low debt to income ratio).

At least then one has some buffer, so to speak against inflation.
I call it, the inflation protection plan because quite honestly, our debt is the one thing we have some control over.

Yes, it sounds like your plan provides a buffer, but like all buffers it won't be effective if the difference between the two things it is buffering continues for too long. There's no getting away from the fact that if an investment plan is structured so that the expected return is less than the expected inflation, then the buying power of the portfolio should be expected to decline over time. Eventually, if one lives long enough, the portfolio won't provide enough resources to meet living expenses. Probably not a factor for an 85 YO with a 50% buffer, but something very different for a 50 YO.

For an early retiree, the conventional definition of investment risk (portfolio volatility) has very limited utility. If individual assets or even the entire portfolio goes down and back up in value before one needs to sell them, it hardly matters (unless we're participating in a "net worth" discussion on this forum). If investments go down and down in buying power in a "safe", steady, nonvolatile way, the only advantage to the long-term retiree is that the need to buy Alpo eventually won't come as a surprise--it was baked into the plan.

 

[Midpack]

55% of portfolio last time I ran it thru M*. I don't include primary residences or personal property in net worth, and our home would be a small % anyway, so the % of portfolio number is fairly representative.

 

[ERD50]

...

- Financial tools such as Firecalc, wonderful as they are, have embedded within them as their major assumption that the future in front of us will never be worse than the past. There will never be a financial dislocation, for instance, worse the 1930's.

I didn't quote all the preceding, but I think they are reasonable observations.

FIRECALC is a tool - it does exactly as you say (assuming no programming/data errors!). But then you can use that as an input to your decisions, not make it the decision. It's why I prefer to shoot for 100% success, take the most conservative view of a 30 or 40 or 50 year portfolio (longer time frames also reduce the data set, so it may give a counter-intuitive higher success for longer time frames), and keep my expected spending level with inflation (rather than assume my spending will decrease with age).

All of those will provide some buffer, but it's still a crap-shoot, but as I've said before - so is getting out of bed to go to work.

Note that the 70's were about as bad/worse for a retiree's portfolio as the 30/s.

I say all these things with not a little reticence. After lurking here for awhile it's clear that there are an awful lot of smart people around. The financial acumen on this site is incredibly high. Far be it for me, a relative newbie, to suggest that there might be a fly in the ointment.

Your input is certainly as valid as anyone else on this forum. I listen more attentively to a first time poster who presents reasons/data along with their viewpoint than I do one of us blow-hards with thousands of posts who just repeats the same self-proclaimed mantra with nothing to back it up.

Maybe I'm in the minority, but I'd much rather have someone warn me about the fly in the ointment than to choke on it because I wasn't warned. I find it interesting, but some people really don't want to be warned - I can't understand that (outside of harmless 'white lies').

That said, I've got a fairly high allocation to stocks. I don't disagree with your points, but I'm not sure the alternatives are better. Some have pointed out that at any time in history, one could come up with a credible list of why the market was scary. I just don't know, but I'm staying the course until I see a clear alternative.

But thanks for your thoughts, that was a very well written post, IMO.

-ERD50

 

[clifp]

30% of my net worth is allocated to Real Estate (both house and rentals).
If the remaining 70% my AA is 80 stocks/ 10 bonds/10 cash/cds. So I guess that makes me 56% stock (which includes a some REITs which arguably should be in Real Estate).

My view is governments are not very smart in general, and the US government in particular is borderline insane. I fear most of the same issues that Jasper fears.

But my reaction is to keep most of my money in the hands of the generally smart CEOs that run Fortune 500 global companies. My believe is that whatever happens to the US economy, the rich will still come out ok. Even excluding organization like Goldman Sachs which have a huge sway on Government policies, your average global company like Boeing, Exxon, GE,Apple will all do ok regardless of what Uncle Sam does. Most of these companies could survive just fine if they never made, researched, or sold another product in the US. I expect if the governmental policies, economic climate gets particularly ugly in the US or Europe these companies will relocate a large portion of their business to the green pastures of developing countries.

Gold makes some sense, but I am not sure why a company like Royal Dutch Shell which pumps a commodity Oil is not an equally good hedge.

As I have noted in the past the countries that have not defaulted on their debt like US,Canada,Switzerland,and Australia are greatly outnumbered by countries that have, either through outright default or via hyperinflation. In particular, I am not at all optimistic that a 30 year US bond is a good vehicle for preserving wealth.

 

[gerntz]

Around 50%. And I think anyone who answers closer than the nearest 5% for anything over 10% spends way to much time thinking about this subject.

 

[haha]

Around 50%. And I think anyone who answers closer than the nearest 5% for anything over 10% spends way to much time thinking about this subject.

Interesting opinion. But most people would use Excel for this, and although it will round to nearest integer, I don't think it does what you suggest, in order that one not seem too interested. And of course, 5% of $3mm is $150,000- plenty enough to get my attention. And many members saw $3mm way back in their rearview mirrors.

Ha

 

[rodi]

60% of portfolio, but 40% of networth.

 

[samclem]

Gold makes some sense, but I am not sure why a company like Royal Dutch Shell which pumps a commodity Oil is not an equally good hedge.

I think the main difference would come if inflation (or a currency collapse, etc) was accompanied by a downturn in economic activity. Such a downturn would reduce demand for oil (and other industrial commodities) and thus its price, while gold might not be similarly affected.

If there were some way to buy a cheap, highly-leveraged hedge against a very unlikely but calamitous economic upheaval, I'd be willing to put 1% of our portfolio in it. But, I haven't found such a thing. Maybe the closest thing would be a bit of arable land--and a small investment in "if the excrement hits the ventilator" necessities.

 

[Meadbh]

If there were some way to buy a cheap, highly-leveraged hedge against a very unlikely but calamitous economic upheaval, I'd be willing to put 1% of our portfolio in it. But, I haven't found such a thing. Maybe the closest thing would be a bit of arable land--and a small investment in "if the excrement hits the ventilator" necessities.

How about arable land with oil and minerals and the rights thereto?

 

[scrinch]

I'm an optimist by nature. But I'm utterly convinced there will be a reckoning. The math impels it.

I've got to agree with this statement, and the one that hard decisions won't be made until a crisis is reached. And I expect that this is going to lead to loss of purchasing power of the dollar. Now whether that occurs in a painful but orderly way or in a way that leads to panic and economic disruption is the big question (in addition to when). I.E. does the ventilator stay white or turn brown?

So my thinking on this issue is that if it stays white, the economy continues to chug along and stocks and bonds continue to perform more-or-less ala FireCalc, although perhaps depreciated relative to other currencies. In this case it makes sense to continue to be invested in the stock/bond markets. If it turns brown, then the economy undergoes real contraction and stocks and bonds will take a huge beating. In this case we will all be in a world of hurt...unemployment will be high, inflation will be higher, and there will likely be social unrest. Better in this case to have enough hard assets at hand to buy food for a couple of years, keep your head down, and quick, study Mandarin!

Stocks: 40% of networth

 

[Alex in Virginia]

60% stocks, 25% cash instruments, 15% bonds. This is fluid, though; 3 months from now the breakout could be a lot different. Or not.

Alex in Virginia

 

[523HRR]

81% of portfolio is in stocks, representing 75% of net worth. ER'd Oct 2012.