Increase stocks in AA?
- Thread starter pb4uski
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Let's say your networth is 1M. When you are 1X long and let's say theortically markets fell 60%. Yor networth becomes 400k. If you were 2X long your networth becomes -200k. Negative networth.
Not to mention the interest you pay, all the while when you are leveraged, is also a loss.
Even when you are not leveraged, there is inherent leverage, because the underlying companies of the stocks you hold use leverage to run their operations. You don't want to do leverage on top of leverage.
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pb4uski
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What I did to think of what my AA target should be was to carve out a SS suppplement fund equal to 3 years of SS since we are 63 and plan to claim at 66. That will be in fixed income.
Then I took our gap of 36% of spending once SS starts and divided it by 4% to get the amount needed to fund the gap and split that result 60/40 to be conservative.
Any remainder was 100% stocks... saying that the first two funds will provide for our spending so any excess can be invested in higher risk/higher reward similar to what my kids would be investing in at their ages.
The overall result would be ~75/25 today and grade to ~80/20 or 85/15 at age 66. Our current target has been 60/40.
Still mulling it over and haven't made a final decision, but I think that our current AA is too conservative based on that logic.
flintnational
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^^^We are 58/59 and considering a similar strategy. SS and pensions at 65 or 66 cover our current inflation adjusted budget. We are keeping 7 years spending in short term bonds to bridge us to 65. I may stop rebalancing and let the stock portion glide up from our current allocation of 70% stocks (less with the current correction).
GravitySucks
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Logic finds my 60/40 also to be to conservative. However I was at 80/20 and 70/30 in the 2015 corrections and I didn't sleep well. At my current AA I have barely noticed this recent fall and haven't lost a minute of sleep. For me, I need to focus on Fear and Greed control instead of maximization.
Best wishes whatever you decide.
Dtail
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I am at 55/45 and it is the same concept for me. I have been investing all my life, but truly paid attention to the specifics and details just the last 2 years.
Thus haven't experienced the 2000/2008 type meltdowns from up close and don't think a very high equity allocation will sit well with me.
steelyman
Moderator Emeritus
I’m DIYing with my retirement accounts but letting the “pros” determine the stock/bond allocation. By “pros” I mean the people at Vanguard who manage their target date funds. The recent allocation is easy to find at their mobile and desktop sites.
I’m using their 2030 target date fund. I’m buying/rebalancing using their allocation but with funds I choose. I’m trying this approach for 5 years, after which I may just switch to the target fund itself and be more hands-off. It’s not a lot of work as-is.
I’m using their 2030 target date fund. I’m buying/rebalancing using their allocation but with funds I choose. I’m trying this approach for 5 years, after which I may just switch to the target fund itself and be more hands-off. It’s not a lot of work as-is.
Running_Man
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Yes I think you are crazy, as a matter of fact as this thread indicates there is entirely too much complacency among investors that stocks as a necessity of their being entitle owners to a comfortable retirement. From 1974 it has been basically a one way ticket up with the Federal Reserve backstopping any fall. Now demographics are going to kick in, there is going to be a large percentage of the population that is retiring that is putting stress in Social Security, which therefore is likely to see benefits reduced, this reduction in benefits will cause the increase percentage of retirees to sell more stocks to provide funds for living.
The odds of this occurring is certainly not 100% but it is more likely than not leading in my mind to reduced valuation of stocks. If stocks were to go back to a 10 PE during your retirement and Social Security reduced 35% maybe you would still make it, but if you were at 60/40 and re-balanced at least during the sharp declines you would be picking up shares of stock at a discount. Using the history of a growing economy and workforce as the study for future retirement may be an indication but financial caution in retirement is warranted.
Presume for a moment that stocks had a very bad bear market, economy goes into deep recession. Immediately there would be a surge of retirees taking Social Security and a reduction in the taxes for Social Security. Within a year the government would be searching for solutions as Social Security would be causing a huge increase in government budget deficit. We are running nearly a trillion now with a good economy.
In any scenario having funds available to purchase stocks at those lower levels makes the retirement far more secure, the closer to 100% equity allocation one goes, the higher the risk. You will of course most likely be able to die far richer with 100% stocks but I do not see the benefit to you. Even if stocks never undergo a dire emergency you indicate you would have more than enough funds, 60% is a very good exposure to equities. To add additional risk with no need for the return is crazy in my book.
The odds of this occurring is certainly not 100% but it is more likely than not leading in my mind to reduced valuation of stocks. If stocks were to go back to a 10 PE during your retirement and Social Security reduced 35% maybe you would still make it, but if you were at 60/40 and re-balanced at least during the sharp declines you would be picking up shares of stock at a discount. Using the history of a growing economy and workforce as the study for future retirement may be an indication but financial caution in retirement is warranted.
Presume for a moment that stocks had a very bad bear market, economy goes into deep recession. Immediately there would be a surge of retirees taking Social Security and a reduction in the taxes for Social Security. Within a year the government would be searching for solutions as Social Security would be causing a huge increase in government budget deficit. We are running nearly a trillion now with a good economy.
In any scenario having funds available to purchase stocks at those lower levels makes the retirement far more secure, the closer to 100% equity allocation one goes, the higher the risk. You will of course most likely be able to die far richer with 100% stocks but I do not see the benefit to you. Even if stocks never undergo a dire emergency you indicate you would have more than enough funds, 60% is a very good exposure to equities. To add additional risk with no need for the return is crazy in my book.
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pb4uski
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
^^^^ Well, aren't you a Debbie Downer!
I'm a long term investor since the late 70s and certainly don't feel that since '74 it has been a one-way ticket up. While I concede that the demographics of the boomers shifting from accululation phase to withdrawal phase will put some pressure on stocks, I think the overall impact will be minor because their sales will be over 20-30 years.
You make a valid point regarding the likelihood of SS reductions... once I factor a 23% reduction in and add a little conservatism to the funds beyond the gap that I'm essentially investing for our heirs and charities (or for us if the SHTF) by shifting it to 90/10 vs 100/0, it changes the overall AA now from 75/25 to 65/35 and the AA at age 66 from 80/20 to 70/30... so essentially reduces the stocks and increases bonds by 10%.
I'm warming up to the idea of shifting from my existing 60/40 now to 65/35 near term and grading to 70/30 over 5 years and then reassessing.
I'm a long term investor since the late 70s and certainly don't feel that since '74 it has been a one-way ticket up. While I concede that the demographics of the boomers shifting from accululation phase to withdrawal phase will put some pressure on stocks, I think the overall impact will be minor because their sales will be over 20-30 years.
You make a valid point regarding the likelihood of SS reductions... once I factor a 23% reduction in and add a little conservatism to the funds beyond the gap that I'm essentially investing for our heirs and charities (or for us if the SHTF) by shifting it to 90/10 vs 100/0, it changes the overall AA now from 75/25 to 65/35 and the AA at age 66 from 80/20 to 70/30... so essentially reduces the stocks and increases bonds by 10%.
I'm warming up to the idea of shifting from my existing 60/40 now to 65/35 near term and grading to 70/30 over 5 years and then reassessing.
Spanky
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Concurred - you could lose your shirt with leveraged ETFs (long or short). A portfolio with high exposure to equity, e.g., 100%, to fund expenses during non-accumulation stage of retirement is highly risky. However, it may not a bad strategy if you want to maximize its size (for your heirs or whatever reasons) and you have a very low SWR (i.e., 1% or less) because of other income, e.g., pension, rental properties.
As other posters have mentioned, why play the "game" when you have already won? If you already have enough to support your retirement, why would you want more and run the risk of losing it all?
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Having just FIRE'd I tend to favor the won the game camp. As you say, unless you have an extremely low withdrawal rate, probably not worth taking the added risk. For now I'm sticking to my roughly 60-30-10 posture.
GravitySucks
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Deleted ... I miss read Spankys post.
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Spanky
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I am staying with my current allocation of (equity/Fixed Income/Cash) 52.37/31.14/16.49.
Dtail
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
My only reservation is timing, since I think stocks are fairly/richly valued. I would prefer to make your shift towards stocks in your allocation when PEs are at the average or, preferably, lower. One could argue bonds also are as richly valued, but that assumes the Fed will continue on its path of 4 additional raises this year and 2019. It could, but I'm a bit skeptical.
I've let my allocation to stocks drift down from 63% to 54% after taking some stock gains over the last 18 months (my "timing" thus far seems good, since most fund prices are below where I sold). But I stashed the gains in cash, for now. I'm supposed to rebalance at 55% but I'm going to wait until my usual rebalancing period in late Jan 2019, unless I see another 5% drop. Then I'll do half the rebalance.
In 20 months, my online 1/2 time gig stops and I convinced SW to retire, so there will be a 4 year slog before regular SS funds come in, although I leave open the prospect of claiming SS early as a put-option on catastrophic stock collapse.
After that, and particularly after DW claims 4 years later, I'm comfortable with a 70-30 allocation, which is probably more similar to your situation with the pension and other funds starting to come in.
I've let my allocation to stocks drift down from 63% to 54% after taking some stock gains over the last 18 months (my "timing" thus far seems good, since most fund prices are below where I sold). But I stashed the gains in cash, for now. I'm supposed to rebalance at 55% but I'm going to wait until my usual rebalancing period in late Jan 2019, unless I see another 5% drop. Then I'll do half the rebalance.
In 20 months, my online 1/2 time gig stops and I convinced SW to retire, so there will be a 4 year slog before regular SS funds come in, although I leave open the prospect of claiming SS early as a put-option on catastrophic stock collapse.
After that, and particularly after DW claims 4 years later, I'm comfortable with a 70-30 allocation, which is probably more similar to your situation with the pension and other funds starting to come in.
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pb4uski
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The first two pieces are what we reasonably need to support our retirement at 100% success.
I guess that the way that I am looking at it is that it is very unlikely that we will ever need the money that we have over what we need for 100% success... so essentially I am investing that extra money for our heirs... and if a 33 yo person came along and wanted advice on how to invest their portfolio then we would recommend 100/0, would we not?
If so, why would I invest the excess over what we likely need conservatively?
flintnational
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I think this is the proper way to look at excess funds that will be left to heirs. I advised my 90 yo DFIL he was investing for his grandkids. I guess the only question is, at what age/portfolio value is it safe to assume your retirement is over funded.
SecondCor521
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I look at it in the same way. I have two parts to my portfolio: the part for me, which I invest at whatever AA produces the maximum historical SWR given my planning horizon (currently 90/10 and 40 years), and the part for my kids, which I invest at 100% stocks.
As far as the last part of flintnational's quote above, I currently view it as a flexible situation where money can logically flow between the two parts of my portfolio (mine and my kids) as my spending, age, and portfolio performance change over time. As a random example: If I had $2M, today I may spend $20K and need $500K in my part and leave $1.5M in my kids part, but if I need $40K then my part grows to $1M and the kids' part shrinks to $1M. My allocation to bonds would adjust in that situation, from 10% of $500K (=$50K) to 10% of $1M (=$100K).
I don't segregate the funds in any real way - the separation and AA is just on paper (in Excel, actually) and in my brain.
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pb4uski
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Same here... while they are our funds and could be used if we need them, realistically it is unlikely that we will ever need them so substantively, I am investing that part for our kids benefit (so that part is 90/10 or 100/0 given they are in their early 30s).
But there is no formal separation... just in my mind for investment purposes only.
But there is no formal separation... just in my mind for investment purposes only.
Huston55
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PB4-
Do you segregate ‘your’ funds from your ‘heirs’ funds in any tangible way? For example, Roths or Traditional IRAs for the ‘heirs’ funds?
Do you segregate ‘your’ funds from your ‘heirs’ funds in any tangible way? For example, Roths or Traditional IRAs for the ‘heirs’ funds?
SecondCor521
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pb4uski
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
No. But our focus for withdrawals will be on traditional IRAs so if we live long what will be left for heirs will be taxable account funds (stepped-up basis so no tax) and tax-free Roths and those are all in equities.
Huston55
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I probably should have said, “Will you segregate...”. But, this is what I was looking for. Your plan, depending on longevity, is to maximize the tax-advantaged portion of your portfolio for you heirs.
In a generic sense, this would create some tension btwn the “traditional” desire to w/d from ‘taxable’ accounts first for the retiree’s benefit, and the desire to w/d from ‘tax deferred’ accounts first for the heirs’ benefit.
steelyman
Moderator Emeritus
My situation may be different than many (most?). I’m trying to maintain a balance between traditional and Roth accounts through withdrawals and rebalancing. I’m also moving lower expected growth into traditional (e.g. bonds) and higher expected growth (stocks) into Roth. That’s a work-in-progress, I’ll see how it goes.
Before the recent drop in the market, my spreadsheet had the entire withdrawal for 2018 coming from Roth. Not so anymore!
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