Portfolio Rebalancing When n-times FI

[Route246]

I got to thinking about asset allocation (equity vs fixed income) and what ratio I am comfortable with. I'm thinking about three scenarios and assumptions:

• 1-times FI ($2million)
• 2-times FI ($4million)
• 4-times FI ($8million or more)

If you use the common 100-age rule (Age 60 should be 40-60 equities-fixed_income, etc) you should start adjusting your asset allocation to match some comfortable ratio as conventional wisdom says you don't have time to make it all back in the event of a market crash.

Let's say you define FI as $2million. 2 times would be $4million, 4 times would be $8million, etc.

I believe at 1xFI or $2million I should be 40-60 at age 60, no argument there.

What about 2xFI or 4xFI? I feel I can afford to take more risk if I have $8million vs if I have $2million as long as I'm comfortable with having $2million in the event of a market crash. My feeling is I'm OK with 40-60 with the first $2million and 0-100 with the remaining $6million something like 10-90 (fixed income to equities) assuming I have $8million.

Is this thinking flawed? I do believe in equities as it is the reason I have FI now but how much optimism is too much and is it reckless to maintain a 10-90 asset allocation over 60?

 

[Major Tom]

I feel I can afford to take more risk if I have $8million vs if I have $2million as long as I'm comfortable with having $2million in the event of a market crash.

This is generally the way I think too. For a lot of folk, a benefit of having a large stash, is that they don't have to take as much risk with their money, and can generate the income they need with minimal or no volatility in their portfolio. I tend to think the other way. The larger my portfolio, the more comfortable I feel with an AA that has a greater weighting towards equities.

 

[audreyh1]

I’ve never used the 100 rule.

I chose my AA based on the graphs that show portfolio survival (for Trinity method, FIREcalc first method) versus AA. These show survival is pretty much the same between 45% and 80%. So then it’s a trade off between short-term volatility versus long term portfolio appreciation.

It’s really personal preference once you have your bases covered.

We’re over 60 with a 50/50 allocation. Long term we’re dead so we don’t care about having a larger portfolio when we die. We’re comfortable with 50/50 volatility.

 

[Flyfish1]

I tend to think the other way. The larger my portfolio, the more comfortable I feel with an AA that has a greater weighting towards equities.

I agree. But also individuals with a large asset base will often diversify out of the stock/bond markets into alternative investments, real estate being the obvious first example. If you are sitting on $8M in investable assets why not diversify into less or non correlated assets?

 

[Route246]

I actually have more than $8M and have really stopped migrating to fixed income for two reasons. First, is I like equities, even with the cyclical downturns and second I don't like paying marginal taxes for the sake of diversification, that is, I don't mind paying taxes if I need a chunk of cash to buy a car or something but not to meet some arbitrary allocation metric.

You mention real estate and does this mean buying property or REITs? I cannot deal with the thought of complicating our lives with buying real estate as being a homeowner is enough hassle already at our age. Even the thought of hiring a property manager is a bandwidth strain for me. I'm quite happy with having everything in SPY-like funds and ETFs and the associated risk of those positions. We do have about 9% in a REIT now and it has performed very well, increasing 400x in 24 years.

I agree. But also individuals with a large asset base will often diversify out of the stock/bond markets into alternative investments, real estate being the obvious first example. If you are sitting on $8M in investable assets why not diversify into less or non correlated assets?

 

[Route246]

Ahhh, I left out the most important thing and just remembered why I wrote this original topic. People have asked why I'm not retired, why I'm still working, etc. as I'm 66 and well past FI thresholds, trying to be the richest guy at the cemetery (my wife and I love that characterization and have adopted it for me, LOL).

My reasoning is I still have a bit of imposter syndrome in me being 10-90 fixed-income:equities. With such a high equities exposure I do feel there is a small chance to be wiped out financially, or at least be severely hobbled. The chance of SPY going to zero is almost zero but a 60% or more black swan contraction is possible, albeit remotely possible. I guess if I were 90% cash I would probably be retired right now but in the back of my mind there is this feeling of insecurity that exists regarding vulnerability of my investable assets.

 

[Dtail]

Ahhh, I left out the most important thing and just remembered why I wrote this original topic. People have asked why I'm not retired, why I'm still working, etc. as I'm 66 and well past FI thresholds, trying to be the richest guy at the cemetery (my wife and I love that characterization and have adopted it for me, LOL).

My reasoning is I still have a bit of imposter syndrome in me being 10-90 fixed-income:equities. With such a high equities exposure I do feel there is a small chance to be wiped out financially, or at least be severely hobbled. The chance of SPY going to zero is almost zero but a 60% or more black swan contraction is possible, albeit remotely possible. I guess if I were 90% cash I would probably be retired right now but in the back of my mind there is this feeling of insecurity that exists regarding vulnerability of my investable assets.

Not many on THIS site would keep working at age 66 with 8m in investment assets.
You are worried on both sides of the equation, so might as well keep working.

 

[youbet]

Is this thinking flawed?

Yes, because it begins with the "100 - age" rule.

 

[pb4uski]

I think about it differently. Let's say that at 1xFI your withdrawal rate would be 4%. At 2xFI it would be 2% and at 4xFI it would be 0.5%.

At a WR or 2% or less you have clearly "won the game" so whether you were 0/100 or 100/0 portfolio survivability is still 100%. So at that point, just pick the number between 0/100 and 100/0 that you prefer... it doesn't really matter.

At 2% WR or less you can take more risk... or you can take no risk... it is all up to you and there is no wrong answer.

Unless you really want to be the richest guy in the cemetery, in whcih case 100/0 is more likely to achieve your goal.

 

[pb4uski]

Above post says 06:42pm but my laptop and phone say 4:42pm. I'm in Texas so CST, but even adjusting for the 1 hour difference between CST and EST that would be 5:42pm not 6:42pm.

Enquiring minds want to know why

Is the posting time based on EDT rather than EST?

 

[Route246]

Just corrected my timezone. For some reason it was CST and should have been PST. Probably happened when I enrolled. These forums are international so I never paid attention to time zone before.

Above post says 06:42pm but my laptop and phone say 4:42pm. I'm in Texas so CST, but even adjusting for the 1 hour difference between CST and EST that would be 5:42pm not 6:42pm.

Enquiring minds want to know why

Is the posting time based on EDT rather than EST?

 

[REWahoo]

Above post says 06:42pm but my laptop and phone say 4:42pm. I'm in Texas ...

So am I and I'm sure you know a lot of folks in positions of authority see things differently here. Maybe that includes time?

FWIW, according to my computer I'm posting this at 5:67pm.

 

[pb4uski]

So am I and I'm sure you know a lot of folks in positions of authority see things differently here. Maybe that includes time?

FWIW, according to my computer I'm posting this at 5:67pm.

I think you mean 5:57 pm.

 

[TickTock]

I'm 66 and well past FI thresholds

My reasoning is I still have a bit of imposter syndrome in me being 10-90 fixed-income:equities. With such a high equities exposure I do feel there is a small chance to be wiped out financially, or at least be severely hobbled.

Ability to assume risk and tolerance for risk are two different things. It sounds like you have the first, but not the second (at least at a 10/90 AA - maybe yours is somewhere between 60/40 and 10/90).

 

[Route246]

I think that is a very accurate assessment. I am not an active trader and tend to be set and forget, hence my propensity to put as much as possible in SPY-like funds and ETFs. I am enjoying 5.35% 3-month laddering of some cash now but I'm guessing when rates drop I'll lose interest (literally and intellectually) and have to find other fixed income methods.

Not complaining about anything, very appreciative of my current situation, BTW. We are also in a redo period for our family trust so the will clauses part of it is taking up quite a bit of thought regarding corner cases (early death of one or both of us, tax code changes, spendthrift heirs, etc.).

Ability to assume risk and tolerance for risk are two different things. It sounds like you have the first, but not the second (at least at a 10/90 AA - maybe yours is somewhere between 60/40 and 10/90).

 

[Lsbcal]

Ahhh, I left out the most important thing and just remembered why I wrote this original topic. People have asked why I'm not retired, why I'm still working, etc. as I'm 66 and well past FI thresholds, trying to be the richest guy at the cemetery (my wife and I love that characterization and have adopted it for me, LOL).

My reasoning is I still have a bit of imposter syndrome in me being 10-90 fixed-income:equities. With such a high equities exposure I do feel there is a small chance to be wiped out financially, or at least be severely hobbled. The chance of SPY going to zero is almost zero but a 60% or more black swan contraction is possible, albeit remotely possible. I guess if I were 90% cash I would probably be retired right now but in the back of my mind there is this feeling of insecurity that exists regarding vulnerability of my investable assets.

You are probably a rational guy but not about this. If you want to be retired just adjust AA to the right level and retire. One in your position has to balance greed and fear. Actually we all have to do that.

Else keep doing what you are doing.