Another AA Question

[Cantwaitanylonger]

I am in a transitional phase right now and have been re-considering my current AA. I know that I am going to get lambasted for this but my AA has always been 100% in index funds, small, mid, and large cap. I am 57 with no debt and have never ever owned any bonds. My overall assets are approximately as follows:

Investible: 850K (all in index funds)
Own Home: 800K
Duplex: 200K
Cash: 50K

I know that I am bucking conventional wisdom and should have about 40% in bonds but I get the best returns in equities. My question is this: If you can afford the ups and downs of the market, why wouldn't you just keep all your money in equities - regardless of your age?

 

[REWahoo]

My question is this: If you can afford the ups and downs of the market, why wouldn't you just keep all your money in equities - regardless of your age?

It isn't the ability to "afford" the ups and downs of the market that makes me want to own bonds, it's the ability to sleep at night when those downs occur. Plus, it looks like I've already won the game and I see no reason to try to run up the score.

To each his own when it comes to AA.

PS: Note you have cash and real estate, so even you don't have all your money in equities.

 

[easysurfer]

Let's just say if the market tanks, can you stomach the downturn?

 

[audreyh1]

I am in a transitional phase right now and have been re-considering my current AA. I know that I am going to get lambasted for this but my AA has always been 100% in index funds, small, mid, and large cap. I am 57 with no debt and have never ever owned any bonds. My overall assets are approximately as follows:

Investible: 850K (all in index funds)
Own Home: 800K
Duplex: 200K
Cash: 50K

I know that I am bucking conventional wisdom and should have about 40% in bonds but I get the best returns in equities. My question is this: If you can afford the ups and downs of the market, why wouldn't you just keep all your money in equities - regardless of your age?

Are you retired or retiring soon?

I was almost 100% equities while wotking, but shifted to 60% within a couple of years of retiring. One modest home, but no other real assets.

It's the sleeping at night when you have no paycheck.

Plus, mixed portfolios with equities 45% to 80% out survive 100% equity portfolios. Having asset diversity and being able to rebalance during downturns gives you an advantage!

 

[Cantwaitanylonger]

I am currently job hunting (very close on one, will probably accept offer tomorrow) and would like to work for 2 more years to get me to 59.5.

I am not a very accomplished investor by any means and have done pretty well over the last 15 years by keeping my stash in equities. I'm just wondering if I am a complete fool by continuing this thought process.

 

[Big_Hitter]

My question is this: If you can afford the ups and downs of the market, why wouldn't you just keep all your money in equities - regardless of your age?

because you need other investments to create the optimal risky portfolio - the one that maximizes returns with the least amount of risk

 

[frankbrenowitz]

Go back and read REWahoo's response. You are not all equities, not by a long shot. Over half of your net worth is concentrated in real estate, and you also have cash. And that's all OK, but it is misleading to yourself and others to say you are 100% equities. The more significant question is what bucket of assets you plan on using to fund your retirement. If it is solely the $850k you have in equities, how will you feel when a 2008-2009 comes along and it is now $425k? If you can ignore that kind of swing, then go for it. I was 100% equities during the Great Recession, lost about 50% of my portfolio, and just kept on contributing. (Full disclosure: I didn't know anything except I wasn't going to lock in a loss.). The portfolio has recovered and a whole lot more, but about three years ago I discovered this site (and Bogleheads), adjusted my AA by degrees over a period of time and I sleep much better. YMMV

 

[pb4uski]

I was 100% equities until I was in my late 40s.... I then started directing my contributions to bond funds and then later did a little rebalancing to get to my current 60/40 AA. Slow and steady wins the race.

 

[FREE866]

It really depends on your time frame and based on your age you have a very long one. Bonds woefully underperform stocks in the long run.

30 year rolling returns
stocks: 2,509%
bonds: 524%
source:global financial data, inc

 

[ERD50]

... I'm just wondering if I am a complete fool by continuing this thought process.

I don't think so, as long as you are aware of the pros/cons.

The people who wail about a 50% drop in the market fail to point out that is a drop from a high. A high that they would not have experienced had they not had a heavy equity exposure. So it really isn't a valid comparison.

A better comparison is to model investing steadily for 25 years. Compare portfolios of 50/50 and 100/0 for all historical 25 year periods. Who generally has the most money at that point? Are the equities far enough ahead to withstand a 50% drop? That will get you closer to an answer (except we can't count on history repeating itself either).

-ERD50

 

[Accidental Retiree]

I am currently job hunting (very close on one, will probably accept offer tomorrow) and would like to work for 2 more years to get me to 59.5.

I am not a very accomplished investor by any means and have done pretty well over the last 15 years by keeping my stash in equities. I'm just wondering if I am a complete fool by continuing this thought process.

Good luck!

 

[gayl]

I am in a transitional phase right now and have been re-considering my current AA. I know that I am going to get lambasted for this but my AA has always been 100% in index funds, small, mid, and large cap. I am 57 with no debt and have never ever owned any bonds.

OMG I could have written this! Except I did ETFs and individual stocks .... recently added 5% tax-free California municipals. The bottom line is as long as you sleep well at night and you can afford to ride the ups and downs then you're fine IMHO

 

[frankbrenowitz]

I don't think so, as long as you are aware of the pros/cons.

The people who wail about a 50% drop in the market fail to point out that is a drop from a high. A high that they would not have experienced had they not had a heavy equity exposure. So it really isn't a valid comparison.

A better comparison is to model investing steadily for 25 years. Compare portfolios of 50/50 and 100/0 for all historical 25 year periods. Who generally has the most money at that point? Are the equities far enough ahead to withstand a 50% drop? That will get you closer to an answer (except we can't count on history repeating itself either).

-ERD50

Actually, it is a valid comparison. The OP is 57 and wants to retire in two years. How does he plan to source the next 40 years of retirement? The fact that the portfolio would not be at $850k today unless he had taken a 100% equity position for a lot of years is wholly irrelevant to the question at hand. What matters is that if he needs the full $850k GOING FORWARD to fund a satisfactory retirement he is at grave risk. "Steadily modeling" investing over 25 years is of zero value to a soon to be retiree exposed to sequence of returns risk. OP needs to ask what his income sources will be in retirement and the stability of the cash flows. And if he needs the cash flow that $850k is expected to generate, he will be really unhappy if the risk shows up and his portfolio is now $425k.

 

[ERD50]

Originally Posted by ERD50 View Post
I don't think so, as long as you are aware of the pros/cons.

The people who wail about a 50% drop in the market fail to point out that is a drop from a high. A high that they would not have experienced had they not had a heavy equity exposure. So it really isn't a valid comparison.

Actually, it is a valid comparison. The OP is 57 and wants to retire in two years. How does he plan to source the next 40 years of retirement? The fact that the portfolio would not be at $850k today unless he had taken a 100% equity position for a lot of years is wholly irrelevant to the question at hand. What matters is that if he needs the full $850k GOING FORWARD to fund a satisfactory retirement he is at grave risk. "Steadily modeling" investing over 25 years is of zero value to a soon to be retiree exposed to sequence of returns risk. OP needs to ask what his income sources will be in retirement and the stability of the cash flows. And if he needs the cash flow that $850k is expected to generate, he will be really unhappy if the risk shows up and his portfolio is now $425k.

I agree with you that at this point, OP needs to look forward, that is what is relevant.

But it is still worth keeping in mind my point about the drops being from highs in equities, a high that would not have been reached w/o those equities. It's where you end up that matters.

I think there is another thread about the age/bonds rule - and I think there were some good ideas there - basically, if you consider a 50% drop in equities to be about the most you expect, plan your AA based on that (making the simplification that a broad-based bond fund would pretty much hold its value). So if a 25% drop was all you could stomach, use a 50/50 AA to plan for a 50% drop.

We never know where things are going, but I think that's about as reasonable a plan you can make among these uncharted waters.

-ERD50