Anyone comfortable with 100% stock?

[amt]

Hi

I hope my question this time wouldn't stir up to produce 16 pages of discussion. My question is this:

Would any of you be comfortable with well diversified 100% stocks/stock funds? If your initial reaction is NO, what if you can withdraw at less than 2%? Say, 1.5% or 1.2%? I think I would like 100% stock if I can live with about 2% annual draw. The reason is that by having 100% stock, the likelihood of your ability to increase the real withdrawal in the future is enhanced since the growth potential is higher. To quote intercst,

"TIPS allow a retiree to enjoy a smoother ride at some cost to the terminal value of the portfolio. Retirees in need of a 4% withdrawal (or more) may find this attractive. Retirees who can live comfortably on much less than a 4% withdrawal rate (say 1% to 3% of assets) may want to play the odds and stick with a mostly stock portfolio to maximize its value over time. These flush retirees already enjoy protection against stock market volatility completely depleting their retirement portfolios by virtue of a lower withdrawal rate."

http://www.retireearlyhomepage.com/novtips.html

The other reason I like it is its simplicity. You don't have to rebalance.

Regards,
amt

[cute fuzzy bunny]

Well, you'd have to like volatility, there are some periods of history where stocks just did horribly for a VERY long time, and at 75% and higher you're buying a lot more risk than you are return.

But if you arent withdrawing or are withdrawing at a very low rate, can stand seeing 30-70% of your money disappear over a 1-3 year period, and will take that level of churning for an extra percent or two of total return, yes you can get to leave $6-8M to charities after you're dead rather than just a couple of mil.

Hello amt! Good post.

I won't pontificate on this as you have all heard it before. Personally, at my age and situation,
I would not own any stocks
no matter what withdrawal rate I could live with.
Not unless I had a crystal ball that is

John Galt

[Hyperborea]

Quote:

Would any of you be comfortable with well diversified 100% stocks/stock funds? *If your initial reaction is NO, what if you can withdraw at less than 2%? *Say, 1.5% or 1.2%? *I think I would like 100% stock if I can live with about 2% annual draw.

If you could really live just fine with a 2% withdrawal then why not retire when you had approximately half the portfolio with a "standard" 4% withdrawal?

Quote:

The other reason I like it is its simplicity. *You don't have to rebalance.

Sure you would. At least if you wanted to maintain that "well diversifed" portfolio.

[wabmester]

Why bother with 100% stocks? Just put it all on either red or black, like this guy:

http://story.news.yahoo.com/news?tmp.../people_bet_dc

Seriously, if you can live on less than 2%, why wouldn't you go with a 100% TIPS portfolio? You'd never have to worry about volatility or running out of money (unless your personal inflation rate is much higher than the CPI-U).

[unclemick]

!00% stocks - absolutely. I'm slogging thru my DRIP stocks - getting ready for the tax account at 11 am tomorrow. Ballpark 4.69% yield mainly because of such barnburners as con ed, Gabelli conv. closed end, new plan reality. The exxon mobils, sbc, eli lilly, aetna, and others drag down the yield a bit. Have 44 of those suckers picked up over the last 13 years as a hobby. Basically did not outperform my balanced index. Plan to whittle them down to 15 -20 stocks and maybe go back to fishing. Yes it can be done and if you enjoy - go for it. Marked to market about 16% of 'my' portfolio.

[charlie]

There is a good chance that stocks will not
outperform bonds in the future. Why put all
your eggs in one basket? If you want simplicity,
put your money in one of Vanguard's balanced
funds and live off of the dividends.

Cheers,

Charlie (aka Chuck-Lyn)

[Billy]

I have no problem with it, and have been for years.

Billy
Web-site http://www.geocities.com/ba264

[sgeeeee]

Quote:

Hi I hope my question this time wouldn't stir up to produce 16 pages of discussion. *My question is this: Would any of you be comfortable with well diversified 100% stocks/stock funds? *If your initial reaction is NO, what if you can withdraw at less than 2%? *Say, 1.5% or 1.2%? *. . .

I'm not inclined to go that far myself, but we discussed this over on the MSN boards a few months ago. I think it could make sense for some people. I think a lot of people who use FIRECALC and intrcst's Safe Withdrawal Calculator tend to become too focused on SWR and pay too little attention to terminal value. Higher stock allocations increase the probability of achieving higher terminal values. Now . . . you don't really want higher terminal values, but this is an indicator of your 1) probability to safely increase your withdraw rates in the future, 2) protection against soaring inflation, and 3) protection against outliving your portfolio.

More information and plots
Posts:
http://groups.msn.com/REHPDiscussion...45829492649920

http://groups.msn.com/REHPDiscussion...57253341200823

SWR plot:
http://groups.msn.com/REHPDiscussion...hoto&PhotoID=7

Terminal Value plot:
http://groups.msn.com/REHPDiscussion...hoto&PhotoID=8

[wabmester]

OK, everybody knows that if you put a dollar in the stock market 100 years ago, you'd be a zillionaire today. * Of course, the future may be different, and what you really want to know is what your outcome probability distribution looks like. * This is where monte carlo is more appropriate than looking at historical sequences.

You should be asking yourself: self, what is the probability that I would do piss-poor with a long-term all-stock portfolio?

Here are some simulated results that tell you what you need to know (namely, that there's about a 33% chance of doing only so-so, and about a 16% chance of doing poorly):



From:
http://homepage.mac.com/j.norstad/fi...-and-time.html

[amt]

Quote:

If you could really live just fine with a 2% withdrawal then why not retire when you had approximately half the portfolio with a "standard" 4% withdrawal? Sure you would. *At least if you wanted to maintain that "well diversifed" portfolio.

Why not 4%? We may be looking at 50+ yrs of horizon.

"well diversified" 100% stock funds, sure; you can still diversify among the stocks without adding bonds.

[amt]

Quote:

*If you want simplicity, put your money in one of Vanguard's balanced funds and live off of the dividends. Cheers, Charlie (aka Chuck-Lyn)

The VFINX will give one a dividend of about 1.5% to 2%. So, if one can live off that much/little withdrawal, then the capital should be preserved for ever (or at least til WW3).

[amt]

SG

Thanks for the links.

[wabmester]

Quote:

The VFINX will give one a dividend of about 1.5% to 2%. *So, if one can live off that much/little withdrawal, then the capital should be preserved for ever (or at least til WW3).

You must know something about the timeline for WW3 that I don't know

If the dividend yield continues to decline at the rate it has been, it'll be about 0.375% in 20 years.

Of course, the 50-year average dividend yield in real terms is less than zero, which makes capital preservation hard to do even in historical terms.

[Nords]

Amt,

I don't have any more data to add beyond SG's thorough job, but let's try some thought experiments & gut checks.

If a 4% SWR supports your lifestyle, you probably don't need more. If a 2% SWR supports your lifestyle, you definitely don't "need" more. If we're greedy enough to want more, why not go back to work for a sure-fire salary and earn our way to richness? Does being INTJ left-handed engineers makes us want to go to the economic equivalent of Las Vegas?

With a 100% stock portfolio, it sounds like you're saying that (1) you wouldn't mind re-living the last four years all over again with 100% stocks and (2) you don't think the last four years will happen all over again anytime soon.

Both Bernstein & Armstrong show the yield/risk (volatility) curve is pretty flat past 70% stock. It's a lot more volatility for not a lot more yield. And that's based on the last seventy years or more, but what if it turns out that the next seven decades are dominated by bonds & real estate? What if your stock holdings are metaphorically the equivalent of a 100% gold bullion portfolio-- and it's 1982 all over again?

You should still rebalance. If nothing else, you'll need to rebalance the small value against the large value. If a particular fund catches fire, you'll want to sell its profits and buy more of your portfolio's laggards. And if, heaven forbid, those laggards turn into losers then you'll want to sell them for better funds in your diversification categories. It might be "buy & hold" but it's certainly not "buy & forget". I prefer "buy to hold".

I interpret John Greaney's "mostly stocks" post to mean "more than 50%". I don't think the endorsement carries beyond 70%, and again "playing the odds" to "maximize the value" is anticipating that past will represent future. He's not predicting anything of the sort. Greaney's strategy recommendation is designed to minimize the risk of volatility depleting the portfolio-- not to maximize the "opportunity" for that same volatility symmetry to make us all as rich as Warren Buffett. But hey, ask John yourself. Buy a ticket to Omaha and ask Warren too.

Speaking of Buffett, it speaks volumes that five years ago Berkshire Hathaway was mostly stocks and today it's mostly companies. He's also sold much of his stock & bond holdings and is sitting on a truly legendary pile of cash. He's even questioned his wisdom in holding on to Coke! Some of the stocks that he does hold are 70-90% unrealized cap gains. By that I mean that his original investment has increased by a factor of at least two and as much as 10... hardly a risk of losing his principle. Contrarian investing has shown time & again that he does this with a reason. If you're sitting on a pile of unrealized capital gains then I wouldn't necessarily sell down stocks either, but I wouldn't rush out to acquire a 100% stock portfolio.

FWIW, I'm not sold on bonds either, especially with today's interest rates. I'd like to see an analysis of holding stocks & cash with no bonds. In our case, we're holding two years' expenses in cash and we're gradually building up a few more portfolio percent in five-year CDs. (We don't see any stocks or ETFs worth buying.) If stocks lead the market, we'll be skimming those profits to replenish the cash stash. If stocks lag, then we'll have at least a few years' cushion to hope for a recovery. (And "hope" is the only sensible word for holding 100% stocks in that environment.) Although 30% of our portfolio is Berkshire Hathaway and another 30% is Tweedy, Browne Global Value, we keep a separate rental home (not part of the retirement portfolio) and we're waiting for an opportunity to expand our real estate holdings. At this point it looks like we may be waiting for another decade, but we're not going to rush in.

[wabmester]

Quote:

I'd like to see an analysis of holding stocks & cash with no bonds.

What kind of analysis would you like, Nords? The whole idea of asset allocation is to exploit negative correlation to reduce volatility without reducing returns. Cash has zero correlation with everything else, so all it does is dampen returns and volatility equally.

[sgeeeee]

Quote:

. . .You should be asking yourself: self, what is the probability that I would do piss-poor with a long-term all-stock portfolio? Here are some simulated results that tell you what you need to know (namely, that there's about a 33% chance of doing only so-so, and about a 16% chance of doing poorly):

You definately need to ask that question too. Although I don't think that FIRECALC gives you the terminal value distribution easily, intrcst's Safe Withdrawal Calculator shows the the decile breakdown for the terminal value.

But the SWR that is predicted for a 100% stock allocation and 30 years is almost 3.9%, so even the poorest performance historically isn't that poor. Monte carlo is a poor choice to look at worst case because it does not include important correlations and those omissions will tend to produce results that are more pessimistic than reality.

The original question assumed a 2% withdrawal rate was satifactory, so playing the odds to build a bigger nest egg may be worth it to some. In addition, many people who have significant social security and pension benefits may have even more reasons to move toward 100% stock allocations.

I'm not reccommending it to everyone, and I'm not planning on doing this myself (even though my initial withdrawal rate is well below the 4% level). But there are reasons why some people might find this strategy reasonable.

[sgeeeee]

Quote:

. . . * * If a 4% SWR supports your lifestyle, you probably don't need more. *If a 2% SWR supports your lifestyle, you definitely don't "need" more. *If we're greedy enough to want more, why not go back to work for a sure-fire salary and earn our way to richness? *Does being INTJ left-handed engineers makes us want to go to the economic equivalent of Las Vegas? . . .

A lot of ER's seem to feel this way. They only need $XX,XXX per year so why seek more. There's certainly nothing wrong with that. It certainly doesn't make sense for those people to take on any additional risk to achieve upside potential beyond their plans.

But if I had 10 times more money than I have now, I would have no problem finding ways to spend it that would add enjoyment to my life.

Why don't I go back to work and earn it? Because I would hate working for that much longer more than I would enjoy the extra money. I will enjoy my retirement at the income level I am planning on. But just because I would rather be retired at this income level than to work another day, doesn't mean I wouldn't find ways to add to my enjoyment if I happened to get a windfall from stock investments.

[wabmester]

Err, well, I don't want to rehash a certain recent *long* debate, but perhaps we can agree on this:

The original poster mentions a 50-year horizon. That means that the historical data of FIREcalc and friends contains 2 statistically independent sequences out of a million-billion "possible" sequences. Granted, that million-billion set of sequences gets reduced if you put more realistic constraints on the simulation. But the point is that you'd want *many* more than 2 sequences to give you a useful probability distribution of terminal values. Even if you believe that statistical independence doesn't matter (HA!), you'd still want more than 100 overlapping sequences to get a good end-point distribution.

My increasingly ellusive point is this: people seem to be under the mistaken impression that there's a 100% chance of a good outcome the longer you play the game. That simply isn't so. The 100% stock portfolio game isn't just a matter of enduring mind-numbing volatility, it's also accepting the very real possibility of a bad long-term outcome.

[unclemick]

Lies, dam lies, and statistics per Mark Twain. Didn't the killer app start with vis calc around 1981? My background is goo and stick(chemistry) - heat shields and adhesives and a lot of make em and break em (test articles) so I view stat/predictions with a grain of salt.

Bernstein's buddy - Angus Maddison makes charts of countries GDP, etc - so I infer much bigger problems than stocks/bonds will show up first - remember the history of the Argentine, Egyptian stock markets?

If you go 100% stocks - I think picking one company at a time makes sense (no mutual funds). I choke on Charlie Munger's thought that one good stock could fund a company's retirement plan.

Chickenheart that I am, 70-80% balanced index(modern version of the 1929 Wellington idea in my mind) and putzing on with my dividend oriented DRIP stocks - it's a hobby and a 'male thing'.

Bernstein's - 15 Stock Diversification Myth- is there to remind me 1 in 6 odds of beating Mr Market. Hope springs eternal - it only takes one good stock.

In 100% stock land - one should read Buffett to pan diversification, rebalancing, market value, even dividends and all that modern junk.