Considering an Aggresive Move

[fireby40]

I'm 31 and have another solid decade of corporate drudgery ahead of me... I'm seriously considering swapping some or all the 25% of my portfolio that is in bonds for equity index funds. Yes, risky, but time is on my side, and I can't help but think that the long term upside outweighs the risk.

Note: all of the money in question is tax-deferred.

Please give me a sanity check!

[W2R]

If you are considering doing it because you think the market has hit the bottom and will head up shortly, that is market timing. I have found that market timing is more often disadvantageous than not, and I would suggest that you should not make this move.

If you are doing it because you are adjusting your asset allocation permanently for other reasons, and would be doing it for the long term even if the market were to sink and stay down for years more, then I would say to go ahead and do it.

I carried 100% equities for a time during my accumulation phase so I can't say you would definitely be wrong to do it. It is quite a rollercoaster ride at times, though.

[dex]

It might be helpful to know your asset allocation.
A couple of other suggestions.
Change future contributions to equity funds.
And/or have the direct the interest on the bonds to equity funds instead of reinvestment.

[plex]

I am a bit younger, but I am 100% equities, about 55% total stock market with a 45% small-cap value tilt. Started out 90/10 when the market seemed to be still in positive territory and I didn't have enough money to properly meet the minimums for the 100% allocation I wanted. Finally got enough to meet the fund minimums and also the current market seemed like a good time to make that switch.

I think now is a good time to adjust your allocation, as long as you have an emergency fund and a stable job (and of course a strong stomach), there is no reason not to increase your risk/return over the long term.

How exactly you implement it though will depend on the types of funds you have, it is simple when dealing with just a switch with a tax-deferred/tax-free account, but somewhat more complicated with a taxable, since it requires minimizing taxes/capital gains as much as possible.

[tryan]

There aren'y too many 31 yo who should have bonds IMO ... 100% equity is pretty safe at your age.

[2B]

Last August I switched from 90/10 to 60/40 when I realized I was truly FI and didn't want to screw it up. In retrospect, that was a good time to switch. The 10% fixed/cash was a solid emergency fund but definitely not enough to provide any stability in a solid bear market like we've run into now.

My extensive experience with market timing is all bad. I learned long ago that I'm always too bullish for my own good. I''d recommend an asset allocation that fits your risk appetite and provides the best path to FIRE. Before you go all equities, ask yourself how you'd feel/react if the market dropped another 20%?

[ats5g]

Sanity Checks:

#1) Time Diversification and Horizon-Based Asset Allocations

#2) Bodie vs Siegel debate

#3) What Practitioners Need to Know about Time Diversification

Feel free to increase your % to include more equities if you can:

1) work longer past your planned retirement age, and/or

2) increase the amount you save to make up for bad returns

- Alec

[fireby40]

A little more information:

Yes, I am trying to time the market because long term I do believe in holding at least 20% bonds prior to FIRE. (Thanks for forcing me to acknowledge this.

Allocation is roughly:
25% bonds
25% sp500
25% eafe
15% completion index
10% company stock (oil major)

Virtually all my portfolio is in my 401k, and I set the contributions to go to 100% equities a few months back.

If I pull the trigger I will move evenly into the indexes.

All in all your (excellent) responses reflect my sentiments-- I am trying to time the market (bad), but with such a long time horizon, why the heck not.

I think all this leads to a fairly logical conclusion-- If I do this I should handle it as a long term change to aa, lowering to say 15% bonds. I'll then hold that for some years until my risk appetite declines... I think I'm convincing myself.

[Animorph]

I'm usually 100% equities. My option was to go 25% company stock when the price was severly depressed. I lucked out twice doing that.

Timing is OK, especially now. You must commit to staying in equities until they recover. You don't want to trade in now, watch it go down 10% and then exchange back into bonds with a loss.

If you can handle that, then go in in steps. Maybe 1/3 now, 1/3 more if the market goes down another 5% and the final 1/2 if the market goes down 10% from the current level. You want to do something similar as the market recovers if you want to return to your original AA. The exact numbers are not that important, but you should have a plan and stick to it. Then you know what to do if the market is down or up and there is no need to worry about what it is doing next.

[Gone4Good]

Dirty market timer.

I've thought of adjusting asset allocations (within a reasonable band, say +/- 10%) based on market performance. Move the equity allocation down after long bull runs and move it up in bear markets. Seems to me that should lower the overall portfolio risk.

[Zoocat]

For a contrary view, you really ought to do some research on what the market bears are saying now. Some are predicting a huge market drop to DOW 8,000. My own conservative market advisor said he wouldn't be surprised if the market dropped another 15% if we go into a tough recession. I think many investment managers are staying very small with their equity allocations right now.

[plex]

Here is the breakdown of an investment advisers priorities:

1) Get as large of a % of someone investments as they can
2) Avoid huge drops in the portfolio, to avoid losing clients and to protect priority #1
3) Get the best return after meeting #1 and #2

[fireby40]

Quote:

Originally Posted by Animorph I'm usually 100% equities. My option was to go 25% company stock when the price was severly depressed. I lucked out twice doing that. Timing is OK, especially now. You must commit to staying in equities until they recover. You don't want to trade in now, watch it go down 10% and then exchange back into bonds with a loss. If you can handle that, then go in in steps. Maybe 1/3 now, 1/3 more if the market goes down another 5% and the final 1/2 if the market goes down 10% from the current level. You want to do something similar as the market recovers if you want to return to your original AA. The exact numbers are not that important, but you should have a plan and stick to it. Then you know what to do if the market is down or up and there is no need to worry about what it is doing next.

Animorph - I think you're dead on.

OK, I'm going to bite the bullet and go for it. I'm going to mull it over a bit to nail down the details, i.e., just what percentage (probably still going to stick with 10% bonds) and in what increments.

The long term upside just outweighs the risk. Thanks everybody!

[copyright1997reloaded]

Quote:

Originally Posted by fireby40 Animorph - I think you're dead on. OK, I'm going to bite the bullet and go for it. I'm going to mull it over a bit to nail down the details, i.e., just what percentage (probably still going to stick with 10% bonds) and in what increments. The long term upside just outweighs the risk. Thanks everybody!

Disclaimer: Going 100% equity might be the best move you could make. Which is another way of saying I have no idea what is going to happen next week or next month or ...

Devils Advocate: Go back and look at some charts in the 1929-1933 era. Imagine yourself back then with the market down 22-25%, when you took the remainder of your fixed income and went all-in. Then watch what happened after that. To put it in perspective, the dow went from 381.17 during the 29 peak to a low of about 41.22 1933. That's 89% DOWN from the peak. (Well, look at the good side...if you were indexed you would still have 11% of your capital left.)

Devils Advocate 2: The market was calmed back then (for a month or so) when short selling was prohibited (in November 1929 if I remember correctly). Also, the Home Owner's Loan Corporation act of 1933 did not prevent the depression (as measured by the stock market) from worsening, although by the time it was enacted most? of the damage had been done.

[Finance Dave]

Quote:

Originally Posted by fireby40 A little more information: Yes, I am trying to time the market because long term I do believe in holding at least 20% bonds prior to FIRE. (Thanks for forcing me to acknowledge this. Allocation is roughly: 25% bonds 25% sp500 25% eafe 15% completion index 10% company stock (oil major) Virtually all my portfolio is in my 401k, and I set the contributions to go to 100% equities a few months back. If I pull the trigger I will move evenly into the indexes. All in all your (excellent) responses reflect my sentiments-- I am trying to time the market (bad), but with such a long time horizon, why the heck not. I think all this leads to a fairly logical conclusion-- If I do this I should handle it as a long term change to aa, lowering to say 15% bonds. I'll then hold that for some years until my risk appetite declines... I think I'm convincing myself.

If you do this, I'd recommend DCA (dollar cost averaging) into the equities...spread the amount over 6-9 months to protect you if the market goes down further. This also gets the decision out of the "market timing" realm and into more of a "I think I want a different asset allocation" realm.

[cute fuzzy bunny]

Short answer: equities are on sale right now. The sale might go deeper. It might not.

Bonds make no sense for a 30ish person that isnt planning on retiring next year. Right now bonds are a bad bet. Oh...unless the market goes a lot lower over the next year or two.

Studies have shown that more than 80% equities doesnt increase your returns but dramatically increases risk. Less than 20% equities dramatically reduces returns without reducing risk.

[fireby40]

Quote:

Originally Posted by cute fuzzy bunny Studies have shown that more than 80% equities doesnt increase your returns but dramatically increases risk. Less than 20% equities dramatically reduces returns without reducing risk.

This is a good point-- It's been a year or two since I've dusted off my Bernstein books, but I think I recall him making this point. I could still move 5% out of equities... not too dramatic, but it still has some potential upside.

[riskadverse]

Make sure that when you say "you have time on your side" you are looking at your retirement age (fireby40) not a typical retirement age (60+). I personally would wait for the s&p to show some signs of a turn around before becoming too aggressive .

[Hamlet]

I'm 36 years old.

Aside from my emergency/new car/bathroom remodel fund, I am 100% equities.

I periodically have to fight the urge to borrow money to put into equities.

That way leads to the dark side. Pay a little principal on your mortgage as penance.