Considering reducing equities?

[Lsbcal]

I've been asking myself for some time if I should move from an AA of 65/35 stocks/bonds to 50/50. Below is a useful table from Vanguard which is figure 2 in this link: https://personal.vanguard.com/pdf/s705.pdf.

The data in the centerline of those bars is the real return history. For a reduction from 65% to 50% equities, it says that real returns might be reduced roughly by 0.6% per year. Since bond and stock returns could be muted over the next 10 years or so, this is perhaps a bigger factor then it appears. That is one possible downside.

Looking at the VPW calculator tool I'm more convinced now that we personally have quite enough to enjoy life. Using a bond strategy like I outlined in one thread recently (variable maturity strategy) gives me some confidence I can get decent fixed income results over a period of several years.

Thoughts?

 

[Senator]

The economy is strong, and getting stronger. I am still in equities.

 

[dtbach]

The economy is strong, and getting stronger. I am still in equities.

+1 November to April is generally a good period for stocks. Wait until March and start taking profits then.

 

[haha]

I've been asking myself for some time if I should move from an AA of 65/35 stocks/bonds to 50/50. Below is a useful table from Vanguard which is figure 2 in this link: https://personal.vanguard.com/pdf/s705.pdf.

The data in the centerline of those bars is the real return history. For a reduction from 65% to 50% equities, it says that real returns might be reduced roughly by 0.6% per year. Since bond and stock returns could be muted over the next 10 years or so, this is perhaps a bigger factor then it appears. That is one possible downside.

Looking at the VPW calculator tool I'm more convinced now that we personally have quite enough to enjoy life. Using a bond strategy like I outlined in one thread recently (variable maturity strategy) gives me some confidence I can get decent fixed income results over a period of several years.

Thoughts?

I think it is prudent idea. No clue as to timing, etc, just the overall plan. I unfortunately do not have my prudence genes working very well, but I admire it in others.

Ha

 

[ejman]

When I ER'd back in 2003 I moved to a 50/50 split having determined at that time that the "pile" should be sufficient to continue our normal standard of living with that allocation. 12 years latter no regrets. The return would have been higher with a higher equity allocation but our standard of living would have been no different and the sleep well factor would have been seriously impacted particularly 2008-2009. Not worth it.

 

[youbet]

When I ER'd back in 2003 I moved to a 50/50 split having determined at that time that the "pile" should be sufficient to continue our normal standard of living with that allocation. 12 years latter no regrets. The return would have been higher with a higher equity allocation but our standard of living would have been no different and the sleep well factor would have been seriously impacted particularly 2008-2009. Not worth it.

I've also been running an approximate 50/50 split, in my case since 2006. It's working the same way for me as for you. We kept our spending level constant right through 2008-2009 and it has worked OK.

I realize that going forward, a 50/50 split could be the dumbest thing ever, or not. You pay your money, you take your chances. I lack the conviction to be either equity or bond heavy........

 

[Helen]

I've been pondering this recently too. My asset allocation target is 50/50, but we are now at 65/35 stocks/bonds. My tax deferred space is filled with G fund and bonds and we've already purchased I-bonds for the year. I will have to sell stocks out of the after tax accounts and find somewhere to put the money that will not increase my income. I do not want to create anymore more income for 2015 due to my ACA subsidies.

I know this is a good problem to have and I remind myself of that when I start to get stressed. I might just let this ride until 2016 when I will lose the ACA subsidy due to a pension that will begin.

Lsbcal, if I could move to a 50/50 stock/bond allocation without creating taxable events I would do so. But that is because 50/50 is the allocation I had planned on.

 

[heeyy_joe]

I double-dog dare 'ya.

 

[Readyforachange]

My target allocation is 50/50. The chances of success for that allocation do not seem to be significantly lower than for say 65/35 in FIREcalc. A higher stock allocation does have the potential to generate a higher balance at the end. But I have no heirs, so for me a smoother ride in retirement is more important than being the richest corpse in the cemetery.


Sent from my iPad using Early Retirement Forum

 

[W2R]

I'm not changing my usual 45:55 (equities:fixed) AA, because I was able to stick with it through 2008-2009 so I feel it is battle tested for me.

I do intend to rebalance to that same 45:55 AA on January 2nd. Right now I'm 46:54, so apparently it's not going to be a big deal. No giant sell-off here.

Lsbcal, I'd recommend figuring out what AA you could stick with even though a crash like 2008-2009 and then DCA or value average until you get to it. Then just stay there. As you pointed out, you have enough to live a good life and so maybe the sleep-at-night factor is a bigger deal to you now than it once was (as it is to me).

 

[nash031]

People are bubble-hunting right now. Valuations are high, but not astronomically so. IMO, this bull still has legs. Another 10+% year or so and we might start turning the tide to some irrational exuberance.

In any event, I don't know, thus I'm not changing anything because my time horizon dictates so. (85/15)

 

[audreyh1]

I've been asking myself for some time if I should move from an AA of 65/35 stocks/bonds to 50/50. Below is a useful table from Vanguard which is figure 2 in this link: https://personal.vanguard.com/pdf/s705.pdf.

The data in the centerline of those bars is the real return history. For a reduction from 65% to 50% equities, it says that real returns might be reduced roughly by 0.6% per year. Since bond and stock returns could be muted over the next 10 years or so, this is perhaps a bigger factor then it appears. That is one possible downside.

Looking at the VPW calculator tool I'm more convinced now that we personally have quite enough to enjoy life. Using a bond strategy like I outlined in one thread recently (variable maturity strategy) gives me some confidence I can get decent fixed income results over a period of several years.

Thoughts?

I always looked at picking the AA based on the annual volatility you were willing to tolerate. Since the Trinity/Bengen study, pretty much showed more or less the same portfolio survival at 4% inflation-adjusted withdrawal, from about 40% stocks to about 70% stocks, you can pick your ratio based on other criteria. Your graph is a very useful look at the annual volatility versus long-term average returns tradeoff.

We're sticking with just under 55% equity allocation. We will probably let it drift higher very, very gradually over time, but are not in a hurry to do so since it's been so long since we've had a bear market.

I've decided I can live with the volatility of around 55% equities, and don't feel a need to increase the allocation to equities to improve the long-term gain. At the same time, I don't feel a need to further lower volatility and thus have a lower equity allocation either. Kind of in the middle of the flat section of that SWR versus allocation graph. I have the graph in my head, but never seem to find a link to it when I want to reference it.

I know some folks have picked 70%/75% as their equity allocation in order to maximize their long-term return without sacrificing portfolio survival. Those folks have to live with quite a bit of volatility. Other folks choose 40% equities (or even a bit less), so as to minimize the volatility of their portfolio without sacrificing survival chances. They don't care so much about improving long-term return if it means they have to live with higher annual volatility.

 

[freebird5825]

50/50 has been my comfort zone AA since I FIRED in 2007. I set it and forget it.

No regrets.

 

[Sunset]

Counting my rentals as bonds I'm estimating my allocation is 80/20. (s/b)

I pretty content as the stocks throw off a lot of dividends, and part of my "bond" allocation is really interest bearing cash accounts ( 1.1%), so we have a few years of cash if things dropped a lot, so we could avoid selling stocks.

I think that is the purpose of asset allocation to protect the principle.
I do realize inflation is hurting a bit when one only gets 1.1% interest and pays taxes on it, but that's the price of the insurance of having cash.

I'm open to better suggestions of course.

 

[audreyh1]

My target allocation is 50/50. The chances of success for that allocation do not seem to be significantly lower than for say 65/35 in FIREcalc. A higher stock allocation does have the potential to generate a higher balance at the end. But I have no heirs, so for me a smoother ride in retirement is more important than being the richest corpse in the cemetery.


Sent from my iPad using Early Retirement Forum

Correct.

 

[audreyh1]

BTW - for us stress over the volatility of the portfolio seems to go down as the portfolio grows. Maybe because we instinctively compare it to where we started. So if it has doubled, a 30% drop doesn't seem as scary as it would have during the first year, even though the $$ amount drop is twice as large.

 

[Don46]

My target is 50/50. I've got enough so that I do not need to take risks, but something in me does not want to miss out on equity growth whether I need it or not. Some of my smaller retirement accounts remain in target funds and it gets a little more difficult to determine just what the split is at any given time in those. I probably need to rebalance this January.

 

[Lsbcal]

My target allocation is 50/50. The chances of success for that allocation do not seem to be significantly lower than for say 65/35 in FIREcalc. A higher stock allocation does have the potential to generate a higher balance at the end. But I have no heirs, so for me a smoother ride in retirement is more important than being the richest corpse in the cemetery.

The VPW retirement calculator shows a 0.3% lower spending plan for a 50/50 versus a 65/35 portfolio. For example, with a 50/50 split VPW allows me 5.0% spending next year at my age and 5.3% for a 65/35 portfolio.

This is in line with my conclusions from running FIRECalc i.e. one should spend a bit less if reducing equities in the AA. Reduced spending also makes sense with the lower historical real returns for a higher bond allocation.

I probably won't spend 5.0% next year, maybe closer to 4% with lots of splurging. Still I won't be the poorest corpse in the cemetary.

 

[Lsbcal]

...
Lsbcal, I'd recommend figuring out what AA you could stick with even though a crash like 2008-2009 and then DCA or value average until you get to it. Then just stay there. As you pointed out, you have enough to live a good life and so maybe the sleep-at-night factor is a bigger deal to you now than it once was (as it is to me).

We entered the year 2008 with a 57/43 portfolio and at the low point in 2009 it became 46/54 portfolio. Rebalanced it in July 2009 to 55/45 and then put in some more and set it at 65/35 where it stands now. 2008-2009 was jarring.

Currently we are 9% above the original inflation adjusted 2003 retirement portfolio. Lots of spending over the past 11 years. Inflation was about 28% over that time.

I sleep well but am always going to be a tinkerer and a bit of a worrier. Seems to be in the blood. Going to a lower AA is a combo for me of (1) getting older and so fewer years to spend in, (2) progressively higher valuations in equities since 2009, (3) better knowledge of bonds, and (4) better historically based projection tools i.e. VPW.

 

[Lsbcal]

BTW - for us stress over the volatility of the portfolio seems to go down as the portfolio grows. Maybe because we instinctively compare it to where we started. So if it has doubled, a 30% drop doesn't seem as scary as it would have during the first year, even though the $$ amount drop is twice as large.

Perhaps some of the relaxed feeling on volatility could be associated with "playing with house money"?

At any rate, I agree with yours and others comments about finding the volatility we can live with. My favorite number there is zero. It seems not to be possible in real life. 55/45 sounds like a good AA to me and is one I had back in 2008. That extra over 50/50 is probably not all that meaningful but is an expression of playing it dangerously ... in a safe sort of way.

 

[harley]

My target is 60/15/25 equities/bonds/Real Estate. I'm still working on getting it fine tuned because most of it is in taxable funds and I also don't want to create any major taxable events. But I'm getting there.

 

[Lsbcal]

I forgot that I'd put together a picture of how the markets behaved from 1968 to 1982. This was one of the worst retirement periods in our history including 3 bad recessions and an inflation spike period -- also Vietnam War, Watergate, the Arab oil embargo.

Below is data on how the bond and stock markets did in that period. The "cum bonds" and "cum stocks" columns show the cumulative real returns over those years. You can see that there was really no place to completely hide but bonds were somewhat of a less volatile ride then.

That must have been a very torturous time for people with heavy slants to either stocks or bonds ... but worse volatility indeed for stocks.

.

 

[Kaufmanrider]

I am 60/40. My age -10 in bonds in my IRA. I just retired. If I add my emergency fund (muni ETFs) its more like 55/45.

If i include the value of my gov. pension (as recommended by Mr. Bogle and others) i am probably 15/85.

 

[Options]

One of the most important aspects of determining an AA is one's risk tolerance. For those of us on the cusp of ER, we have sequence of returns to deal with. Pfau recommends the rising glidepath approach (lower equities at beginning of retirement rising gradually from there). Criticism of his approach is it fails to take into account an older retiree's comfort with an 80% equities PF. Cotton recommend also recommends lower equities during early retirement years as partial remedy to dreaded sequence of returns risk. Finally, Bernstein recommends taking your chips off the casino table once you've won the game.

For this reason, I will rebalance to 40/60 in two weeks as I ER 3/15. Yes, it's on the lower end of equities allocation, but it is in line with my more conservative risk tolerance and I already have enough fixed income to cover essentials.

 

[ejman]

I forgot that I'd put together a picture of how the markets behaved from 1968 to 1982. This was one of the worst retirement periods in our history including 3 bad recessions and an inflation spike period -- also Vietnam War, Watergate, the Arab oil embargo.

Below is data on how the bond and stock markets did in that period. The "cum bonds" and "cum stocks" columns show the cumulative real returns over those years. You can see that there was really no place to completely hide but bonds were somewhat of a less volatile ride then.

That must have been a very torturous time for people with heavy slants to either stocks or bonds ... but worse volatility indeed for stocks.

.

I think long term high inflation is the real killer. Once annual inflation gets to the 8-10 +% range and stays there for years I feel one's goose is largely
cooked if one is depending on either bonds and/or stocks. I think (hope) the Fed and other western nations central banks have learned from past experience.