Increase stocks in AA?

[audreyh1]

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Originally Posted by Chuckanut After the Bear of 73/74 the market did not return to its previous level in real terms until 1993, 20 years after the Bear's paws took its first flesh out of the stock market. I have wondered how an AA of 60/40 (total US market/total US bond) - with re-balancing once a year - would have fared during that time. When I have time I might find one of those sites that looks at past returns and see if I can find out.

It’s very easy to run this specific scenario in Firecalc. You can try different withdrawal (spending) methods. Specify a start year. 1966 is actually the worst starting year. Get a spreadsheet result (or it’s readable as an html file which can be copied and pasted into a spreadsheet).

Total US bond might not be an option. I have used 5-year treasuries because I wanted an intermediate bond type option.

[RunningBum]

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Originally Posted by Dawg52 I'm probably the crazy one as I'm just the opposite. I couldn't sleep well with a 60/40 AA.

See, if I was very light on equities I'd be losing sleep over the profits I was missing out on by being mostly out of the market.

I'm not sure either side really appreciates the other side's perspective, but it shows why it's important to understand your own risk profile in setting your AA, and not letting someone else tell you what it should be.

[OldShooter]

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Originally Posted by RunningBum ... I use an age based AA (I've yet to hear a convincing argument why it's silly or misleading, and btw those target date mutual funds have nothing to do with what I do), but I may get to a point where I stop letting my equity position drop. ...

Since I"m the one that used the word "silly" I'll comment. What I think is silly is to blindly follow formulas like "age = %in fixed income" or "120-age is the correct equity %." My standard example:

Two widows, 70YO with parents who lived into their 90s, both needing to supplement their SS. So, same AA? The formulas say yes. Now notice that one has $200K and one has $10M. Same AA? I don't think so.

Your AA is probably based on your assets, your tested risk tolerance, etc. Nothing at all silly about that. If you're reducing equity exposure based on your age like a target fund might, that's really saying risk tolerance is declining with age and I don't think there's anything silly about that either. In my Adult Ed investment class I tell people that there's no particular reason to match a fund target date with their planned retirement date. If they want to be on a more aggressive track, pick a later target date that suits. If they want to be more conservative, pick an earlier date.

[njhowie]

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Originally Posted by RunningBum See, if I was very light on equities I'd be losing sleep over the profits I was missing out on by being mostly out of the market.

Fear of Missing Out: An Investor's Worst Enemy | Net Worth Advisory Group

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When it comes to investing, FOMO is significantly impacted by recency bias. Our fear of missing out becomes more and more intense after the market has just experienced an uptick. If we take a couple of steps back, it is clear why we maintain a diversified portfolio – it provides the most appealing tradeoff between maximizing returns and minimizing risk. Yet, it is hard to remind ourselves of this when it seems like everyone around us is taking advantage of the latest market trends and we are missing out. Of course, changing our portfolio to try and take advantage of a run that has already taken place would be foolish, as we would be selling assets with prices that have remained flat and may now be undervalued relative to the market in order to buy assets that have recently experience significant growth and are likely now expensive. These are the type of decisions that FOMO can cause and we would be wise to avoid this type of thinking.

[RunningBum]

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Originally Posted by OldShooter Since I"m the one that used the word "silly" I'll comment. What I think is silly is to blindly follow formulas like "age = %in fixed income" or "120-age is the correct equity %." My standard example: Two widows, 70YO with parents who lived into their 90s, both needing to supplement their SS. So, same AA? The formulas say yes. Now notice that one has $200K and one has $10M. Same AA? I don't think so. Your AA is probably based on your assets, your tested risk tolerance, etc. Nothing at all silly about that. If you're reducing equity exposure based on your age like a target fund might, that's really saying risk tolerance is declining with age and I don't think there's anything silly about that either. In my Adult Ed investment class I tell people that there's no particular reason to match a fund target date with their planned retirement date. If they want to be on a more aggressive track, pick a later target date that suits. If they want to be more conservative, pick an earlier date.

I agree that one number or one strategy does not fit all. Your post before came off (at least to me) as "it's silly for anyone to do an age-based AA". What I read now is "it's silly to say that everyone should do an age-based AA", which I don't have a problem with.

[RunningBum]

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Originally Posted by njhowie Fear of Missing Out: An Investor's Worst Enemy | Net Worth Advisory Group

Well, that's one view. I'd take it a little more seriously if the author didn't say "everyone did this, then everyone did that". No, everyone didn't do that. I did very little of what he says, though I am guilty of chasing tech stocks in the late 90s. I rode it up, and rode it down, and learned to diversify and stay the course.

As I said, "I'm not sure either side really appreciates the other side's perspective, but it shows why it's important to understand your own risk profile in setting your AA, and not letting someone else tell you what it should be." Maybe give that a thought before repeating the "why take risks if you've won the game" to everyone who wants to do something different, especially since it's not a game and if it was, few of us can be certain we've really won it.

[njhowie]

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Originally Posted by RunningBum Maybe give that a thought before repeating the "why take risks if you've won the game" to everyone who wants to do something different, especially since it's not a game and if it was, few of us can be certain we've really won it.

We all have biases when it comes to this subject. You clearly have yours, and as I said in my very first reply, if you understand it and are comfortable with it, then more power to you.

I can see this is beginning to become personal, and so I'll bow out.

[kgtest]

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Originally Posted by pb4uski Interesting idea.... so if I started collecting $1k of SS and I ascribe a value of $25k to that income using the 4% rule then I could shift $25k from bonds to equities for each $1k of SS that I am receiving.

That's the general idea.

[RunningBum]

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Originally Posted by njhowie We all have biases when it comes to this subject. You clearly have yours, and as I said in my very first reply, if you understand it and are comfortable with it, then more power to you. I can see this is beginning to become personal, and so I'll bow out.

I apologize, for some reason I thought you had been repeating this in multiple threads, but it wasn't you, at least not in those words.

[muchohucho]

I'm curious what types of bonds/bond funds, seems like they are only going to go down for awhile anyway with rising interest rates, or at least stay in shorter term ones. As much as I'd like to I'd like to move out of bonds and cash into equities which I should have done 3 years ago instead of reverse, but I am afraid that the equities are going to lose steam at this point - at least in year or two. But I have no idea.

[Qs Laptop]

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Originally Posted by pb4uski I'm thinking of migrating from 60/40 to a much higher equity allocation.... minimum of 80/20 but possibly as high as 100/0 once we have started SS. The higher risk return would somewhat mitigate that we don't have LTC insurance and provide a larger inheritance for the kids. Thoughts? Am I crazy?

I don't think you're crazy. Sounds like you could ride out a bad year and recover and I like your idea of getting aggressive for possible long term care expenses down the road.

How's your family's longevity? If you think you're going to get into your late 80's or your 90's it makes sense to be more aggressive.

My mom's still alive and is 97. My dad made it to 90. My grandmother on my mom's side got to 100. I've got aunts and uncles that went into their 90's. An uncle recently passed at 103.

I'm at roughly 62/38 and keep thinking I should put more in equities. I really can't do it this year because I recently left Edward Jones for Fidelity and I have a bunch of capital gains to reckon with. But come next January there will be an adjustment toward equities.

[pb4uski]

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Originally Posted by Qs Laptop ... How's your family's longevity?....

Well, I'm sitting here having a beer with my mom, who will be 88 in November. Gram lived to be 99. Dad died at 75 but his younger brother is still working at 86... so pretty good longevity.

[Chuckanut]

I am interested in using a higher equity percentage to help with LTC expenses.

One of my reasons of taking SS at 70 is that the extra money will be useful to pay for LTC if I need it. The current LTC market is broken, IMHO, and the products offered are just not worth the cost.

But, I had not considered that by taking SS at 70, I could allocate more to stocks and growth and therefore start to build assets that I might need to use for LTC. Of course, there is no guarantee the market will be UP when that happens. I suppose I could skim some profits now and then and put them aside. Hmm.... need to give this some thought. Thanks for the suggestion.

[TwoByFour]

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Originally Posted by muchohucho I'm curious what types of bonds/bond funds, seems like they are only going to go down for awhile anyway with rising interest rates, or at least stay in shorter term ones. ..

You should consider TIPS. I ladder them rather than invest in a TIPS fund. A ladder is not going to lose value when/if interest rates rise. And of course the bond keeps pace with inflation. If you can, hold the TIPS in an IRA to keep your taxes simple.

[OldShooter]

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Originally Posted by muchohucho I'm curious what types of bonds/bond funds, seems like they are only going to go down for awhile anyway with rising interest rates, or at least stay in shorter term ones. As much as I'd like to I'd like to move out of bonds and cash into equities which I should have done 3 years ago instead of reverse, but I am afraid that the equities are going to lose steam at this point - at least in year or two. But I have no idea.

Well, with bond funds and rising interest, your fund's net asset value is going to decline then slowly recover as lower-yielding bonds mature. If you need to sell before the recovery is complete, you lose.

But remember that (subject to credit risk) an actual bond you own will pay face value at maturity and along the way you will get the YTM you expected. IOW you will never lose money in nominal dollars (though of course you're losing purchasing power to inflation).

Along the way, though, your brokerage statements will look like you lost money because the market price of the bond will have declined as interest rates rose. But market price is irrelevant assuming you will hold it to maturity. That is the beauty of bond ladders.

Actually DW and I were discussing this issue in connection with a small nonprofit where she is investment committee chair. The portfolio holds a million or two in bonds. (By policy, absolutely no bond funds except near-cash.) We would like to see quarterly reports that include the sum of all those bonds' face value as a sort of alternative way of understanding the "real" bond portfolio value. Not sure the FA can tweek the reports to do this, but there is always Excel.

[Chuckanut]

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Originally Posted by OldShooter Well, with bond funds and rising interest, your fund's net asset value is going to decline then slowly recover as lower-yielding bonds mature. If you need to sell before the recovery is complete, you lose.

Isn't that also true of an individual bond somebody buys? Interest rates go up, bond price goes down, if one needs to sell it before the recovery is complete, one may lose money.

[jebmke]

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Originally Posted by Fedup What about your wife, would she panic and sell out if you are not around?

Just enough to pay for the parties.

[SecondCor521]

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Originally Posted by pb4uski The thread on whether pension/SS is an reduction of the numerator or addition to the denominator got me to thinking about adjusting my AA. My AA has been 60/40 for year and I intended to carry that forward forever. However, if I put my situation into FIRECalc and solve for success rates at various AAs using the Investigate tab, it says 100% at any AA, even 100% stocks.... I can confirm by putting 100% stocks into the Your Portfolio tab. For these purposes, I set spending at a number that is ~125% of what we actually spend (which is what I typically use in planning)... its actually a bit more than 125% because we currently have a mortgage so it includes our mortgage payment and they will end in 2027. I'm thinking of migrating from 60/40 to a much higher equity allocation.... minimum of 80/20 but possibly as high as 100/0 once we have started SS. The higher risk return would somewhat mitigate that we don't have LTC insurance and provide a larger inheritance for the kids. Thoughts? Am I crazy?

What I do, and I'm not sure I could adequately explain why:

1. Put my actual numbers into Firecalc and see what historical success rate I get. Usually it's 100%.

2. Go to the Investigate tab and have it solve for spending to get down to 95% historical success.

3. Put whatever that spending is (from step 2) on the first tab.

4. Go to the Investigate tab and have it solve for AA.

I then try to pick the AA that represents the highest point on the resulting hump. If there is a large flat plateau in the middle I'll bias towards the right hand side (higher equity allocation). Since I'm looking at a 40 year planning horizon currently, that usually means 90-95% equities.

Another thought: I have three kids and am not even spending at the 4% level (currently I'm around 2% net WR after accounting for some non-portfolio income). So I look at it as though I am spending 4%...just from about half of my portfolio. The other half of my portfolio is going to be unspent by me and thus will end up as my kids' inheritance. So that portion should be at 100% equities since I'm 49 and hope to stay above the turf for a few decades.

Oh, and my main thought is that you and I should try to thoughtfully and in a value-oriented way spend more money.

[VanWinkle]

I am usually on the conservative side of the Stock/bond equation. I will agree that if your portfolio is only for LTC and inheritance, you can take more risk on the equity side. I would never go more than 90/10 as in most cases it will beat a 100% stock portfolio over long periods when tilted to small cap and value. I am currently at 54/46 due to equity gains this year, but will likely increase my equity risk in 2021 when I turn on the SS income stream. SS and pension will cover my current living expenses, so I will have to figure out how to spend more money.

[gcgang]

Increase stock allocation? Ten years into a bull market, with The Fed raising rates, what could go wrong?

Crazy? No. Just maybe not the best time. But, some say there is no such thing as a
bad time, or a good time. Except for Hindsight Harry.