Increase stocks in AA?

[RunningBum]

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]

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]

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]

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]

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]

... 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]

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]

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]

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]

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

Just enough to pay for the parties.

 

[SecondCor521]

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.

 

[DrRoy]

Well, 2008/2009 was IMO in the category of a "real test".... I stood pat and held on while others were dumping stocks (in many cases never to return)... however I could not find the courage to buy more equities when my AA was literally screaming at me to do so.

I was at 82% equities (and about 1.2 beta) in 2008. I also held on but hated the experience, and also did not buy. I am now RE and at 60% and feel much better.

The only thing I am wondering is if your risk tolerance is still as high as when you were working. I know for me my risk tolerance dropped big time when I retired in 2016. It might be different for you since you seem to be in a great position. I am still at 56% stocks though and sleep well.

I would say that it is different when you are now relying on the investments to live on.

 

[MrLoco]

I think it is easy to "talk" about going or being 100% equities....especially when the market is setting all time highs daily and the bull markets just keeps going.


But when one looks at "reality"......say you have a $2 M portfolio today....100% equities... and a bear market comes.....and in say 18 months the value of your portfolio drops 50%. Oct. 9, 2007: DOW at 14,164.....March 5, 2009 DOW at 6,594......a drop of 53%.


Sure the market came back and came back strong and quickly. But what about next time? What if we find ourselves in a prolonged bear market? Political issues....maybe a war....high unemployment, whatever, and this bear market drags on for years....maybe even a decade. Now you need to sell those depressed equities to live. And tell me when you click on your account at your brokerage house and you see that "total balance" of $1,000,000 with an unrealized loss of $1,000,000 you won't feel a little queasy? I would.


The only way this would work for me is if I had a pension plus SS plus some REITS for diversification plus 5 years cash or cash equivalents.
Otherwise I will stick with my AA of 50/50. I already have insomnia.

 

[RunningBum]

...And tell me when you click on your account at your brokerage house and you see that "total balance" of $1,000,000 with an unrealized loss of $1,000,000 you won't feel a little queasy? I would.

I hear what you are saying, MrLoco, and I am closer to your position than 100% equities, but at least in my case, if the market took such a drop, if I saw a total balance of $1,000,000 I would show an unrealized gain/loss near 0, having ridden this market up for a whole lot of gains. I don't know the OP's situation but he is not going from 0% to 100% so certainly there are unrealized gains in the account. The risk of a major drop isn't just abated by the (hopefully) following recovery, but also by the preceding run-up. But I'm not tempted by this thread to increase my equities.

 

[Fedup]

The last time I had this exact thought, the market dropped. That was January of this year.
So wait until I post I want to increase my equities first, it’s guarant to drop.

 

[OldShooter]

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.

Sorry so slow to reply.

You are correct that having to sell a bond before maturity exposes you to interest rate risk. But when the bond reaches maturity (subject to credit risk) you get all your money back.

So the key is to avoid selling early, something that a bond ladder is extremely effective at doing. Having a bond ladder will also minimize the damage if you need to sell unexpectedly because you can sell the bond(s) that will cause you to lose the least.

You do not have this kind of control if you're in a bond fund.

 

[RunningBum]

Sorry so slow to reply.

You are correct that having to sell a bond before maturity exposes you to interest rate risk. But when the bond reaches maturity (subject to credit risk) you get all your money back.

So the key is to avoid selling early, something that a bond ladder is extremely effective at doing. Having a bond ladder will also minimize the damage if you need to sell unexpectedly because you can sell the bond(s) that will cause you to lose the least.

You do not have this kind of control if you're in a bond fund.

But if you hold a lower-interest bond to maturity, you're locking yourself into that lower return. Holding the bond to maturity and getting your principal doesn't make up for the lost opportunity to get a higher return. That's why it has a lower value if you were to sell early. Take the loss early, or take it with each lower interest payment, it basically works out to be the same. There's no reward at the end where you make up for taking a lower than market return if interest rates have risen. Am I wrong about that?

With a bond fund you don't have the control of making that decision but I'm not sure where the problem is with that.

 

[OldShooter]

But if you hold a lower-interest bond to maturity, you're locking yourself into that lower return. Holding the bond to maturity and getting your principal doesn't make up for the lost opportunity to get a higher return. That's why it has a lower value if you were to sell early. Take the loss early, or take it with each lower interest payment, it basically works out to be the same. There's no reward at the end where you make up for taking a lower than market return if interest rates have risen. Am I wrong about that?

With a bond fund you don't have the control of making that decision but I'm not sure where the problem is with that.

Well there are people here who think about bonds far more than I do; maybe they will chime in with more wisdom, but try this scenario:

I have a bond and interest rates have risen. If I sell that bond, I take a loss. Just for grins let's say I take a 30% loss on a bond with a 6% coupon. If interest rates have gone up by 1 point as you say I can reinvest that money at 7%. But I'm getting 7% of 70%. At $10,000 face I was getting $600/year. Now I am getting $490/year assuming I can get that 7% on $7,000, right? That is without even thinking of YTM. At maturity I am now getting only $7,000 rather than the $10,000 I would have gotten if had held the original bond. Right?

I am too lazy to try to work out an exact break-even point, but if my loss on sale is more than 14% I lose on the interest payments and I still lose more at maturity. I think this whole scenario is very dependent on how long the bond has before maturity. Maybe there is a point where your argument is correct.

 

[RunningBum]

Those numbers seem unrealistic to me, that you'd lose 30% of a bond value with a 1% increase in interest rates, but I don't have experience with individual bonds. My presumption would be that the value would drop to around the break-even point, but maybe I'm wrong.

 

[OldShooter]

Those numbers seem unrealistic to me, that you'd lose 30% of a bond value with a 1% increase in interest rates, but I don't have experience with individual bonds. My presumption would be that the value would drop to around the break-even point, but maybe I'm wrong.

I don't know. I didn't cherry pick them. They were just the first numbers that came into my head.

As I said, I'm not a bond guy. But what I do know is that people that I know who are bond people all view bond funds with disdain and basically make the argument I was making. Further they will say that bond funds only make sense for very small portfolios in markets like junk and international where really good diversification is important and the portfolio is too small to achieve that. Even a small portfolio buying things like govvies and agencies is better off buying individual bills, notes, and bonds.

 

[TwoByFour]

But if you hold a lower-interest bond to maturity, you're locking yourself into that lower return. Holding the bond to maturity and getting your principal doesn't make up for the lost opportunity to get a higher return. That's why it has a lower value if you were to sell early. Take the loss early, or take it with each lower interest payment, it basically works out to be the same. There's no reward at the end where you make up for taking a lower than market return if interest rates have risen. Am I wrong about that?

That is true, to a degree. When interest rates rise, the bond's current value is the price that satisfies the YTM equation, where the yield used in the equation is the current yield rather than the coupon rate of the bond. The price you will get for your old bond will be below its par value, so when you go to buy the new bond at a higher coupon, you will be buying less bonds than you sold.

If you are in the accumulation stage and are reinvesting all dividends, the above is the right thing to do, and as you point out, is what a bond fund largely does for you. But when you are in the decumulation stage, the above can be a problem.

For me, the purpose of my fixed income is safety - I need to know I can liquidate at least some of it without losing money. With a bond fund, when interest rate rise, the bond fund permanently loses value. If you are pumping your interest payments back into it, the total value will increase and surpass the original value, but it will take roughly the time period of the average maturity of the bonds in the fund for that to happen. And if you are not reinvesting dividends, then it will never happen. This for me is the big problem with bond funds, while retired. I cannot count on them to retain value. So I ladder. Yes, I am leaving some money on the table but that is the price I pay for the degree of safety I want.