Quick Asset Allocation Question

[ILikeStarTrek]

My take on the "rich uncle" scenario:

Thought Experiment: Say you have $1mil and just get by on your SWR of 4% (because you are 65/35 and you are a believer in FIRE "theory.") You are "comfortable" on $40k/year, but you kind of wish you could buy a few toys (maybe a Lexus) and take a couple of cruises a year. That's pretty much the limit of your wish/bucket list. Maybe 2008 or April 2020 spooked you a bit, but you are a believer so you successfully rode it out.

Now, your rich uncle you never knew dies intestate (no that's not the reason he had no children of his own) and his state of residence finds only YOU to give his fortune (after all taxes, fees, etc.) of 100 million dollars. Do you invest all your new found wealth at 65/35 or do you find 400 banks and open FDIC insured accounts to keep the money in while you quadruple your spending and buy 2 Lexus(es) and take 4 cruises?

My point is that there must surely be SOME level of "stash" that means you no longer have to take the "risk" of using equities (or even bonds) to replenish your stash. Yes, there is risk that 400 banks will fail and not be bailed out by the FDIC, but I would think that would be vanishingly small compared to say 1929 redux.

On that basis, my feeling has always been to use the risk you need (and no more) to reach your spending goals. I suggest starting from there and working backward rather than using a set AA or listening to experts tell you what you should have as an AA. YMMV

I need to understand why (because I don't), but under the rich uncle scenario, my first thought is that all 100 million would go into equities. Who cares if there's a bumpy road when you pull such a tiny percentage for living? I tried to understand the "you've won, take it all off the table" approach, and I see there may be a few scenarios where it makes sense, but for someone that's got 25 or 30 years left (maybe), it seems like too soon to completely pull back. I also occasionally think that if the markets go south real hard, many of us will be hit very hard, and it will be easier to cut back.

The example I use in my Adult-Ed investing classes is two 75YO widows in good health whose mother has just died at 95 and who are living on social security. Now imagine that one has $100K and one has $10M. The idea that they should have the same AA is ridiculous.

WRT the $100M that is just a bigger stash where the question must still be "What is the purpose?" If you don't know where you're going, any road will get you there. In our case, the answer would be "We have no purpose for holding that much money, so we'll give almost all of it away." We might give some to friends and family, but family is pretty well handled in our current estate plan. So charity would be the big winner. It makes me smile just to fantasize how much fun it would be to do that.

In the rich uncle scenario, I think that putting $100 Million in FDIC-insured banks because one has essentially won the game and no longer needs to put up with the risk of investing in equities, is not necessarily the "correct" thing to do. It may be what some people choose to do, but it's not for everyone.

For instance, Warren Buffett's net worth is about $81 Billion (per one article I saw - it could be more). By any measure, he "won the game" a long time ago, but he didn't move all his money into FDIC-insured accounts. My understanding is that his money is still in Berkshire Hathaway and other aggressive investments. I have also seen articles saying he is gradually donating much of his money to charity. So, the more he earns on his investments, the more he will have to donate. That goes to OldShooter's illustration about having a purpose for one's investing.

 

[Ready-4-ER-at-14]

The idea of a one-size-fits-all AA is easily debunked. Fidelity is doing its customers a disservice by perpetuating such a myth. Our AA at 73YO is right for us: 75/25.

The other thing to understand is that volatility is NOT risk. Risk is a stock that goes down in price and stays down, producing losses for the owner. Market volatility is just variations in the steady rise that has been occurring for close to 100 years. ref: https://en.wikipedia.org/wiki/Mr._Market

The place volatility and risk intersect is "Sequence of Returns Risk," fondly known around here as SORR. You can read up on this, but the fix is to hold enough in fixed income that you don't need to sell equities during a down market fluctuation in order to achieve the income you need. I think people around here look at anything from 3 years' spending to even ten as adequate SORR protection.

This was eye opening to me. I understood all the components of what you said but in my minds eye I always focus on a snapshot of the portfolio at one time rather than a moving point making a graph. Volatility truly was risk to me. Possibly it should be considered more strongly at end of life but I doubt the beneficiary would know or care.



Looking back it has taken longer to double accounts that a more volatile allocation would have yielded. Thus my pyramid no longer needs any base expansion unless I consider inflation.



Thanks.

 

[GalaxyBoy]

I'm 60 (for a short while longer anyway) and my AA is around 50/50. Because I inherited money which I never counted on while saving, coupled with the last decade of stock gains, my nest egg is rather larger than I ever imagined it could ever be. Therefore, my actual withdrawal rate is much lower than my predicted safe withdrawal rate. John Bogle said, "Once you've won the game, why keep playing?"

 

[CRLLS]

It has been many years since I entered data in Fidelity's planner. I seem to recall somewhere it asking about my comfort level under certain circumstances. At minimum thay asked me what my target investment style was. Mine is "Growth". DW and I are in our late 60's and we are ~80/20. I don't recall getting any of those automated cautionary notices. At least if I did, I just blew over it. It has raised a flag within the application a few times about drifting away from their "growth" AA range. Perhaps there are some underlying questions that you answered that are no longer matching your current comfort level or portfolio AA goal?

As has been said, there is no magic one-fits-all AA. I believe that many times it has been shown that there is little difference in Firecalc success between 50/50 and 80/20 AA. In <2 years when I file for SS on my earned benefits, our SS will cover 90% of our current expenses (before the BTD expenses are added in). Our AA choice is not for our benefit, but for our heirs. Lowering our AA now won't affect our lifestyle one way or another and by all the regular calculators we are safe up to age 100. Why not give them the benefit? They are in their 40's and if we pass on early, it might help them to reach FIRE.

 

[FREE866]

As has been said, there is no magic one-fits-all AA. I believe that many times it has been shown that there is little difference in Firecalc success between 50/50 and 80/20 AA.

Thx for mentioning this. The only difference I really saw was that the heavier stock allocation had an enormously higher ending balance. That is what I keep hanging on to--if my success % is very similar why not go with the higher stock? I'm effectively at 100% stock , but have ~ 2 years expenses in cash. Be curious how Old Shooter or others would view that.

 

[sengsational]

Free, I can imagine a situation where the market goes in half for 2 years, forcing a sell low situation. If you are sitting on a rich uncle stash, no problem, but if you are playing it closer to the line, you might feel inclined to cut back during the second (and beyond) years of low equities. And then there's the opportunity to cut back...if you're spending 4% of your nest egg annually and that includes 2% discretionary, good deal. If 0% discretionary, not so good.

 

[FREE866]

Free, I can imagine a situation where the market goes in half for 2 years, forcing a sell low situation. If you are sitting on a rich uncle stash, no problem, but if you are playing it closer to the line, you might feel inclined to cut back during the second (and beyond) years of low equities. And then there's the opportunity to cut back...if you're spending 4% of your nest egg annually and that includes 2% discretionary, good deal. If 0% discretionary, not so good.

Thx. Yeah at these levels im withdrawing ~3%
I guess, in my mind, I don't see a reality of a 50% market decline that would stay down for 2 years, but I totally get that logic. And yes, I can always cut back up to 20-25% of expenses.

 

[sengsational]

I'm bad at predicting, especially about the future. I also don't see a market halving that lasts 2 years at all likely. One might point to the history of Japan, if they wanted to worry a lot. But that is one aspect of "won the game" I do buy into, and that's to have enough cash to weather the longest imaginable storm. And if it's unimaginable (black swan-ish), that's why I'm as diversified as I am... nothing better IMO. Not even FDIC is better since the USD isn't 100% assured. I don't want to go all "guns and ammo", because nobody with a stake in the financial system wants to hear that, nor is it likely, but I think the best approach is diversity.

 

[FREE866]

I'm bad at predicting, especially about the future. I also don't see a market halving that lasts 2 years at all likely. One might point to the history of Japan, if they wanted to worry a lot. But that is one aspect of "won the game" I do buy into, and that's to have enough cash to weather the longest imaginable storm. And if it's unimaginable (black swan-ish), that's why I'm as diversified as I am... nothing better IMO. Not even FDIC is better since the USD isn't 100% assured. I don't want to go all "guns and ammo", because nobody with a stake in the financial system wants to hear that, nor is it likely, but I think the best approach is diversity.

Fair points for sure. The other thing is that I'm 54 now and "my plan" is to take SS at 70 which at that point will take care of a large portion of my expenses so my time frame is 16 years. Yes, I know SS isn't guaranteed , etc

 

[ILikeStarTrek]

I'm 60 (for a short while longer anyway) and my AA is around 50/50. Because I inherited money which I never counted on while saving, coupled with the last decade of stock gains, my nest egg is rather larger than I ever imagined it could ever be. Therefore, my actual withdrawal rate is much lower than my predicted safe withdrawal rate. John Bogle said, "Once you've won the game, why keep playing?"

Evidently, John Bogle's philosophy about this was different than Warren Buffett's (per my post #26 above).

 

[CRLLS]

I think a lot of deciding on a safe AA has to do with one's flexibility in controlling ones retirement expenses along with how closely they are to being FI. Other fixed income sources help too. The less flexibility one has in managing expenses, the less one would have in equities IMO.

We were always planning on having a mortgage in retirement. The math was there to support it and we could comfortably cover it. However this last year, we took money out of our retirement savings at a relative market high, and paid off the mortgage. This gave us less of a nut to cover on a monthly basis.

 

[OldShooter]

Thx for mentioning this. The only difference I really saw was that the heavier stock allocation had an enormously higher ending balance. That is what I keep hanging on to--if my success % is very similar why not go with the higher stock? I'm effectively at 100% stock , but have ~ 2 years expenses in cash. Be curious how Old Shooter or others would view that.

There's nothing wrong with a 2 year cushion; from reading posts here I think there are many who think a one-year or a two-year cushion provides adequate somnambulant comfort.

But you still beg the "What for?" question. You want a maximum stash on the day you die. I get that and it is a popular goal. Probably most of us have the same goal.

But, "why?" If the goal is to maximize an estate where the assets will be immediately cashed out, then maybe volatility is a risk in a sort of SORR sense. Charities AFIK usually sell gifted stock upon receipt and invest the proceeds according to their advisors' strategies. OTOH, the majority of our pile will go into trusts for the grands and DS. Those trusts will have a ten-year horizon per the IRS rules on inherited tIRA withdrawals, so volatility is pretty much a don't-care..

 

[FREE866]

There's nothing wrong with a 2 year cushion; from reading posts here I think there are many who think a one-year or a two-year cushion provides adequate somnambulant comfort.

But you still beg the "What for?" question. You want a maximum stash on the day you die. I get that and it is a popular goal. Probably most of us have the same goal.

But, "why?" If the goal is to maximize an estate where the assets will be immediately cashed out, then maybe volatility is a risk in a sort of SORR sense. Charities AFIK usually sell gifted stock upon receipt and invest the proceeds according to their advisors' strategies. OTOH, the majority of our pile will go into trusts for the grands and DS. Those trusts will have a ten-year horizon per the IRS rules on inherited tIRA withdrawals, so volatility is pretty much a don't-care..

Thank you OldShooter.
To be honest, I think mentally seeing my balance grow brings great joy haha and lately, because of that I've been able to help people in need with large food purchases. I know it sounds silly, but those are my initial thoughts. And I've just always been a stock guy; not speculating--just major market index ETF's. Very simple!

 

[GravitySucks]

OP: Ive been at 70/30 at a slightly younger age. The FIDO planner told me I was outside my stated goal of Growth and Income. Maybe you set your goal as Conservative or Income when you answered the setup questions?
If you slept well in March at 65/35 your AA is fine for you.

Thx. Yeah at these levels im withdrawing ~3%
I guess, in my mind, I don't see a reality of a 50% market decline that would stay down for 2 years, but I totally get that logic. And yes, I can always cut back up to 20-25% of expenses.

How about losing 30% year 1 and 30% year 2 then going sideways for a bit?
Welcome to the 2000s.

 

[Rickt]

When we retired in 2017 at age 57, we decided on a 13 years' expenses in Fixed income till age 70 (we decided to start drawing on SS at age 70). Our combined SS at that age will more than cover our annual living expenses. We are almost 61 years old now and have reduced our Cash/Bonds to 10+ years of living expenses (includes discretionary spending). This has resulted in our AA to be 80/17/3.

We are comfortable with the higher equity allocation because we are holding 10+ years of expenses (living + discretionary) in fixed income and are confident that we will not panic sell in a bear market knowing that we did not sell in Feb/March 2020.

 

[Brat]

Instead of purchasing a bond fund look at CDs, or insured bank deposits. SPAXX, Fidelity Govt MM is also an option. I think bond funds have too much principal risk if interest rates go up. I have Fidelity Intermediate Treasury Bond Index Fund which has returned 0.04% !!! I think that stinks, I might as well buy insured CDs.

I am 79, not wealthy, but am heavily into equities.

 

[Koolau]

I need to understand why (because I don't), but under the rich uncle scenario, my first thought is that all 100 million would go into equities. Who cares if there's a bumpy road when you pull such a tiny percentage for living? I tried to understand the "you've won, take it all off the table" approach, and I see there may be a few scenarios where it makes sense, but for someone that's got 25 or 30 years left (maybe), it seems like too soon to completely pull back. I also occasionally think that if the markets go south real hard, many of us will be hit very hard, and it will be easier to cut back.

Heh, heh, I guess I thought it was "self explanatory." Obviously, it was not - which is my bad. My point is that we take risk to meet our financial goals. In essence, our mutual goal is to have "enough." I'm saying that someone used to having (what did I suggest) a million, would no longer need to "strive" if he suddenly had 100 million. Why risk the hundred million when he just spends a million now? IF someone fits the "there's no such thing as enough" then maybe risking your 100 million for "more" is okay. It just makes no sense to me. I see that you disagree which is what makes this site so much fun.

 

[Broland]

I have a different philosophy than most (it appears). I'm currently at 91% stocks and don't plan to go below 80% after the periodic rebalancing. Rationale? I can ride out a 40% downturn for a couple of years and history has shown the vast majority of downturns have come back within that timeframe.

I don't understand the philosophy (at all) of "won the game so sit back and relax". I want to depart this part of my existence with as much as possible (while enjoying my time on this earth to the maximum possible) for (fill in the blank ... eg: family, charity, friends etc).

 

[ILikeStarTrek]

Heh, heh, I guess I thought it was "self explanatory." Obviously, it was not - which is my bad. My point is that we take risk to meet our financial goals. In essence, our mutual goal is to have "enough." I'm saying that someone used to having (what did I suggest) a million, would no longer need to "strive" if he suddenly had 100 million. Why risk the hundred million when he just spends a million now? IF someone fits the "there's no such thing as enough" then maybe risking your 100 million for "more" is okay. It just makes no sense to me. I see that you disagree which is what makes this site so much fun.

It's nice to have "enough" money to meet one's own personal needs, but if someone manages to acquire more money than that, I suggest they can start thinking bigger.

Do you have any heirs (e.g. kids) that you plan to leave money to? If so, how much is "enough" to fund them for the next 3+ generations / 100+ years? I doubt $1 million will do it. $100 million, perhaps. $200 million may be even better.

Do you have any charities you think are worth giving money to? Suppose someone wants to contribute money to fight/cure diabetes, breast cancer, ALS, or some other disease. How much money is "enough" to cure these? I doubt $1 million will do it. $100 million may not do it either, but it will go a lot further than $1 million. $200 million would be even better.

If I have $1 million, then I want to do what I can with it. But if I manage to earn/win/inherit $100 million, then I want to do what I can with that too. In both cases, that includes investing it to try to earn more money. And when I say investing it, I mean trying to earn more than 0.5% (or so) in an FDIC-insured savings account.

 

[big-papa]

Hi, folks. A quick question about asset allocation. Fidelity's analysis of my profile gave me the feedback that my AA was too high for someone my age. It said that most people my age have a more conservative asset allocation, and that I was potentially exposing myself to too much risk.

My AA is 65/35 (65/33/2, to be more exact), with most everything in low-cost index funds. I'm retired completely. I'm 59 years old.

The Fidelity input caught me a little off guard. I wondered, "Am I exposing myself to too much risk? Should I adjust my AA?"

So, I'm just seeking input about that. I believe, in the past, the consensus on this forum has been that any AA between 50/50 and 80/20 is fine, and it doesn't really make a whole lot of difference. So it's possible that the answer to this question is, "It doesn't matter."

I'll add a couple things for context. I am moderate-conservative by nature, including in my dealings with money. I don't need to maximize returns or pile up more money (although my portfolio has been doing very well, and I'm happy about that). I picked 65/35 as a target because 1) I heard John Bogle mention it as working in most cases; 2) it's a halfway point between my waffle range of 60/40 and 70/30, and 3) when I was at 60/40, my CPA told me I was too young to have so much money in bonds (that was two years ago; now apparently I'm too old to have so much money in stocks, lol).

TLDR: Fidelity is telling me 65/35 is too risky for an old coot like me (59). Do you think that's right? Should I be more conservative with my AA?

As others have noted, there is no one-size-fits all for asset allocation. One thing to note is that for portfolios for retirees, much of the advice given for asset allocation oftentimes has an unstated assumption that the retiree will be using an SWR type of withdrawal method - fixed withdrawal amount adjusted each year for inflation. As such, it would be subject to sequence-of-returns risk, meaning the possibility of running out of money before running out of life. So the advice tends towards more conservative portfolios with increasing age in an attempt to mitigate that possibility.

There are other withdrawal methods with no such possibility. No free lunch because those methods instead have withdrawals that vary year on year and you may find yourself with a withdrawal that is below the minimum required to pay your bills. But they also have the possibility of having a total withdrawal over a lifetime than is larger than what you can have with SWR and that is definitely dependent on your Asset Allocation.

In all cases, having more than you need saved up is the biggest lever you can have, along with living below your means.

Cheers.

 

[ER Eddie]

As others have noted, there is no one-size-fits all for asset allocation. One thing to note is that for portfolios for retirees, much of the advice given for asset allocation oftentimes has an unstated assumption that the retiree will be using an SWR type of withdrawal method - fixed withdrawal amount adjusted each year for inflation. As such, it would be subject to sequence-of-returns risk, meaning the possibility of running out of money before running out of life. So the advice tends towards more conservative portfolios with increasing age in an attempt to mitigate that possibility.

I see. I'm not using a fixed withdrawal rate, partly because I'm early in retirement, so I'm still trying to get an accurate estimate of my real expenses. I am currently drawing about 2% off my portfolio. I just take the dividends, and that covers my expenses.

In all cases, having more than you need saved up is the biggest lever you can have, along with living below your means.

That describes my situation, fortunately.

Thanks for the input. It makes sense.

 

[themillerman]

Quick Asset Allocation Question - Response

I haven't read all the responses so sorry if this is a repeat. I'm 65, been retired since 58 and my AA went from 60/40 in 2012 to 50/50 now. As many of the others probably said, it's really up to you. With greater risks come greater rewards but also greater volatility. If the ups and downs of equities don't keep you up at night, long term returns for stock are likely much greater but you could have to withstand even a decade of downturn based on historical returns. I don't think I want as much volatility in my portfolio at my age so I live with the fact that my returns might be lower than if I had a higher equity stake.

Bottom line, depends on your stomach for volatility and your timeline.

 

[Markola]

If you were at 65/35 during the Great Pandemic Meltdown of early last year, and felt fine through it, then there is no need to change.

I think this is great counsel. If a buy and hold type investor slept well through that test without developing an itchy trading finger, then they are probably at a good asset allocation. Unfortunately, one can’t know how they will feel until they live through some swoons.

I agree with the OP’s comment that, surprisingly, there isn’t a significant difference in outcomes over the long haul among 50 - 80% equity portfolios as long as the portfolio is left the heck alone no matter what.

Again, market timers’ results will be all over the map and, far more often than not, unfavorable.

 

[Koolau]

I have a different philosophy than most (it appears). I'm currently at 91% stocks and don't plan to go below 80% after the periodic rebalancing. Rationale? I can ride out a 40% downturn for a couple of years and history has shown the vast majority of downturns have come back within that timeframe.

I don't understand the philosophy (at all) of "won the game so sit back and relax". I want to depart this part of my existence with as much as possible (while enjoying my time on this earth to the maximum possible) for (fill in the blank ... eg: family, charity, friends etc).

I am happy with "enough" but strongly support you in your efforts to maximize as much as possible. By the way, I already do the family, charity, and friends (all, quite literally). Within my "enough" is enough to help others. I feel quite blessed, but YMMV.

 

[Koolau]

It's nice to have "enough" money to meet one's own personal needs, but if someone manages to acquire more money than that, I suggest they can start thinking bigger.

Do you have any heirs (e.g. kids) that you plan to leave money to? If so, how much is "enough" to fund them for the next 3+ generations / 100+ years? I doubt $1 million will do it. $100 million, perhaps. $200 million may be even better.

Do you have any charities you think are worth giving money to? Suppose someone wants to contribute money to fight/cure diabetes, breast cancer, ALS, or some other disease. How much money is "enough" to cure these? I doubt $1 million will do it. $100 million may not do it either, but it will go a lot further than $1 million. $200 million would be even better.

If I have $1 million, then I want to do what I can with it. But if I manage to earn/win/inherit $100 million, then I want to do what I can with that too. In both cases, that includes investing it to try to earn more money. And when I say investing it, I mean trying to earn more than 0.5% (or so) in an FDIC-insured savings account.

I guess I set off this group of responses because I postulated that there MUST surely be SOME amount that's SO ENOUGH that folks could forget about growing their stash. I was obviously wrong for some folks. I guess we are all different.

But, regarding your response attached, see my response in #49 above. I think of "my" risk as being passed to family friends, charities. If my stock portion tanks just before I pass, those could be affected. Selfishly, (let's be honest that there is always a "selfishly" clause) I don't like to worry about my stash (that's too much like w*rk). I don't want to worry about having to go back to w*rk if the worst should happen in the markets. I retired to enjoy the remainder of my life. Thinking too much about my finances interferes with my enjoyment. I know a lot of folks here find "guiding" their stash as the ultimate pleasure. I do not, though I do not condemn anyone else's "fun." For me, a roughly 30% equity position lets me sleep well and provides more than enough to meet my needs (which include the things you mentioned - helping others in general.) We all have our own risk tolerance and our own set of guiding principles when it comes to what we do with our money. I've chosen what works for me and I applaud what others do - even though I don't personally understand it. Obviously, some folks don't understand where I come from. What a rich diversity we represent here on the FIRE forum!