Quick Asset Allocation Question

[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]

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Originally Posted by sengsational 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]

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Originally Posted by Koolau 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]

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Originally Posted by ER Eddie 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]

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Originally Posted by big-papa 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.

Quote:

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]

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]

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Originally Posted by jollystomper 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]

Quote:

Originally Posted by 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).

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]

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Originally Posted by ILikeStarTrek 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!

[Souschef]

I have most of my stash in equities, and have done OK. I am blessed with having more than we need.

I have been upping my donating to charity, to help the less fortunate: Homeless shelter, local food bank, etc. There is a feeling of satisfaction for helping others, not an ego thing, but just a nice feeling.
I just got a newsletter from the homeless shelter with a picture of the handicapped shower my donation bought being loaded into the shelter. Admittedly, they acknowledged my donation, but nobody knew how much it was.

[Koolau]

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Originally Posted by Souschef I have most of my stash in equities, and have done OK. I am blessed with having more than we need. I have been upping my donating to charity, to help the less fortunate: Homeless shelter, local food bank, etc. There is a feeling of satisfaction for helping others, not an ego thing, but just a nice feeling. I just got a newsletter from the homeless shelter with a picture of the handicapped shower my donation bought being loaded into the shelter. Admittedly, they acknowledged my donation, but nobody knew how much it was.

It's a good feeling indeed. Hard to find any better way to spend (or is that 'invest') money than to help others.

[RetireBy90]

To op question, I look at the AA as a function of what is the investment timeframe. Most would suggest saving for retirement in 20s and 30s should be heavy on equities due to 30-40 year timeframe. Then as the timeframe shortens in your 50s start moving to more fixed income and less equities.
My timeframe is long term as most of stash is for after we pass. If you don’t plan to get anywhere near using your stash then i would ask what is the timeframe for your investments.
DM had about 1/2 of her stash in a Fidelity account I managed and the other half with a FA at Wells Fargo. She had income to meet her needs so I tried to get the FA to do a 60/40 AA but they said no, she is too old for that. My point was that her investment timeframe was about 30 years.
Just one way to think about your AA, but works for me

[ZachTB]

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Originally Posted by OldShooter 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. The place volatility and risk intersect is "Sequence of Returns Risk," fondly known around here as SORR.

Bingo.

[gayl]

Don't you just hate it when their computers stick out some algorithm that states someone is invested too aggressively! My Schwab Advisor stopped trying to discuss that with me (87/13 moving to 85/15). I'm really just trying to do 3 things: (1) build legacy estate (2) keep kids in their homes instead of mine throughout pandemic (3) start each GCs Roth when they get their 1st real job. Pension covers everything but travels / SSA will cover trips.

[OldShooter]

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Originally Posted by gayl Don't you just hate it when their computers stick out some algorithm that states someone is invested too aggressively! ...

I agree, though I think some of it can be blamed on the majority of investors in Schwab's book, very few of whom are at the investing intelligence level of this group. The cardinal sin would be a rep who pressed the point when dealing with an investor like you.

They mean well. A few years ago I ran an experiment with Schwabs new (at that time) robot. I had to game the investor questionnaire for quite a while before I found the set of answers that maximized equities and minimized cash and fixed income. A few months later I got a call from an actual Schwab person who was planning to counsel me on risk, the computer noticing that I am an old fart and assuming this $100K was my entire stash. That was totally appropriate IMO, but when I told him this was a single digit percentage of the portfolio and that I really did know what I was doing, we had a nice conversation and that was the end of it.

[gayl]

I'm on my 3rd new guy. Until he is promoted (which usually means a different office) The mgr continually tried to stick me with someone 'upstairs' until I got him to understand that newbies listen and others ass-u-me that I'm too aggressive and need to retreat to 60/40. I've excused myself and walked out of a few upstairs appointments

I really just need someone to help me run the Monte Carlo to see if 6 grandkids' inheritance is on track

[ZachTB]

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Originally Posted by gayl Don't you just hate it when their computers stick out some algorithm that states someone is invested too aggressively!

Don't blame the algorithm; it was doing what it was designed to do. Blame the people who a) treat the results with insufficient nuance, or b) decided on the assumptions in the first place.

The algorithm is just an inanimate tool. Ultimately, it's the people who are involved with the project, and/or the personal advisors, who are using it incorrectly. (Or the programmers who took some liberties, but that's doubtful.)

[gayl]

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Originally Posted by ZachTB Don't blame the algorithm; it was doing what it was designed to do. Blame the people who a) treat the results with insufficient nuance, or b) decided on the assumptions in the first place. The algorithm is just an inanimate tool. Ultimately, it's the people who are involved with the project, and/or the personal advisors, who are using it incorrectly. (Or the programmers who took some liberties, but that's doubtful.)

[emoji106]