VERY conservative asset allocation

[Tafkah]

Feeling very pessimistic a few years ago, I changed my AA to 25% equities, 50% bonds and 25% cash. Sounds insanely conservative, right?

But when I input all my particulars into FI Calc, the success rate is 97.6%, even if I DOUBLE my spending and increase that with inflation. I don't have any heirs to think about, so what would be the logical argument for increasing my equity allocation and volatility?

Thanks for the help.

 

[foxfirev5]

No idea regarding your age, retirement plans and other data. If you're 85 you may be OK, or if your have so much and can't do basic math. If not past history may work. Who knows ?

 

[mrfeh]

Sounds like you have so much it really doesn't matter.

That being said, there's really no reason to ever be less than 30% equities. If nothing else, you could donate all the excess.

 

[VanWinkle]

Sounds like you have won the game!! Congrats. You don't have to put any more into equities, and if sleeping at night means keeping it the same, so be it.

Best to you,

VW

 

[daylatedollarshort]

We have a pretty conservative AA and it has worked out for us a decade into into ER. Pensions, SS and some minor miscellaneous side income I make cover all our expenses. The portfolio is invested conservatively, though we do have a lot of TIPS in case of high inflation. I'm more concerned about not having to push a shopping cart under a bridge than I am of fear of missing out in the stock market. We use an asset matching concept to cover inflation.

We do have adult kids to think about. I like knowing if something happened to us and for some reason they couldn't work at some point in their lives, they would be okay financially, not filthy rich, but not have to worry about housing, food or medical care. Which they should be from our estate, and then they would get our inheritance from the grandparents, too. That is a nice sense of security I never had, growing up in a paycheck to paycheck household with poor money decisions.

 

[Samsung4321]

Calculate your minimum rate of return required unto death:


https://www.early-retirement.org/forums/f28/minimum-rate-of-return-in-retirement-111693.html

 

[TheWizard]

If you want to increase your financial assets by a few more million dollars over the next twenty years or so, it's going to be better to have a higher stock allocation, an S&P 500 index fund, not individual stocks...

 

[pb4uski]

Feeling very pessimistic a few years ago, I changed my AA to 25% equities, 50% bonds and 25% cash. Sounds insanely conservative, right?

But when I input all my particulars into FI Calc, the success rate is 97.6%, even if I DOUBLE my spending and increase that with inflation. I don't have any heirs to think about, so what would be the logical argument for increasing my equity allocation and volatility?

Thanks for the help.

Probably none, unless you covet a larger stash to be passed on to heirs or charities or you want to spend more than double. Higher stock allocations typically result in higher terminal values for heirs and charities.... but the impact on success is negligible.

Go to FIRECalc's Investigate tab and select the "Investigate changing my allocation... How will changing the allocation -- putting more or less into stocks -- affect the results?" option.

What you'll see is that success rates are generally 93-96% from 40% in stocks to 100% in stocks... at 25% in stocks success rates are 81%... yours is so high because you are very overfunded... which allows you to chose to take less risk.

 

[razztazz]

Sounds like you're not using the usual 4%. If you're living on small enough percentage even if all you had were greenbacks in an old coffee can during a period of hyper-inflation it'll still last. AA only relates to max survivable spending.

 

[OverThinkMuch]

Feeling very pessimistic a few years ago, I changed my AA to 25% equities, 50% bonds and 25% cash. Sounds insanely conservative, right?

When I ran simulations on Vanguard, below 30% equities caused problems. Have you considered simplifying a little bit, and giving equal amounts of equities, bonds and cash? (1/3rd each)

I think it would be more helpful if you provided some context about yourself, too, like age or how long you expect to be retired. And maybe your expected percentage spending per year, relative to your portfolio value.

 

[24601NoMore]

Feeling very pessimistic a few years ago, I changed my AA to 25% equities, 50% bonds and 25% cash. Sounds insanely conservative, right?

But when I input all my particulars into FI Calc, the success rate is 97.6%, even if I DOUBLE my spending and increase that with inflation. I don't have any heirs to think about, so what would be the logical argument for increasing my equity allocation and volatility?

Thanks for the help.

Sounds like we're at similar places in terms of equity allocation and likely success rates. (I've been at ~25% equities for many years now, and am entirely comfortable with that level of risk and return). Not sure I could double my level of spend and still be successful, but we have a very good handle on our spending and the plan works in all but Armageddon level scenarios, so I'm good with it.

If you don't have any need to take on additional risk and especially if you are not comfortable doing so, my own advice FWIW is...DON'T.

It's challenging to read through what frequently seems to be an overwhelming consensus on ER and elsewhere (eg: Bogleheads) that you "have" to hold a large percentage of stocks. This may be true for many or even most people. However, if you're fortunate enough to be in a position to not have to do so, why do it? If you increase your allocation to stocks, you're risking the success you've already achieved and things could easily go splat in an ugly way.

I think a lot about the very real possibility of a 50+% drop, which I personally feel is likely over the next year to several years. Some here say they'd be comfortable with that, and perhaps that's true. But if you go back to Bogleheads or perhaps even here and read people's reactions to the big drops we've had in the past, there was a lot of wailing and nashing of teeth by many who had previously advocated for holding big stock allocations.

I'd say you're good to go. No need to take the risk unless your goals were to dramatically change.

 

[OldShooter]

... what would be the logical argument for increasing my equity allocation and volatility? ...

Well, start with the observation that volatility is not risk, particularly in your case where you are wealthy far beyond your needs. You have no tenable reason to worry about volatility or to confuse it with risk.

No heirs? Fine, but surely there are charitable or religious causes that you care about and which could benefit from a wisely-invested bequest or even from gifts while you are still alive. Essentially you are now behaving like the servant (in the Parable of the Talents) who buried the money entrusted to him.

My "logical argument" (WADR) is this: You do not have a "conservative" allocation. You have a selfish one.

 

[OldShooter]

... I think a lot about the very real possibility of a 50+% drop, which I personally feel is likely over the next year to several years. ...

Do you also think about the fact that every single drop in recorded market history has been followed by a complete recovery? The only reason to worry about a large drop is if you plan to panic and sell or if your AA strategy cannot tide you over a couple years of a dip.

​

(Sorry, the chart is a little out of date but adding the last 6 years of history will only make the point more strongly.)

 

[DjBrown]

I don't have any heirs to think about, so what would be the logical argument for increasing my equity allocation and volatility?

Thanks for the help.

Making money and having much more money to spend.

Cash = losing money. I hate losing money. Today's Bonds are way more risky than stocks. So you don't really have "conservative" portfolio.

 

[CincyDave]

As some others have mentioned, one reason to increase your equities would be to give more to charities, if that interests you. But, your money, your call. If your current allocations helps you sleep, nothing wrong with that.

 

[COcheesehead]

Making money and having much more money to spend.

Cash = losing money. I hate losing money. Today's Bonds are way more risky than stocks. So you don't really have "conservative" portfolio.

I don’t want to derail this discussion, but there are lots of “bonds”. People use the term generically and usual are referring to treasuries. Some bond categories go up, some go down. So when one refers to bonds being risky, please specify which ones you are talking about.

 

[DjBrown]

I don’t want to derail this discussion, but there are lots of “bonds”. People use the term generically and usual are referring to treasuries. Some bond categories go up, some go down. So when one refers to bonds being risky, please specify which ones you are talking about.

You can compute P/E for bonds as well as for stocks. If you bought "safe" treasuries at PE of 60-70 that is riskier investment than S&P 500 at PE 25.

Subtract from bond yield: inflation and taxes and what kind of profit are you left with? Losing money is risky not conservative.

 

[COcheesehead]

You can compute P/E for bonds as well as for stocks. If you bought "safe" treasuries at PE of 60-70 that is riskier investment than S&P 500 at PE 25.

Subtract from bond yield: inflation and taxes and what kind of profit are you left with? Losing money is risky not conservative.

Again, there are bonds that will provide a nice gain in the anticipated environment going forward too and I will leave it there to not derail the thread. Do your homework.

 

[DjBrown]

Again, there are bonds that will provide a nice gain in the anticipated environment going forward too and I will leave it there to not derail the thread. Do your homework.

That is a very weak argument and I will leave it there.

 

[pacergal]

It sounds like you have more than what you will need in your lifetime, and have an AA that l you feel fine with and lets you sleep well. No problem with that.
If you have no one else who might possibly depend on any monies left after you die, keep things as they are. It's your money, your life.
We all do what is right for us.
Congratulations and enjoy every day!

 

[COcheesehead]

That is a very weak argument and I will leave it there.

I don’ want to argue, apparently you do.
There are at least three, maybe more bond categories that do well in rising interest rate, tax and inflation environments.

 

[Tafkah]

OP here. Thanks for all the thoughtful responses, I really appreciate the wide range of opinions. Plenty of "food for thought."

Hope everyone has a happy, healthy and prosperous new year!

 

[daylatedollarshort]

I don’ want to argue, apparently you do.
There are at least three, maybe more bond categories that do well in rising interest rate, tax and inflation environments.

Fidelity has all these warning and caution screens about buying 5 year TIPS with negative yields these days, though if inflation stays the current course they are still returning 4 - 5% because of the inflation factor, maybe even more if inflation goes up higher. But the funny part is there are no warning screens when you buy stocks that you could lose 50% or more of your investment.

 

[ERD50]

... But when I input all my particulars into FI Calc, the success rate is 97.6%, even if I DOUBLE my spending and increase that with inflation. ...

Something's not right.

If your success rate is 97.6% and you double your spending, the success rate should go down. And what do you mean "if you increase that with inflation"? The default for FIRECalc is to adjust spending for inflation.

Sounds like you are modifying some entries that we don't know about?

-ERD50

 

[stepford]

I read that as the success rate was 97.6% under the conditions of double expected spending (implying that the success rate was higher - presumably 100% - at the nominal spend rate). I don't think the OP meant to imply that the success rate remained exactly 97.6% in both scenarios.