Putting on my "dunce" cap.

[LeatherneckPA]

And zipping up my asbestos suit, 'cause somebody is going to flame me for my ignorance, stupidity, whatever you want to call it.

I'm learning lots here, but still have a long way to go I guess. I finally got a grip on that SWR thing. (Became a lot easier once I found out what SWR means) And realizing that my pension equates to about 4% of a million dollars made me feel pretty good about ER. I still don't know what TIPs is supposed to mean. But I digress.

Recently there was another post about getting 8% without the volatility issue. And I devoured that with interest. I even read that link from that Bernstein guy. (Bear in mind I have no idea who he is.)

So here's what I don't understand. If the market consistently outperforms every other form of investment, why not just invest it all in a variety of stocks and hold on for the wild ride? Eventually the downs average out with the ups, and supposedly you end up ahead in the long run. So why bother with bonds and other stuff?

Ok, the visor is closed. Flame away.

 

[haha]

So here's what I don't understand. If the market consistently outperforms every other form of investment, why not just invest it all in a variety of stocks and hold on for the wild ride? Eventually the downs average out with the ups, and supposedly you end up ahead in the long run. So why bother with bonds and other stuff?

We don't flame much on this board, especially with people as polite as you are.

I would say learn a bit more, then if you still feel that way, go ahead and do it. It's your money and your life. You could hit it big.

Really, no one “knows” what is best, because the future, which is all that matters, hasn’t happened yet. And it isn’t even clear how to best apply whatever lessons there may be lurking in past history.

In the final analysis, you pay your money and take your choice, or you hedge as best you can.

Ha

 

[audreyh1]

If you can live off your pension, then no reason NOT to invest the any additional assets in 100% equities unless it prevents you from sleeping at night.

Audrey

 

[Anansi]

You probably will get a lot of replies to this, most of them far better than mine, so I will be brief. As to going 100% in stocks, there are people who do advocate that strategy (although not many here) and if you have a large pension you might go further in that direction than most people. But to simply answer your question why everyone doesn't do this, the problem is with "eventually". Even if you were positive that stocks would outperform everything else, you may not live long enough to see it happen. If you are actually immortal, on the other hand, and your pension has a cost of living inflator, go for it.

 

[samclem]

As Anansi points out, the market can stay down for a LONG time. Every year the market declines, you might wish you had some portion of your portfolio earning a "dull" 5% interest. 5% gain looks realy good when everything else you've got has dropped 5% to 10% per year. Or more. Also, there are many people who believe equities will be yielding only a little more than bonds for the next decade or so, not the big gap we've seen for the last 25 years. Finally, having a small amount (20%) in cash/bonds does not impact on your overall yields very much, if you re-balance every year or so (since you'll be taking funds from your bonds to buy cheaper stocks, which will boost your overall gains when stock prices go up, since you'll own more shares of the appreciating stock).

 

[cute fuzzy bunny]

Theres a post around here somewhere asking "why bonds" or some such. Should answer your question.

The short answer is that if you have balls of steel, an all equity portfolio would have done you well over the long haul of 20 year periods or longer. There have been some nice 10 or so year periods when equities stunk, produced little or no gain, and little or no income to go with them.

It'd suck to be 65 or 70 with an all stock portfolio when hitting one of those 10 year periods when bonds did well and stocks didnt. Or a long period of very high inflation while holding no inflation indexed/adjusted products.

I'd recommend a high equity portfolio to anyone accumulating and still working, or for an ER thats still fairly young, or for an ER with a small income that can pay the critical bills like food, electricity and taxes.

Otherwise you might consider a dollop of bonds. Past 80% equities you're taking on a lot more risk vs reward than may be prudent. Below 20% equities and you're taking on far less reward than the reduced risk would offset.

The truth for most people lies somewhere in the middle there, with sleeping at night and willingness to stick it out being the critical deciding factors.

 

[lowflyer]

I certainly wouldn't feel too bad about asking these questions. That should be part of what the forum is all about. From your questions, it seems like you are in the process of learning and trying to understand all the aspects of this retirement stuff. Join the crowd. Since you aren't quite ready to retire yet anyway, keep reading and learning. I think it's real important to look closely at all areas of investment and income. Evaluate them all for "appropriateness" for you...so you are comfortable (can sleep at night.)

Investing in a bunch of stocks and then holding on for the "wild ride" doesn't sound like a good plan to me, but it depends on the bigger picture. If the market heads south for a year or two, you'll likely not be too excited with only your pension coming in.

Also remember that your idea of what "good retirement investing" is will probably evolve over time and you'll continue to modify your plans.

 

[brewer12345]

retiredbop, the reason why all equities isn't a universal choice has many roots, but there is an easy way to understand why this might be the case. Pretend you retired in 1966 with an all-equity portfolio. Look at what happened to the after-inflation value of the portfolio in the period from 1966 to 1982. Not pretty.

 

[Alan]

I'm learning lots here, but still have a long way to go I guess. I finally got a grip on that SWR thing. (Became a lot easier once I found out what SWR means) And realizing that my pension equates to about 4% of a million dollars made me feel pretty good about ER. I still don't know what TIPs is supposed to mean. But I digress.
Ok, the visor is closed. Flame away.

I've monitored this forum for a couple of years and I like the way that there are no dumb questions - the folks here are genuinely helpful.

I concur with the earlier replies. For me at age 38 - 40 I was 100% equities but as I got closer to retirement I cut back quite a bit. Over 12 years I have achieved an equivalent of 8% year on year with 3 down years (worst was -11% and best was 19%). Over the same period I also noticed that I stopped enjoyed the most exciting roller coasters at the fairground I think the biggest thing with all stock portfolio is maintain your nerve, stay diversified, rebalance as needed and don't bottle out.

on the acronym thing like swr have you seen the helpful entry on the forum admin page

http://early-retirement.org/forums/index.php?topic=5392.0

 

[Nords]

So here's what I don't understand. If the market consistently outperforms every other form of investment, why not just invest it all in a variety of stocks and hold on for the wild ride? Eventually the downs average out with the ups, and supposedly you end up ahead in the long run. So why bother with bonds and other stuff?

Because the market can remain excessively volatile and irrationally low for longer than most people think that they can stay solvent.

It's pretty emotionally wrenching to have to take out 4% when your portfolio's down 20% and say "No problem, honey, in the long term it'll all come back!"

Logic, statistics, math, & history don't lull most people to a comfortable nighttime sleep.

But 90% is good for us, considering that we have a COLA pension and other hedge factors working for us.

 

[Bikerdude]

Eventually the downs average out with the ups, and supposedly you end up ahead in the long run. So why bother with bonds and other stuff?

John Maynard Keynes (I'm sure you don't know who he is) once said "In the long run, we're all dead".

If I had a million dollar pension I would be inclined to roll the dice and invest in a widely diversified portfolio of equities and then hang on for the ride!

 

[donheff]

Because the market can remain excessively volatile and irrationally low for longer than most people think that they can stay solvent.

It's pretty emotionally wrenching to have to take out 4% when your portfolio's down 20% and say "No problem, honey, in the long term it'll all come back!"

Logic, statistics, math, & history don't lull most people to a comfortable nighttime sleep.

But 90% is good for us, considering that we have a COLA pension and other hedge factors working for us.

We are in a situation similar to Nords', good COLAd pension and high proportion of equities. I too shared your same question and still wonder if you are not correct. Every monte carlo I checked returned a better SWR the higher you keep the equities. I finally dropped down from about 90% to 80% when I added a 10% cash cushion in CDs and money markets based on the buckets discussion here (e.g. have a sufficient cash buffer to ride out a few bad years without withdrawing from the non-cash portion of the portfolio. More discussions here have me considering adding maybe another 5% bonds to smooth out the bumps a little and allow equity purchases in downturns through rebalancing.

But I think the pension makes a huge psychological difference. If I was depending entirely on my investments for ER, I think I would buy an inflation protected immediate annuity to cover some or most of the basics. I would just not be comfortable with the downside of returning to work

 

[SecondCor521]

I am very close to 100% equities in index funds and have no pension at all, but I am also 10-14 years away from retirement and will move towards something like an 80/20 mix between now and then for maximum 40 year survivability. I may add some bonds to reduce the volatility between now and then -- being 100% equities was tough in 2001-2003. I know I need to balance the upside risk of retiring a year or two sooner vs. the downside risk of a sideways or extended down market in the few years right before my scheduled retirement date.

2Cor521

 

[brewer12345]

Oh yeah, almost forgot.

I am currently sitting on about 25% cash, CDs and high grade bonds right now (and if some covered calls get exercised it will be over 30%) even though I consider myself an aggressive investor with a large appetite for risk. Why? Ain't nothing worth buying right now. When the market is less rosy, there will be opportunities.

 

[laurence]

About 10% cash here, ( MM @ 5%), but I'm not agile enough to manage my portfolio like Brewer. Buy and hold...and hold...