Anyone's asset allocation now more aggressive?

[Lusitan]

Thus far, I've been pretty much following the old "rule of 110" when it comes to asset allocation: the percentage of my investments held in stocks is 110 minus my age. So roughly 80% stocks at this point.

During the past year or so, I switched to 100% stocks for new contributions, just to maintain my asset allocation as the stock market crashed. Now that the stock market has stabilized (for now, anyway) and my asset allocation is in balance, I should in theory adjust my new contributions back to 80/20 stock/bond.

However, I'm considering whether it makes sense to stick with 100% stock allocation for now, given the crash we've seen and the fact that I'm now behind the eight-ball when it comes to how my portfolio has performed over the past decade (i.e. the stock market has sucked, when compared to historical averages).

I know that the worst thing one can do is to change their asset allocation based on fear and move away from whatever is crashing and towards whatever is stable/growing -- that's chasing returns and probably not going to work. But what about going in the opposite direction, i.e., getting more aggressive now in the face of a large stock market crash?

Has anyone else (presumably younger investors) gotten more aggressive with their overall asset allocation based on the recent stock market crash? If so, do you anticipate this being a fundamental shift in your asset allocation strategy over the long term, or a short term move in anticipation of trying to get the most out of any (potential) substantial stock market recovery? (i.e., dirty market timing )

 

[Kronk]

I had been invested 80/20 before the crash. I moved some bonds into stocks along the way, and I'm now at 86/14. I'm not feeling much of a need to adjust back to 80/20 until the market gets higher (maybe DOW 10,000 as an arbitrary number).

 

[ziggy29]

I know that the worst thing one can do is to change their asset allocation based on fear and move away from whatever is crashing and towards whatever is stable/growing -- that's chasing returns and probably not going to work.

It depends. Constantly shifting asset allocation based on fear and greed is probably a bad thing in a buy high/sell low sense.

But I think a lot of people learned that they didn't have as much risk tolerance as they thought they had, and as a result if they *permanently* switch to a somewhat more conservative AA they can live with (and not panic in times of fear), then it's not really a "worst thing" to do. In other words, if an 80/20 AA makes someone very fearful, stressed out and tempted to sell everything in a repeat of late '08/early '09, but a 60/40 AA allows them to weather the storm without much fear or temptation to make bad moves in a fearful market, then I'd say 60/40 may be more appropriate for them -- even if it was fear during a bear market that triggered it.

 

[freebird5825]

I enacted a small shift from my post-FIRE 50/50 AA in 2007 to a deliberate 40/60 AA in early 2009, as a direct result of what happened in 2008.
My self-perceived risk tolerance was exceeded, so I adopted a less risky AA as a starting point for 2009.
That being said, I am still DCAing, the majority of which is going into stocks right now. I just looooooove bargains.
So my AA has migrated to 45/55 since January 09. No biggie.
If I don't like what 2009 market fluctuations do to my AA over the next 6 month period, I simply redirect my DCA. A few mouseclicks at the Vanguard site are so much easier to do than exchanges and the resultant tax paperwork.

 

[Lusitan]

But I think a lot of people learned that they didn't have as much risk tolerance as they thought they had, and as a result if they *permanently* switch to a somewhat more conservative AA they can live with (and not panic in times of fear), then it's not really a "worst thing" to do.

I agree with you on that point.

But let's say you were perfectly comfortable with your 80/20 allocation and maintained it through the carnage via rebalancing and new stock investments. Now the time comes where you should be investing in some bonds too, but ... your heart just isn't into buying bond index funds these days ...

Those of us who have had a very poor return on our stock investments over the past decade or so ... should we be taking on higher stock allocations in order to "make up for lost time"?

I know most people, especially younger investors, are proud to say they're staying the course with their asset allocation (and I'm one of them) in terms of not running away from the stock market. But how many are increasing their stock allocation on a long term basis, e.g. by going with a "rule of 120" or other such shift in the allocation theory?

 

[lucija]

We're still more or less maintaining overall 80/20 stock/fixed...

I would be really tempted to reduce (but not eliminate) the non-stock portion of our investments if it was not for two reasons:

1st - More than half of our fixed investments is in a stable value fund consisting of non-exchangeable contributions by my current employer (these can be rolled over into an IRA when I leave this job), and

2nd - The remaining portion of our fixed investments is doubling as additional unemployment funds (things still look just as perilous on that front for us)

So... we decided to do the only other thing we could - all of our new contributions are 100% stock!

 

[lucija]

I should add... if the market picks up a bit again, I will let the equity portion ride it out without re balancing back down to 80% overall. I do not see us getting higher that 90% equity, though!

(And I do hope, I will not have to re balance "up" to get to 80% equity.)

 

[Texas Proud]

I agree with you on that point.

But let's say you were perfectly comfortable with your 80/20 allocation and maintained it through the carnage via rebalancing and new stock investments. Now the time comes where you should be investing in some bonds too, but ... your heart just isn't into buying bond index funds these days ...

Those of us who have had a very poor return on our stock investments over the past decade or so ... should we be taking on higher stock allocations in order to "make up for lost time"?

I know most people, especially younger investors, are proud to say they're staying the course with their asset allocation (and I'm one of them) in terms of not running away from the stock market. But how many are increasing their stock allocation on a long term basis, e.g. by going with a "rule of 120" or other such shift in the allocation theory?

I remember back before the dot com bubble burst... my mother (80 at the time) was wanting to take a lot more risks since my brother was making so much money....

I said "diversification works even if you don't want it to"....

Stick with what you are comfortable with.... don't chase returns... don't think that the market can not crash an additional 50% over the next two years... there IS a chance it can happen...

 

[W2R]

But let's say you were perfectly comfortable with your 80/20 allocation and maintained it through the carnage via rebalancing and new stock investments. Now the time comes where you should be investing in some bonds too, but ... your heart just isn't into buying bond index funds these days ...

You gotta do what you gotta do. If bond index funds just don't float your boat, it might be worth wondering why. Maybe you are young and working with a long time horizon. Then I would say that your shift is realistic and not unwise. But maybe you are pushing 60 and really can't afford to lose anything but it has been too long since your last foray to the local casino. In that case, think twice. Maybe some other conservative investment like Wellesley would be more fun than a plain bond index, and still meet your needs as well as your wants.

Those of us who have had a very poor return on our stock investments over the past decade or so ... should we be taking on higher stock allocations in order to "make up for lost time"?

Uh.... no?

I know most people, especially younger investors, are proud to say they're staying the course with their asset allocation (and I'm one of them) in terms of not running away from the stock market. But how many are increasing their stock allocation on a long term basis, e.g. by going with a "rule of 120" or other such shift in the allocation theory?

I'm not young, and I am staying the course. There is a reason for that. I have an aversion to buying high and selling low.

 

[Lusitan]

The remaining portion of our fixed investments is doubling as additional unemployment funds (things still look just as perilous on that front for us)

So... we decided to do the only other thing we could - all of our new contributions are 100% stock!

Good point about the unemployment funds. We have a pretty good emergency fund, but more is always better.

Sounds like you're doing what I'm doing with 100% new money going to stocks, even though technically you might be at 80/20 already and don't need to overweight stocks. Like you, I'm also considering increasing the stock allocation to 90%.

Decisions, decisions ...

Stick with what you are comfortable with.... don't chase returns... don't think that the market can not crash an additional 50% over the next two years... there IS a chance it can happen...

I hear ya. I'm all for not chasing returns -- heck, I went 100% new money into stocks during the biggest crash I've ever seen, so I wasn't chasing returns, I was swimming against the tide trying to keep my asset allocation on target. But good advice nonetheless -- I should pause and really think through any changes to my asset alloction.

If bond index funds just don't float your boat, it might be worth wondering why. Maybe you are young and working with a long time horizon.

I'm not young, and I am staying the course. There is a reason for that. I have an aversion to buying high and selling low.

Yeah, I have a pretty long time horizon for these retirement assets, and that's part of what drives the lack of interest in bond index funds. But the long time horizon is nothing new -- what's new is that the stock market has given me pitiful returns over the past decade or so, and it sort of feels like I'm "locking in" those returns by shifting increasing percentages of my money into fixed income at this stage of my life.

I agree with you wholeheartedly on the aversion to buying high and selling low!

 

[haha]

In an economy that we haven't ever seen befoe, the only fixed asset is ST US treasury assets. The rest is anyone's guess. People seem comfortable with the idea that corp: treasury spreads are narrowing and will continue to do so. I agree that they have narrowed, but I don't think that says diddle about what happens tomorrow.

The problem with ST treasuries is that they yield nothing. Very peculiar that a country with over a 10% Debt/GDP ratio can borrow at 0.15%. If anyone can tell me in what universe this makes sense please do.

I guess it is hope.

In this situation day to day volatility will be greatest with equities, but longer term there could be abrupt valuation shifts that make us wonder was was fixed about fixed income. What I am saying is that we may habitually think fixed income securities give stability, but in anything but the very short term this could well be wrong. It could happen that debt-free equity of companies that make necessary things is actually the most secure.

Perhaps it is a sign of the times that anti-psychotic medications have recently pushed out statins as the sales volume leader in the USA. I guess that is part of the pursuit of happiness. Hard to stay happy if you are hallucinating.

Ha

 

[WhoDaresWins]

No, I have not changed my asset allocation or changed anything around as I am hopeful things my mutual funds will experience an uptick. Other than my deferred comp plan at work where I continue to purchase shares in mutual funds, I am not doing any buying. I am trying to build more of a cash position as I was woefully lacking in this area when the present recession hit.

 

[FUEGO]

I know that the worst thing one can do is to change their asset allocation based on fear and move away from whatever is crashing and towards whatever is stable/growing -- that's chasing returns and probably not going to work. But what about going in the opposite direction, i.e., getting more aggressive now in the face of a large stock market crash?

Has anyone else (presumably younger investors) gotten more aggressive with their overall asset allocation based on the recent stock market crash? If so, do you anticipate this being a fundamental shift in your asset allocation strategy over the long term, or a short term move in anticipation of trying to get the most out of any (potential) substantial stock market recovery? (i.e., dirty market timing )

Yes, this describes my appetite for risk well. I have always been basically 100% stocks for the five years of my working life. It worked well until last year when it didn't.

Back around Nov 19 2008 (a market bottom I thought) I changed my asset allocation to include some riskier and/or beaten down stuff like domestic REITs, international REIT's and international small cap. I have been overweighted in emerging markets for a few years, and even more so now with their amazing recovery.

I had wanted to add these asset classes for a while, but neglected to do it due to poor availability of investment options and/or perceived overvaluation (dirty market timing). Once I saw the opportunity to get into these asset classes at a relative bargain, I made the shift and it is a permanent shift. Until I decide to scale back my risk some (if that happens).

My thinking is that I am still in my late 20's and I have plenty of time for my investment strategy to pay off. I'm still something like 7 to 10 years minimum from being FI. As my portfolio gets closer to what I need to be FI, I will probably dial back the risk some by either changing the equities allocation to a less risky mix, and/or increasing the bond allocation over time. In the meantime, I have the ability now to try to hit a few homers before getting older and settling for singles and doubles.

But I wouldn't say that I am "trying to make up for lost ground" exactly, since I don't have a specific target retirement date in mind that I am shooting for. I'm FI when I'm FI. I just viewed some of these riskier asset classes as being beaten down so much that they presented a good reward for the risk taken.

 

[SecondCor521]

I never change my asset allocation based on the performance of the market, either short-term or long-term.

I do change my asset allocation if I decide my risk tolerance or future goals and plans have changed significantly.

I personally believe that in the long run there is not a whole lot of difference between, say, 80/20 and 75/25, or especially between 50/50 and 40/60 and 60/40. But I haven't looked at one of those efficient-frontier graphs in a while.

I also believe that those same people who adjusted their allocations more conservatively in, say, December of 2008 (and missing the ~35%? rebound since then) will be the same folks who decide to become more aggressive at the next market top. To the degree that people chase performance I think they lose vs. LTBH.

So the trick is to be really honest with yourself and decide if your adjustments up or down are truly a shift in your long term allocation or if they're chasing returns.

Personally, I have stayed at 100% US equity index funds (mostly VFINX/VTSMX and similar) for a number of years now. I was a little dismayed and frustrated at the very bottom last fall, but stuck with it. There were also times that I wanted to go to 110% stock allocation (not 110%-my age, but 110% stock) during this recent downturn, but that seemed like too much hassle for too little reward, so I didn't.

Long term I have a general goal of getting to 80/20 when I hit FI in a few years because I believe that is the best survivability ratio for a 40 year retirement, but I'm not sure when I'll decide to do that. I said to myself that I ought to go to 90/10 when I turned 40, but I'm past 40 now and still not interested in dialing back. Part of the reason is that if you stay at 100% equities then you don't have to make any rebalancing decisions. I'm somewhat of a Couch Potato.

2Cor521

 

[unclemick]

1980 - 60/40

2009 - 65/35

Party on.

heh heh heh - more complicated than that - but that's the big dog on the porch.

 

[FUEGO]

Long term I have a general goal of getting to 80/20 when I hit FI in a few years because I believe that is the best survivability ratio for a 40 year retirement, but I'm not sure when I'll decide to do that. I said to myself that I ought to go to 90/10 when I turned 40, but I'm past 40 now and still not interested in dialing back. Part of the reason is that if you stay at 100% equities then you don't have to make any rebalancing decisions. I'm somewhat of a Couch Potato.

Would a prolonged bull market run of 6-8 years (like the 1990's) entice you to hurry up and switch to 80/20 or 90/10? I think a prolonged bull market might make me consider dialing back the equities a little at some point (right at the peak of the market immediately preceding the crash LOL).

 

[ziggy29]

Would a prolonged bull market run of 6-8 years (like the 1990's) entice you to hurry up and switch to 80/20 or 90/10? I think a prolonged bull market might make me consider dialing back the equities a little at some point (right at the peak of the market immediately preceding the crash LOL).

A prolonged bull market would make me realize that I no longer need to take much risk and I'd probably permanently dial back to something like 40/60.

Hindsight being 20/20, I wish I realized that in 2007. And who's to say in the future when the bull is getting tired and when it still has legs. Someone could have been forgiven if they thought the 1987 crash might be the end of the 1982-87 bull market -- but it turned out to be a brief detour in a secular bull that still had a dozen years to run.

 

[FUEGO]

Hindsight being 20/20, I wish I realized that in 2007. And who's to say in the future when the bull is getting tired and when it still has legs. Someone could have been forgiven if they thought the 1987 crash might be the end of the 1982-87 bull market -- but it turned out to be a brief detour in a secular bull that still had a dozen years to run.

Who knows? If we see 20% average annual returns for 6 years, that might indicate to me that we are nearing a top and it could be a good time to either redeploy some $$ into bonds or sell some investments and pay off the mortgage. Unfortunately this gets into the "dirty market timing" realm - something I'm not particularly skilled at. But I know at some point in the next 6-10 years I want to increase my bond allocation to some non-zero number, and 6 years into a beautiful bull run seems as good a time as any. Problem comes when the bull ends at 5.75 years - then what?

 

[jIMOh]

I decided a little while ago (late 2007) that 80-20 was my ideal allocation (age 36; 17 years to FIRE)... and then 2008 came and moving to that allocation would be selling low... so I am continuing to buy equities (close to 100% new money into equities).

As some of our funds (mostly foreign and emerging markets types, plus company stock) had 30%+ returns for first half of 2009, those high returns were sold into cash and bonds. As long as I can get to 80-20 within 15 years of retirement I think I am OK- no hurry to change from what was 92-8 to 80-20 and sell low. The difference in volatility between the two will be neglible I think, especially over a short time period (3 years).

 

[Meadbh]

I should add... if the market picks up a bit again, I will let the equity portion ride it out without re balancing back down to 80% overall. I do not see us getting higher that 90% equity, though!

(And I do hope, I will not have to re balance "up" to get to 80% equity.)

I thought the primary objective was to get a higher return at an acceptable risk, rather than to reach a specific asset allocation. Of course, it may be different early in life....

Anyhow, at 51, I am not reallocating my current investments, but I am reducing my DCA into equities and allocating it elsewhere.

 

[lucija]

I thought the primary objective was to get a higher return at an acceptable risk, rather than to reach a specific asset allocation. Of course, it may be different early in life....

I think my "problem" is that I do not mind taking on more risk. In fall 2007 we were 100% equities, and it occurred to me that we stand to lose quite a bit if the market takes the dive... so, I re balanced down to 80% (simultaneously as my employer did some retirement plan changes) just in time to test my new allocation by watching the never ending spiral down for the next 18 months. I have discovered I was not bothered by it at all.

Now, after all the loses we all had so far, I am thinking I would not mind a bit more risk... how much larger can my potential loses be if I increase equity allocation (80% vs 90-95%)? Not all that much...

 

[DblDoc]

The efficient frontier would argue that somewhere between 10-30% bonds is the sweet spot for maximizing returns with minimal risk. 100% equities gets you slightly better predicted returns - but at the cost of proportionally greater risk.

We survived this bear (so far) with 80:20 equity:FI and are on autopilot for shifting the AA to 60:40 in about 10 years when I hope to retire. If a bull comes along that shift may occur a little more quickly as my need to take risk decreases. One take home message from this latest bear was do not wait until the day you pull the FIRE trigger to adjust your AA.

Rather then increase the equity ratio we have been saving more aggressively during this bear. I took on a locums job and we shifted the extra mortgage payments to investments.

DD

 

[Animorph]

I'm nominally 100% equities and retired (though DW is still working). I put about 25% in cash in mid-2007 as I retired, to avoid any problems with a bear market just as I retired. The idea was to spend down the cash first, regardless of the market. Not really market timing, though I was concerned about consumer debt at the time. I also did a little timing, with gold and a bear market fund with another 15% of the portfolio.

As the bear unfolded, I got rid of my hedges first and then bought equities with cash. I added equal amounts every time the market went down another 5% from the peak. I planned on a 40% drop, since that seemed like an average bear. When the markets dropped below that, I used my home equity line of credit to add another couple of buying steps to my plan. I tried to preserve 2 years living expenses in cash, though that ended when the market was at its lowest. I had about half a year cash in March this year, and had shifted from some conservative equity funds to more aggressive funds.

With the latest recovery I ended up with about 11% cash as I sold some of the equities. I'd like to drop that to 5% or less. I'm hoping to buy if the market will go down a bit more. Then I'm probably back in "permanently" until things look too optimistic or I need more cash for expenses.

So, yes, I'd be more agressive with the allocation for the next few years. My risk tolerance is obviously high. I was more worried that the market would start going up before I bought my next chunk of equites than I was about the market continuing down. At least until I was "all in" in March. If it had gone down any more the only thing I could have done was shift out of conservative funds and into agressive funds a second time. And I may have had to sell some of the equities I had just bought, hopefully at just a small loss.

 

[ls99]

For me the last year or so the returns have been below the value of the risk. However the cost of changing the risk were above the value of potential returns. So steady as she goes.

As I often say things are down so low the seem like up to me. Surely the up will come..... hopefully in this lifetime.

At least between TIAA and Vanguard the costs of investments is not that high.

 

[Lusitan]

One take home message from this latest bear was do not wait until the day you pull the FIRE trigger to adjust your AA.

Excellent point.

I've decided to stick with 100% equities for my new contributions, as I've been doing since October 2008. Barring any major drop in the stock market, this will likely change my AA from 80/20 to something approaching 85/15 by year's end. I'll revisit at that time.

Like Lucija, I probably won't increase my stock holdings above 90% of my AA, but somewhere in between 75% - 90% seems to be a comfortable range for me at this age.