I'm young - why not 100% equities now???

[NinjaPigeon]

I'm close to 100% right now. I figure I'm young enough that the extra risk will pay off over the long run. I will probably start adding some bonds into the mix someday, but right now, I already have some indirectly through my freedom fund, so don't need to add anyone on my own.

 

[Dawg52]

Most of what I've seen shows diminishing returns for >80% equities vs a huge increase in volatility. Which for certain is something you can handle when you're more than 20 years away, providing things go the same in the future as they have in the past.

Since the US economy was an emerging and stabilizing market through most of the historic data's time period, and we're more of a mature market now, I wouldnt count on the same full returns for equities that the historic data indicate.

I doubt you'd do a lot worse going with something like a target retirement 2045 fund thats about 80/20 now and slides down as you go, less volatility, most of the return, and some goodness during bond market bull runs.

I like this approach. We offer target funds in our 401k plan at work and I always tell young employees that 80-100% in equities makes sense while your young but I'm also afraid that they will run for the hills when a market crash occurs and never return. An 80/20 mix would soften the blow and still realize pretty close to the same gains as an all equity portfolio.

 

[haha]

(your state of mind may become disconcerted when you portfolio of 2 million falls to 600K and you lose your job)

Buck to schmuck in 18 months. Sounds invigorating.

I agree that 100% equity allocations require more careful investing than 80/20
splits. I invest only in top quality (IMO) companies, with long histories of paying
and raising dividends, being financially responsible, not making stupid strategic
decisions, etc. Being able to live on the dividend flow makes it much easier to
ignore market downturns.

Ha

This seems like an excellent approach. But at today's yields, it seems that it would require a very large stash, or very low expenses.

Ha

 

[figner]

I was 100% equities until about a month ago. Now that I'm 10-13 years from ER,
and after reading Bernstein's "Intelligent Asset Allocator", I decided to switch to
20% bonds.

My reasons for being 100% equities were:

1) In theory, best chance of high returns over long time periods.
2) I seem to handle portfolio volatility just fine (2000-2002).
3) ER seemed far off, and having to postpone for a few years due to portfolio volality
wouldn't be a disaster.

Reasons for 80/20 AA:

1) As I get closer to ER, volatility has a bigger chance of affecting my ER date
substantially. 80/20 is still a high equity mix, but past 80/20 returns have had
significantly lower volatility while not giving up that much in returns.

2) Bonds are a less-correlated-with-stocks asset class, and being able to slice and dice
among uncorrelated asset classes is good. (oversimplification alert! )

It was interesting watching my reaction to the market blip on 2/27/07, right after
I'd gone to 20% bonds: the bonds probably made the drop slightly less painful, but
I'd gotten in the habit anyway of not letting how I feel about portfolio losses affect
my actions.

 

[CyclingInvestor]

This seems like an excellent approach. But at today's yields, it seems that it would require a very large stash, or very low expenses.

I agree a somewhat larger stash is required, but a portfolio with 3% average
yield with decent growth from good companies is pretty easy to put together
(a few more weeks like last week and it will get even easier). When I first hit
FI I could not have afforded this approach, but since I had an extra 2+ years of
good work conditions I was able to build the extra cushion needed. It was well
worth the peace of mind.

 

[ADJ]

If you are heavily invested in equities and wanted to move money to let's say bonds, is that transaction taxable? Presumably you'll have to sell some equities to purchase the bonds. Another question, once you decide to withdraw from your nest egg, can you withdraw up to your original contributions without oweing tax or do you have to pay gains on each withdrawal (assuming there are gains in your portfolio). Thanks.

 

[firewhen]

As long as you do not need the money for at least 5 years, and its movements up and down will not affect you, either emotionally or in your day-to-day living, 100% equities except for a cushion of 6 months-1 year living expenses should be fine. This has always offered the highest return, and my philosophy has been why not go with the best performing asset class? Why sacrifice return when the risk and volatility were not important to me?

I would recommend broad-based holdings, like a total stock market index fund or stocks in many industries and sectors. You could really ramp up the volatility otherwise.

At some point, you probably will want to reduce the equities percentage. Before I found this board, I did not believe this, but I now recognize that the risk of a meltdown when you are not working, however unlikely, could be worse than the greater chance of missing out on some additional return. IMO you still want at least 50% stock, if not more, but diversification becomes more of a needed safety net.

If you are heavily invested in equities and wanted to move money to let's say bonds, is that transaction taxable? Presumably you'll have to sell some equities to purchase the bonds. Another question, once you decide to withdraw from your nest egg, can you withdraw up to your original contributions without oweing tax or do you have to pay gains on each withdrawal (assuming there are gains in your portfolio). Thanks.

This is another issue. I plan to move the IRA money first to bonds to avoid the capital gains, and have the interest tax-deferrred, while keeping the taxable equity accounts intact, where dividends are taxed at the favorable rate. If you have bought shares in blocks, I believe you can separately identify them when you sell, and try to minimize the capital gains. If many of your funds are long-standing and have grown over time, the tax bill, even at 15%, coupled with any state income taxes, can be considerable.

 

[ERD50]

If many of your funds are long-standing and have grown over time, the tax bill, even at 15%, coupled with any state income taxes, can be considerable.

I know this is implied and understated by most, but just in case someone misses it - if you were to convert a portion of your equities to bonds over time, only the *gains* on those equities would be taxed. Someone might be thinking the 15% (or whatever tax rate applies at the time) would be the entire 'conversion'.

-ERD50

 

[Hamlet]

I'm 34 with 100% equities. After the market downturn last week, I started thinking about whether I still have the stomach for the swings now that my portfolio is much larger than it was the last time we had a downturn. If the S&P gets knocked down 35%, will I be able to continue to hold my stocks as well as continue buying into the decline?

I believe the answer for me is yes.

 

[youbet]

I'm 34 with 100% equities. After the market downturn last week, I started thinking about whether I still have the stomach for the swings now that my portfolio is much larger than it was the last time we had a downturn. If the S&P gets knocked down 35%, will I be able to continue to hold my stocks as well as continue buying into the decline?

I believe the answer for me is yes.

Of course, if you are truly 100% equity, the only money you would have to buy in would be new money from current earnings.......

 

[cute fuzzy bunny]

Which means downturns are good...you're buying stuff on sale!

Downturns are only bad if you're forced to sell during them. A nice emergency cash buffer in 6.25% cd's is proof against that.

 

[SecondCor521]

I'm 100% equities - 6 months expenses in an emergency fund at age 37.

2Cor521

 

[youbet]

Which means downturns are good...you're buying stuff on sale!

Downturns are only bad if you're forced to sell during them. A nice emergency cash buffer in 6.25% cd's is proof against that.

So rather than go 100% equity, you keep a nice emergency cash buffer instead?

 

[Alex]

experts say that adding 20% bonds will barely reduce your return, but it will significantly reduce your overall risk. I think it is a good trade off.

Stock
/Bond Avg. | Worst | # of loss
Alloc. Return | Loss | Years
100/0 | 11.0% | -43.1% | 21 of 75
80/20 | 10.3% | -34.9% | 20 of 75
60/40 | 9.3% | -26.6% | 18 of 75
40/60 | 8.2% | -18.4% | 16 of 75
20/80 | 7.0% | -10.1% | 13 of 75

 

[ERD50]

So rather than go 100% equity, you keep a nice emergency cash buffer instead?

I think a cash buffer is important, esp for someone starting out. And esp if you are going 100% equities.

But, if you measured that 3-6 month cash buffer as part of your overall portfolio, it would probably make a fairly large %. So, you are not really 100% eq overall.

But, I'd be OK with the rest being all equities for someone in the accumulation phase. Sure, some bonds would cut the volatility, but if you are not drawing down, and a sharp drop does not make you too nervous, what diff does it make? You are in there for the long haul.

-ERD50

 

[bosco]

Oh no, you mentioned paying off a mortgage , let the firestorm of mortgage payoff debate begin !!!!

in a-sucks case, the debate is much more straightforward. IIRC, he is in Canada, and there is no deduction for mortgage interest (at least not without some very fancy financial footwork). So the temptation to keep the mortgage and invest the loan is much lessened. But we can still debate whether his house equity should be considered a bond...

 

[Hamlet]

Yup. I'm smack dab in the middle of my accumulation faze. I'm saving pretty close to a third of my income at this point.

Of course, if you are truly 100% equity, the only money you would have to buy in would be new money from current earnings.......

 

[Leonardo]

Which means downturns are good...you're buying stuff on sale!

Downturns are only bad if you're forced to sell during them. A nice emergency cash buffer in 6.25% cd's is proof against that.

Unless the downturn continues... just remember the Nikkei 225 and the decline of 1989 to 2003. Anyone who is with a buy-and-hold strategy from 1989 still hasn´t recovered from that. A multi-year (10+) bear market is always a possibility.

 

[free4now]

When I was in my 20's I was basically 100% in equities. It worked well for me and I would suggest it to anyone who knows they are a buy and hold investor. However if you might be tempted to sell on a market downturn, then it makes sense to buy some "sleep at night" by lowering your equity percentage.

Frankly my main reason for being 100% in equities was that I didn't really understand the way that an 80/20 ratio can actually perform almost as well with rebalancing. The rebalancing tends to make you "sell high and buy low" which boosts the returns almost up to what you would get with 100% equities.

The other advantage of 100% equities is the simplicity... when you have a relatively small stash (say less than 100k) the extra work of say an 80/20 split might just not be worth the benefits.

Yet another advantage of being in equities early on is that you can make all the "beginner mistakes" early on before your balances are too big. It seems like everyone has to go through the stage of thinking they can pick the stock that's going to the moon before you realize that diversification is a better approach.