Inflation and AA/Bonds

[kenpoed]

I am 45, have a 1.1 m portfolio of low cost, passive indexes and feel good about the diversification.

My biggest concern as I try to retire in 15 years is to avoid the inflation train I feel is coming. with a 85/15 mix right now I feel I need to stay aggressive because inflation has to come based on geopolitical spending and money printing.

Would you be this aggressive? Am I nuts?

 

[pb4uski]

Only time will tell, but 85/15 is very aggressive for a 45 yo IMO.

 

[W2R]

Still, you say you have 15 years before retirement. So, it's reasonable to have a less conservative portfolio than someone who is planning to retire in, say, 3 years or so.

 

[MichaelB]

Delaygratification, why not run your numbers through FIREcalc using your current allocation, and then once again with a 70/30, to see the difference. You might find that the return is slightly lower but the volatility is substantially lower, meaning your portfolio is less risky.

 

[btbw2380]

While 15 years is a decent timeframe to ride out fluctuations in the market with your aggressive allocation, I'd be more concerned about your ability to stomach those possible fluctuations. When 1.1 mil turns into 700k, often a strategy morphs from growth to survival. One might say only you know your ability to ride it out but I don't think anyone really knows how they'll react until the times comes. No way I would be that aggressive.

 

[Lsbcal]

I am 45, have a 1.1 m portfolio of low cost, passive indexes and feel good about the diversification.

My biggest concern as I try to retire in 15 years is to avoid the inflation train I feel is coming. with a 85/15 mix right now I feel I need to stay aggressive because inflation has to come based on geopolitical spending and money printing.

Would you be this aggressive? Am I nuts?

This is always a tough call. Personally I had a 100% equity portfolio at that age. With real rates at such low levels, to me it feels right to have an equity heavy portfolio for the present. If real rates climb towards historic levels then I'd move to a more conservative mix perhaps.

Also the bond market is not signaling the inflation you fear. Take a look at the 30 year TIPS rate -- miserably low right now.

The good (and bad) news is that you are in the drivers seat. We are in other cars and waving to you. Fast or slow lane?

 

[Midpack]

Like Lsbcal, I was 100% equity throughout until I was about 45. I was after maximum returns and I was willing to wait for the long run to work in my favor no matter how many years that took (FI early or late, I was OK with either). It served me well, but hindsight would suggest it wasn't very smart so I'm not recommending it.

Furthermore, there is no right answer, so I won't waste your time with my recommendation. You have to decide what your risk tolerance really is (many people don't know until they go through a big downturn), what your goals are and how flexible they are. Anyone who says you're "nuts" or not is simply reflecting their needs, not yours...

It seems many members here are DIY low expense index fund investors with 10 funds or less. Most choose an asset allocation for the long run and rebalance to maintain come what may. Asset allocation changes are often made very slowly only in response to getting older (fixed income allocation = age or the like) or major changes in financial circumstances - not due to projections for inflation, returns, PE ratios or where we are in broad economic/business cycles. IOW long term investors, not traders. YMMV

 

[Gatordoc50]

I am 45, have a 1.1 m portfolio of low cost, passive indexes and feel good about the diversification.

My biggest concern as I try to retire in 15 years is to avoid the inflation train I feel is coming. with a 85/15 mix right now I feel I need to stay aggressive because inflation has to come based on geopolitical spending and money printing.

Would you be this aggressive? Am I nuts?

That is the same mix I have but it's only about 50% of my portfolio with the rest in real estate. I wouldn't say that having 85% of your investment portfolio in stocks is well diversified. If you don't have a pension or other investment vehicles, I'd say you are wise to question it. As far as inflation goes, I agree with Big Ben in that deflation is the bigger risk.

 

[Animorph]

I was and still am 100% equity. I see no problem there. It's especially appropriate if your retirement timing is flexible. Then there is no need to get conservative until you do retire or set a date. When that time comes, then get a least a little conservative so that those early retirement market fluctuations don't hurt you.

 

[Independent]

I'd say that you are investing 3% of your assets for 15 years, 3% for 16 years, 3% for 17 years, ...., and 3% for 47 years. That may make the 85/15 more plausible.

I'd also say that if my primary concern were inflation, I'd stay away from any non-indexed bonds.

I also note that you're only 45 and you've already saved $1.1 million. Unless you recently took a big income cut, you're going to be adding more assets to your nest egg over the next 15 years. That makes it easier to be aggressive.

But, full disclosure, I'm one of the more conservative investors on this board, and I'm married to the most risk averse person I know, so we wouldn't have been 85/15 at age 45.

 

[Spanky]

Is it too aggressive? Only you can tell based on your risk tolerance and financial goals (i.e, the amount of nest egg in 15 years before retirement) which will determine if your AA is aggressive (or not).

 

[obgyn65]

Yes IMHO the OP's asset allocation is too aggressive.

 

[walkinwood]

My allocation through most of my working years was 80% equities, 20% short-term bonds & cash. I think it helped with the volatility without losing much in terms of return (I don't have any figures to back that claim).

A couple of years before we ER'd, I ratched the equities down to 70%. It is now 60%.

In hindsight, I wish I had moved to 60/40 a few years before ER.

 

[clifp]

Yes IMHO the OP's asset allocation is too aggressive.

I am not sure why.

Historically for a 35 year period (which seems prudent given that OP is retiring at 60) an 85/15 portfolio had only 1/2 the failures of a 50/50 portfolio with a 4% withdrawal rate.

Given that bond yields are at historical low levels and we have seen the best performing 10 and 30 year periods for bonds ever. I see no reason to think that next 30 years will be better for bonds than the past.

Stocks may not do great in the next 10-30 years but compared to bonds I think they will.

I am retired and have an 85/15 AA.

 

[Lsbcal]

I am not sure why.

Historically for a 35 year period (which seems prudent given that OP is retiring at 60) an 85/15 portfolio had only 1/2 the failures of a 50/50 portfolio with a 4% withdrawal rate.

Given that bond yields are at historical low levels and we have seen the best performing 10 and 30 year periods for bonds ever. I see no reason to think that next 30 years will be better for bonds than the past.

Stocks may not do great in the next 10-30 years but compared to bonds I think they will.

I am retired and have an 85/15 AA.

I agree with your thoughts in general.

At retirement I'm not sure that most will be best served by an 85/15 AA. Some possible profiles that might fit such an AA:
1) Have inflation adjusted income cash flows that meet needs so 85/15 is just icing on the cake.
2) Must get the most bang for the buck due to portfolio shortfall and can stomach the high risk.
3) Just are doing what they always did. May not appreciate the risk they are taking.
4) The portfolio is so large that even a 50% loss will not crimp their living standard.

 

[GrayHare]

Given that bond yields are at historical low levels and we have seen the best performing 10 and 30 year periods for bonds ever. I see no reason to think that next 30 years will be better for bonds than the past.

Stocks may not do great in the next 10-30 years but compared to bonds I think they will.

+1

 

[Koolau]

85% stock gives me the willies, but the only time I was over 50% stock was when I allowed my company stock portion of the 401(k) to get to about 80% of that vehicle. Talk about dumb! BUT, that was also the reason I got to retire early. That stock went to the moon (I sold most of it) and THEN it tanked. SO, unless you are lucky, I wouldn't even think about 85% stock at 45 (or 35, or 25). But that's just me.

My bigger concern (going forward) is I don't see much upward potential for bonds OR stocks. Both seem overvalued. Still, putting money in the mattress (or a bank) probably won't make it grow either. How about some good old real estate? Good luck and YMMV.